Rabobank: “In My Mind All I See Is The Little Dog In A Hat Drinking Coffee In A Burning Building”

Monday, February 4, 2019
By Paul Martin

by Michael Every of Rabobank
Mon, 02/04/2019

Queen Eliza-Brexit

Market comments: You know things are going well on Brexit when the media suggest that the government is preparing to evacuate Queen Elizabeth and the Royals in the case of No Deal happening at the end of March. I’m certain that whatever secret location is in mind to transport the Windsor family to will be incredibly safe, unless Philip is driving. However, it does bear considering that the Royals stayed in London for the entirety of WW2, including the Blitz. Is a Hard Brexit really on a larger scale of potential danger than that?

One also wonders how that kind of news is going to be taken by one of the major currencies with the Queen on it – Sterling. Likewise that Japan’s Nissan has just announced that it will be cancelling plans to build a new model in Sunderland, though this isn’t because anywhere in Europe is going to win the bid: that work is heading back to Japan, helping PM Abe to Make Japan Great Again.

That’s the backdrop for PM Theresa May to head boldly off to Brussels this week and explain to the EU that the Withdrawal Agreement they are already ratifying needs to be reopened and changed to suit the Tory Party. It’s also the backdrop to the Guardian reporting that rumours of a snap election on 6 June are being dismissed, with the Home Secretary saying: “The last thing we want is an election, the people will never forgive us.” That said, the latest opinion polls show the Tories pulling away from Labour as Leave voters drift over to them, while Remain voters switch to the Lib-Dems. So don’t necessarily rule an election out? Presumably this would be after an extension to Article 50, of course. Otherwise the only upside is that there are a wider range of nice place to hide the Queen in the summer.

Perhaps not France though, given we got another Yellow Vest crowd on Saturday to protest police violence, which was then immediately subject to some police violence.

I get the feeling it’s going to be a long, hot summer. Fed Chair Powell might also be thinking the same thing, and about where he is going to hide in the future. That’s after Friday’s payrolls data were what he absolutely didn’t want to see: a blockbuster number over 300K suggesting that by the Fed’s own yardstick, the jobs market is on fire. And then the US ISM survey came in stronger than expected to boot, showing that the trade war is not already showing up as a threat to the US economy, as I heard someone say in public last week. That’s all great – and also really awkward considering he’d only just managed to get all the FOMC to line up behind his shameless U-turn away from the higher rates and QT that looked oh-so sensible until the S&P suffered a correction.

Of course, on one hand the markets can enjoy the thrill of knowing the economy is doing fine (for now) and that the Fed also has their back. However, that’s a pretty short-sighted way to read things. If the Fed has stopped because of what they see lurking in the depths of the data then growth is going to slow anyway; and if the Fed is wrong and only paused because of the Dow/S&P, what is it going to do if unemployment continues to fall and at some point the economy overheats? In other words, you have to believe in a Goldilocks scenario to be completely relaxed right now; that’s fine, but consider that the people who are supposed to be delivering it just did a complete U-turn in the space of a few weeks, which hardly instils confidence.

And talking of U-turns and not instilling confidence, China’s latest run of poor PMI data has the official and the Caixin measures both showing that manufacturing is contracting in the workshop of the world, and services are slowing too: the composite Caixin PMI was down from 52.2 to just 50.9. It’s the stat of the Year of the Pig in China today –Kung Hei Fat Choy!– and yet it is starting off like a real Pig of a Year, to quote our FAR analyst Pan Chenjun. Chinese markets are now out until 11 February, and I would like to say that this will make a difference to trading action, but given I have previously advocated the use of the word “shmarkets” for the price action we see in the Asian giant, I am not sure if it actually will. Also having a pig of a year so far, what with ridiculous heat and now terrible floods, is Australia, where today’s building approvals numbers went off a cliff once again at -8.4% m/m vs. +2.0% expected and -22.5% y/y vs -10.9% expected.

I know I should be focused on pigs, but all I see in my mind is that internet meme of the little dog in a hat drinking coffee in a burning building and saying “This is fine.” Doubly so given the blaze in a Melbourne high-rise today, which has apparently used the same cladding as London’s Grenfell Tower, and which comes on the back of local reports of possible poor construction standards in the tens of thousands of new apartments that have sprung up all across Australia, and whose price is now coming down just as quickly. Keep drinking that delicious coffee, RBA.

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