Daily Macro: Much Ado About Credit and more

In this briefing:

1. Much Ado About Credit
2. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat
3. UK Preview: Disinflationary Date for Dec-18
4. Anatomy of a Shutdown: Scenarios for an Outcome
5. Trade Talks/Commercial Spying/Cars ‘N Consumers/Easier Credit/Yuan Rise

1. Much Ado About Credit

• Global financing conditions could tighten further
• Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
• A de-escalation in trade tensions and a Fed pause could ease the pain
• Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?

2. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat

We noted in   Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017.  Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.

3. UK Preview: Disinflationary Date for Dec-18

• UK inflation has tended to disappoint expectations, and another 0.1pp downside surprise looks likely in the Dec-18 data. I forecast CPI inflation to slow by 0.3pp to 2.0% and for a 40bp loss in RPI inflation to 2.8% (index print at 285.8).
• The ONS is likely to use 11 Dec for its index day, which would mean it is using cheaper seasonal travel dates in its airfares survey. The Consensus tends to miss this effect and be surprised by it. My proprietary food price data were soft too.

4. Anatomy of a Shutdown: Scenarios for an Outcome

The Republican president and Democratic House of Representatives remain at loggerheads over a partial government shutdown.  This is not because their differences over a ‘border wall’ are unbridgeable – it is because their mutual enmity is feirce to the point of existential. 

For the first time since 2016, the democrats have a weapon (a House majority) with which to fight Trump.  Unfamiliar with the mechanics of divided government, Trump blundered by demanding wall funding.  The shutdown is unpopular and poll data shows that Trump garners the most blame; it therefore provides a boon to Democrats, who are content to hold firm, watch Trump suffer and hope that the affair finally depresses his approval rating below the 40-42 percent threshold. 

There are five apparent ways that the shutdown could come to a resolution.  These include one of the two sides capitulating, Republican senators defecting or Trump invoking emergency powers.  At this stage it seems more likely that a resolution will hinge on a deal involving a reduced amount of spending – but there will be extended wrangling over the details, including the definitions of “fence” versus “wall”.  Neither side is showing any initiative to compromise thus far, and the shutdown seems likely to continue. 

In these circumstances, the 800,000 Federal employees who lack paychecks are collateral damage.  The shutdown adversely affects certain services, especially in transportation and economic data collection, while impacting GDP by an estimated 0.1 percent every two weeks.  More generally, circumstances damage perceptions of the US and its ability to govern itself.  The strife will have achieved something if it debunks Trump’s doctrines and diminishes his appeal.  But it will exact a toll in the meantime in terms of depressed sentiment among consumers, traders and investors. 

Given Trump’s record to date and the dearth of relatively reasonable moderates left in his administration, continued frontal conflict with House Democrats appears likely to persist for the remaining two years of his term. 

5. Trade Talks/Commercial Spying/Cars ‘N Consumers/Easier Credit/Yuan Rise

China News That Matters

• Progress, yet trade war still morphing into tech war
• Economic espionage: US targets Chinese spying
• Tesla dreams big in China despite consumption fears
• Bank funding beckons for SMEs
• Yuan leaps as hopes fade for US rate hikes