An awful lot happened yesterday, if you join the headlines, the dots, and the plot; yet not a lot of it played out the way the largest headlines and the most important dot plot would have it.
In the US, the Empire PMI collapsed to -32.9, showing further signs of real pain in the real US economy. By contrast, in Europe the German ZEW survey of investors expectations surprised to the upside at 16.9, as German Chancellor Scholz said there would be no recession this year. Adding more good cheer, the IMF is revising its latest call that one third of the world is heading for recession: another sterling projection from the Fund.
China’s Liu He then thrilled Davos by saying China will hit 6% GDP growth in 2023 — after the hilarious data yesterday, pencil it in now — and loves private business, foreign investors, markets, its property market, opening up, free trade, imports, and globalisation. Suddenly ‘common prosperity’ and national security are gone, even as Bloomberg separately reports the PLA is rebuffing all US efforts to re-establish military-to-military lines of communication. This was a 2017 redux moment, when global capital last rose as one to applaud a Chinese speech extolling exactly it, just before the opposite transpired.
Not much mention was made of the epochal first fall in China’s population since 1961, years ahead of official expectations. ‘A Midwife Crisis’ already flagged it in 2021, quoting a PBOC working paper that stressed the need to reverse the demographic trend, advocating controlling housing prices to do so, and arguing China should “be highly vigilant and prevent the savings rate from falling too quickly…if there is no accumulation there will be no growth…. [Developed economies are] not a model to learn from.” In short, China should consume less, automate more, and always run trade surpluses: just don’t tell Davos. ‘A Midwifer Crisis’ later in 2021 put the shift in China’s population into a global context: it’s staggering.
Eclipsing this long-term trend was the short-term rumor the ECB will shift from 50bp hikes to 25bp. We also got positioning for a BOJ meeting today where we might (or might not) see a further retreat from Yield Curve Control, something the FX market is already heftily pricing in, and which is negative for the US dollar. (The rights and wrongs of that are another matter.)
“And do not harm the oil and wine” Revelation 6:6
All in all, the market hummed at the ideas that the Fed was close to a rates peak; so was everyone else; that there wouldn’t be a recession; that the dollar is weakening; that rates would go down; and so assets would go up. The latter is of course all that really matters.
Are the assembled billionaires in Davos really worried about what was already projected as a mild recession that would reverse very low unemployment rates and very high (nominal) wage growth? No! What worries them are tight labor markets and nominal wage growth: that, and the asset-price recession in 2022 as interest rates rose in response.
With higher rates, the rich have already been in recession, and they didn’t like it. One year was quite enough, thank you very much, and now it’s time for central banks to make the rich richer and the poor poorer again, as before. Thus all the right headlines, speeches, data, and rumors are being mobilized in support of ‘Just not 2022!’ trades in 2023 – and working so far.
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