We have lift-off πŸš€

Delivered on By Justin Pyvis

Good morning! China’s government has got itself in a bit of a pickle, at least according to the FT. Citing “officials and policy advisers”, the report noted “policy disagreements within the Chinese government”:

“Chinese regulators led by vice-premier Liu He are concerned that the government is underestimating the economic impact of its crackdown on the property sector and Covid-19 lockdowns in Shanghai and other cities.

But other senior officials have opposed efforts by Liu, President Xi Jinping’s longtime financial and economic adviser, to ease the pressure on the real estate sector.”

The Chinese Communist Party set itself a growth target of 5.5% this year but its “dynamic zero-COVID” policy has resulted in a conflict between that goal and its desire to stabilise the debt-to-GDP ratio, avoid reinflating bubbles and preventing bad debts and capital flight from taking out the financial system.

In the past, the stimulus side of the dispute has always won out (someone else can deal with the mess!). And there’s no reason to think that won’t happen this time, especially after President Xi told a meeting of the Central Committee for Financial and Economic Affairs this week to increase infrastructure construction, which ANZ estimated “was akin to the 4 trillion-yuan rescue package during the global financial crisis in 2009 under President Hu Jintao”.

How China executes a stimulus package of that magnitude with rolling lockdowns remains to be seen, but if it materialises it’s certainly good news – at least in the short term – for Australia’s exporters and indebted governments, given that China is the destination for close to half of Australia’s total goods exports.


Reading the tea leaves

Daily % change

AUD/USD

71.2

-0.1%

AUD/CNY

4.67

-0.2%

AU Bond

3.09

+2.7%

US Bond

2.82

+1.7%

ASX200

7,261

-0.8%

S&P500

4,184

+0.2%

Brent (bbl)

105.4

+0.4%

Gold (oz)

1,886

-0.8%

Iron ore (t)

141.5

+1.4%

Bitcoin

39,018

+2.4%

Ethereum

2,864

+2.0%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

TheΒ US S&P500Β edged higher overnight, adding 0.21% after the likes of Microsoft (+4.81%) and Visa (+6.47%) reported solid quarterly reports with stronger than expected forward guidance.

Google parent Alphabet (-3.67%) was not so fortunate, reporting lower than expected earnings which pulled down the communication services sector (-2.36%) to make it by far the worst performer of the index’s 11 sectors.

Locally, theΒ ASX200 fell -0.88% as most sectors followed the very weak US lead into the red, with only energy (+0.97%) performing decently thanks to higher oil prices. Growth stocks in the tech sector (-2.43%) were the laggards as rapidly rising inflation threatens to send interest rates significantly higher, reducing the present value of their future earnings.

Elsewhere in the region China’s CSI300 added 2.94% after President Xi Jinping told officials to once again dust off the old playbook of driving GDP growth through infrastructure investment.


Food for thought

Only a bureaucracy could have been surprised by the March quarter inflation.
Only a bureaucracy could have been surprised by the March quarter inflation. Source

We have lift-off:

“Headline inflation [in Australia] in 1Q22 rose to 5.1%, a lot more than the consensus expectation of 4.7%, and comes off a 2.1% quarter-on-quarter increase, accelerating from 4Q21’s 1.3%QoQ rise.

The broad spread of gains meant that as well as the rise in the headline inflation rate, core inflation rates also surged. The trimmed mean inflation rate rose from 2.6% to 3.7%, and the weighted median inflation rate rose from 2.5% to 3.2. With the Reserve Bank’s target for inflation of 2-3%, all three measures of inflation are now comfortably above the upper band of that target.”

A 21-year high with broad-based price increases and a quarterly growth rate of 2.1%, which is only marginally lower than the 2.2% the US notched up in the same quarter.

This result should force a pre-election rate hike out of the Reserve Bank of Australia (RBA) in May. Even the million-dollar man himself, governor Philip Lowe, must have time between photo shoots to see the mountain of evidence that now stands before him. To repeat what we wrote a couple of weeks ago:

“The RBA has all the data it needs; it just chooses to look elsewhere. At this late stage it would be a purely political decision not to increase rates before the election!”

Not to toot our own horn but we’ve been regularly warning of inflation becoming a major issue in Australia this year since at least July 2021, which was when it became clear (to us) that “the risk profile has shifted”.

We also cautioned in October that the RBA may want “to break from its pledge to maintain the cash rate at just 0.1% ‘until 2024’,” because – as we wrote in December – not doing so would “risk falling for what the International Monetary Fund (IMF) recently dubbed ‘inaction bias’, where doing nothing can result in much higher ‘costs associated with containing second-round impacts’.”

Unfortunately the RBA heeded none of the warnings, sitting back as every other developed economy entered exactly the same crisis a few months in advance, blinded by what its overly sophisticated models of the economy said should be happening, rather than what was happening.

It now faces the daunting task of reigning in inflation without causing a recession in the process. Good luck. 🀞


Chewing the fat


Bits and bytes

πŸ“ˆ “Swaps traders [are] now fully pricing in a 15-basis-point hike at the RBA’s May 3 meeting with a 25% chance of a 40-basis-point move.”

πŸ•΅οΈβ€β™€οΈ The EU warned Elon Musk that Twitter must continue “moderating illegal and harmful content… or risk hefty fines or even a ban”.

β›ˆοΈ The Bureau of Meteorology’s latest Climate Driver Update noted that models are predicing the Indian Ocean Dipole to turn negative next month, which “increases the chances of above average winter–spring rainfall for much of Australia”.

πŸ“‰ Growth-stock investor Cathie Wood, whose ARK fund is down 48% this year, said the US Fed has already tightened too much and that “its policy measures could cause an economic and/or financial crisis”.

🏝️ Australia’s Home Affairs Minister Karen Andrews insinuated that China’s deal with the Solomon Islands was strategically timed “in the middle of a federal election campaign… I mean we talk about political interference and that has many forms”.

❌ Russia’s government ordered Gazprom to cut gas exports to Poland and Bulgaria after they refused to pay in roubles, citing breach of contract.

πŸ›’οΈ Poland and Bulgaria are now receiving gas from their EU neighbours. European Commission head Ursula von der Leyen said: “Today, the Kremlin failed once again in its attempt to sow division among member states. The era of Russian fossil fuels in Europe is coming to an end.”

πŸ“£ The Twitter executive in charge of content moderation “cried during the meeting as she expressed concerns about how the company could change [following Elon Musk’s takeover]”.

🍁 “A Canadian actor and self-proclaimed wellness guru is facing deportation from Indonesia’s Bali island after a video of him dancing naked at a sacred mountain went viral.”

πŸ₯ New Zealand’s High Court ruled that in imposing border and quarantine controls, the government acted “unlawfully, unreasonably and in breach of the Bill of Rights that states every New Zealand citizen has the right to enter New Zealand”.

βš”οΈ Russia’s President Vladimir Putin warned: “If anyone sets out to intervene in the current events from the outside and creates unacceptable threats for us that are strategic in nature, they should know that our response… will be lightning-fast.”