Macro

• The ECB will end net asset purchases on 1 July and considers the persistent inflationary outlook to meet its conditions for monetary tightening to begin.
• Rate hikes in July and September are explicitly indicated, with a presumption in favour of the latter being 50bps unless the inflation outlook “persists or deteriorates”.
• That greater deposit rate jump would probably restore symmetry to the ECB’s policy rates (i.e. refi & MLF +25bps) as a one-off rather than starting a faster hiking pace.

• In a famous interview released on May 2020, Jerome Powell stated Central Banks can print money in digital format.
• And he is right, they indeed do that when they embark in policies such as QE.
• But he forgot to mention that what they print is bank reserves, which is money only for commercial banks and not for us common people.

• In Depth: College student depression hides anxieties about jobs and Covid

• Some Chinese colleges won’t let students graduate without proof of employment

• Regulatory reform forces China’s trust firms to cut back on risky lending

• Job market conditions improved further in early 2Q 2022
• Signals firmer economic activities, thus GDP growth, in into 2Q 2022

Unemployment rate fell to 3.9% in Apr 2022 (Mar 2022: 4.1%), lowest since 3.3% in Feb 2020, and averaged 4.1% in 4M 2022 (2021: 4.6%). This is as employment growth accelerated to +3.3% YoY in Apr 2022 (Mar 2022: +2.9% YoY) and +3.0% in 4M 2022 (2021: +1.7%). Data indicate firmer economic activities — thus improving job market conditions – in early-2Q 2022 after real GDP growth picked up to +5.0% YoY (4Q 2021: +3.6% YoY), and supports BNM’s decision to start unwinding monetary accommodation last month via the +25bps hike in OPR to 2.00%.

• The market fall this year has been steady and relentless rather than a panic crash, and last month the Sell in May mantra cut through and markets switched to bear market behaviour of selling rallies and not buying dips
• Much of this we believe has been associated with leveraged structures unwinding, combined with fund redemptions, especially in tech, reversing the ‘upside crash’ of last year
• Confidence is picking up slightly, but the Fed is key, in particular the extent to which it actively want the markets lower

• In Depth: Chinese consumer startups find taking on global titans is no easy task

• Shanghai’s top prosecutor investigated for graft

• Hong Kong money man Calvin Choi faces two-year industry ban for misconduct

• Geopolitical vulnerabilities argue for Chinese leaders to undertake reforms that they have long avoided but the practical and political obstacles to these reforms are significant:  
• Once the current slowdown is contained, a policy of faster appreciation of the Yuan is possible, to rebalance the economy. We also see more liberalisation of the capital account.
• Other necessary moves, e.g., strengthening social safety nets to reduce savings, will take longer. Ideological obstacles will probably delay reforms that alleviate institutional constraints on the more productive private sector.

• The arrival of War so soon after Pestilence or Plague has unsurprisingly led many to speculate (some idly, others determinedly) as to whether the Third of the Four Horseman of the Apocalypse is due soon.
• That one of course is Famine. Such speculation has been fuelled by the co-ordinated attempts coming out of Davos last week to blame Russia for an upcoming food shortage.
• While the threat of serious shortages, if not outright Famine, is very real indeed, it is only peripherally due to a the current lack of Wheat shipments out of Ukraine

• Yuan / In Depth: Behind the yuan’s tumble against the dollar

• Juvenile / China seeks to prevent sealed juvenile criminal records from being leaked

• Carbon / China lays out fiscal tools to reach carbon neutrality by 2060

• Despite cumulative trade surpluses of US$215bn for Jan-Apr’22, foreign reserves declined by US$130bn, suggesting substantial capital flight. China’s ability to ease monetary policy is severely constrained. 
• China’s M2 money supply is up 500% since Aug’08 (pre-GFC), while US M2 has only expanded 180% over the period. China’s record monetary growth has funded massive property/industrial over-capacity.  
• Real GDP is unlikely to exceed 4.5% growth in 2022. Global monetary tightening will rein-in China’s property market, and constrain FAI growth, likely tipping the financial system towards crisis.  

• Last week’s market action sparked buy signals everywhere. How far can the rally run?
• Despite last week’s show of strength by the bulls, our base-case scenario calls for a bear market rally within a bear trend.
• We offer a few tips on how to spot the bear rally high.

• September’s FOMC meeting is being viewed as an inflexion point towards less draconian tightening, but this outcome is dependent on economic data over the course of the summer.
• Reaching the neutral federal funds rate as quickly as possible is the FOMC’s objective, but the policy outlook thereafter will be driven by the stickiness of inflation.
• The lack of concern by the Fed about falling equity prices is viewed as a signal that falling household net worth is viewed as a means to curb inflationary pressures.

• Our base-case scenario is that this is a bear market rally and the March lows are not the lows of the bear cycle.
• The alternative scenario is the U.S. economy sidesteps a recession next year. If the market doesn’t weaken to a new low by early Q4 2022, the bottom is in.
• . We assign a 60–70% probability to the bear market rally scenario and a 30–40% chance of a soft landing.