Global Macro: US-China tensions building, but not yet a cyclical game-changer – Following Beijing’s plan presented in its annual National People’s Congress to impose a new security law governing Hong Kong, US Secretary of State Pompeo overnight declared to Congress the territory as ‘no longer autonomous from China’. While this move has no immediate implications, it does pave the way for Congress to revoke the territory’s special trade and investment status and to make it equivalent to China. This would erect considerable trade and investment barriers to Hong Kong, and potentially opens up a new front in the geopolitical tensions between the US and China. This comes alongside a host of other measures the US has targeted China with recently, including: tightening rules regarding the supply of semiconductors to Huawei, blacklisting 33 Chinese entities and imposing technology export restrictions, restrictions on Chinese companies listing on US stock exchanges, the halting of investments by the federal government pension fund in Chinese stocks, and imposing sanctions on Chinese officials deemed responsible for the treatment of Uighurs. More broadly, with US presidential elections due in November and the US president having lost his ‘trump card’ of a solid domestic economy, Mr. Trump is openly blaming China (and the WHO) for their respective roles in the covid-19 crisis, in part to position versus Democratic candidate Biden and to divert from the crisis at home.
Decoupling is now more of a structural rather than a cyclical story – All of this takes the US and China further down the path of decoupling, a process that started in 2018 with the tit-for-tat trade war. This is confirmed by the collapse in import shares each country has in their respective trade flows. Since peaking at 23.6% in February 2018, the share of Chinese goods in US imports has fallen to just 18.6% as of March 2020 – the lowest since December 2006 (monthly numbers are volatile, so we take the 12m sum). For China, the equivalent US share has fallen from around 8.5% at end 2017 to a multiyear low of 6%, although stabilising in recent months. Full implementation of the Phase One Trade Deal could mean trade shares continue to stabilise in the short term, but broadly speaking we expect decoupling to continue. Indeed, while the shock of the start of decoupling led to a global cyclical slowdown before the covid-19 recessions, it is now becoming more of a longer term structural shift that weighs on global potential growth – particularly given that the fallout from covid-19 is now by far the dominating cyclical driver.
Re-escalation of tariff war would be a game changer – What could change matters would be a major re-escalation of the trade war, if it involved much more punitive tariffs that required abrupt changes to supply chains. This is not something we expect as a base case, but clearly the ramping up in geopolitical tensions raises that risk. For now, progress on the implementation of the US-China Phase 1 trade deal signed in January has stalled, and there is little sign of negotiations on Phase 2. The covid-19 crisis has likely played a role given the generalised slowdowns in trade flows we are seeing globally, and the disruptions to supply chains in the US make it more difficult to raise certain exports to China (e.g. ethanol, pork). All in all, given the reconfirmed commitment to the deal by Beijing last week, we do not yet expect it to be torn up and a re-escalation of the tariff war; such a move would be a political decision. In any case, tensions are likely to continue to build over the coming months, particularly as we get closer to the presidential election – when both Republicans and Democrats are likely to want to sound ‘tough on China’. It will be important in that environment to distinguish between aggressive rhetoric – which could nonetheless have big market impacts – and concrete policy changes that affect the macro outlook. (Bill Diviney & Arjen van Dijkhuizen)
Euro Macro: Euro labour market in worse shape than it seems – The most commonly known labour market indicator is the unemployment rate according to the definition of the International Labour Organisation (ILO), which is also published on a monthly basis by Eurostat. According to this definition the eurozone unemployment rate edged higher in March (to 7.4%, up from 7.3% in February). This seems only a modest rise considering that by the middle of March, all eurozone countries had gone into lockdown. However, when taking a closer look at the numbers and at alternative labour market indicators we find that the labour market deteriorated much more that the official unemployment rate suggests. To begin with, the ILO unemployment rate only captures people that meet all of the following three criteria: 1 – they are without work (i.e. not on a government subsidised temporary unemployment scheme), 2 – they are available to start working within the next two weeks and 3 – they have actively sought employment during the previous four weeks. This implies that unemployed people that stopped looking for a job because the companies they wanted to work for were closed during lockdown and people that were not able to start working immediately because they needed to look after children, no longer are registered as being unemployed. According to Eurostat, this was exactly the reason why the unemployment rate in Italy dropped in March (to 8.4%, down from 9.3% in February). As Italy was the first country to go into full lockdown in the eurozone in early-March, and Italy is also the only country that recorded a drop in the unemployment rate in March, this seems to indicate that the unemployment rate might have dropped in other countries in April as well despite a deterioration in labour market conditions (Eurostat plans to publish the April unemployment report on 3 June).
France’s statistics bureau Insee has also published reports that illustrate that the labour market is in worse shape than suggested by the unemployment rate. According to Insee the number of private sector jobs dropped by 453,000 in Q1, which is equal to 2.3% of private sector employment and around 1.6% of France’s labour force, yet the number of unemployed according to the ILO definition fell by 94,000 in Q1 and the unemployment rate declined by 0.3 percentage points qoq in Q1, to 7.8%. According to Insee, around 1.7 million people wished to work without being included in the ILO definition unemployment in Q1. The institute estimates that, as a percentage of the labour force, this so-called shadow unemployment increased by roughly 0.2 percentage points in Q1 due to lockdowns. Considering that the lockdowns in France started around mid-March this probably is only a tip of the iceberg and the impact will be much stronger in Q2. Spain is also among the handful of countries that have published extensive Q1 labour market reports. Spain’s ILO unemployment rate increased by merely 0.2 percentage points qoq in Q1, but adding the unemployed that do not fit into the ILO definition, an additional rise of 0.6 pps results, so a total rise of 0.8 pps. (Aline Schuiling)
Global Commodities: Too early to become positive – On 21 April the CRB index set a low at 101.48 when WTI oil prices dropped deep into negative territory. WTI accounts for a considerable share of the CRB index (23%). Since then oil prices and the CRB index have recovered. The CRB index has risen by around 27.5%. We expect the CRB index to weaken again in the coming three months for a number of reasons. First, we think the market is under-pricing macroeconomic risks, and expect renewed lower demand for oil and metals. Second, we expect another major risk-off wave. Investors will then probably sell commodities. Third, resurfacing tensions between the US and China will dampen commodity demand (see above). Fourth, inventories in oil, industrial metals and some agricultural commodities are high, which will hang over markets for the time being. Last but not least, the technical picture is deteriorating. Having said all this, we do think that the index will bottom above its previous low. See our note here for more. (Georgette Boele)