Outlook: Friday’s payroll remains the biggest stress point, with durable goods and today’s factory orders for June likely not driving the market.

The strange and persistent drop in US rates is indeed becoming very worrying. Yesterday we had a welcome excuse: the Treasury will issue less (by $ 150 billion) than announced in May. A supply constraint is the same as tapering, or at least some say it, in the sense of reducing excess liquidity.

New FOMC member Waller told reporters yesterday that if job growth continues at levels we just had – 850,000 / month – the Fed is expected to start declining in October. “We should go early and go fast, to ensure that we are able to raise rates in 2022, if necessary. The announcement could be in September. Once the Fed starts, “there’s no reason you want to slow down the cut, to extend it – you want to do it and be done.”

You must be wondering if Mr. Powell is a little bored. After all, he persists in clinging to the recovery being “a way to go.” Waller sees an increase in jobs from 1.6 million to 2 million in July and August indicating an 85% recovery in pandemic-induced job losses, and that meets the bar of “substantial further progress.” We would like to note that an increase of 2 million jobs is NOT an 85% recovery of the 8 to 9 million still considered lost due to the pandemic.

Before that we get the Bank of England (Thursday). No one expects a change in policy this time around, but surely MPs will debate rising inflation and possibly talk about debt reduction. Econoday reports that “Much will depend on the updated economic forecasts contained in the new Monetary Policy Report (MPR), also released Thursday.” Bloomberg estimates that given the pace of the recovery, traders now see a 13bp rate hike by mid-2022, nearly double what it was a month ago. He agrees with Econoday that “While the policy is not moving this week, the BOE could still shake up the markets with a review of how it will eventually withdraw the stimulus.”

The key thing to infer from central banks’ desire to reduce or end quantitative easing is that they implicitly judge the Delta variant not to be a game-changer on the same level as the original outbreak. This is not unrealistic when you look at the UK recovery barely shaken by Delta and Delta itself pushed back by the high vaccination rate in that country. This bodes well for the pound sterling, and probably for the near future for the dollar as well.

About China: Everyone is deeply confused as to why China has taken steps to cripple tech companies at the expense of investor interests, both at home and abroad. Bloomberg reports that Ray Dalio says China runs capitalism to best serve the interests of the people and that private companies need to show that they value their subordination. About DiDi: The state manages education. A private company providing educational services is practically an insult.

We would never quibble with the brilliant Dalio but he is a whitewash. Jack Ma’s Alibaba and other companies are not in competition with the state, and he was the first to be knocked down by more than one ankle. What the state opposes are the damn millionaires themselves. In the United States, much to the chagrin of Marxists, the ordinary Joe doesn’t care if billionaire Jeff Bezos can squander billions on a space company – they wish they could be like him, to the point of underpaying and mistreating employees. . This is what China is afraid of: a population that admires millionaires who by definition are a stain on the Communist notebook. They should not be possible in a country of Commie. A new adherence to communist principles is emerging, largely conveyed by President Xi himself, considering the second most powerful figure after Mao, according to recent articles in The Economist.

If China’s experience with free market ideas and “state capitalism” gets a facelift, it involves a drop in stock indexes as foreigners give up, an increase in the returns needed to attract foreign capital, and a currency conflict – declining relative to actual demand. but up, perhaps, on yields and if China can turn it into the currency of export transactions. It will be tricky.

And expensive. FT’s Plender writes that “the massive dumping of Chinese bonds and equities by developed country fund managers earlier last week – in the face of Beijing’s continued assault on Chinese tech giants and its new attack against the Chinese private education industry – a stark turnaround. Doubly, given the record influx dynamics in China.

“The stock of inward foreign direct investment in China has grown from $ 587 billion in 2010 to $ 1.9 billion in 2020. While global foreign direct investment fell 35% last year to $ 1 billion. dollars, inflows into China rose from $ 141 billion to $ 149 billion, no doubt partly reflecting perceptions of a very rapid recovery from Covid-19.

“Foreign investors also bought $ 35 billion in Chinese onshore stocks and $ 75 billion in government bonds in the first half of this year, in each case a 50% increase from dynamic levels before. Covid in 2019. As for Chinese companies listed in the United States, until this month, investors have largely ignored administration threats to deregister those who fail to meet audit compliance requirements more The same goes for bans on investment in Chinese companies with links to the military. “

The Peterson Institute for International Economics doesn’t think what’s going on is decoupling. Concrete example : ” …. By easing restrictions on inflows of bonds and equities, the Chinese authorities have helped alleviate the solvency problems of overburdened American and European pension funds … and “to find more generous returns in the Chinese bond market than in the United States or Europe. “

We underestimate the importance the Party attaches to control and stability. “Beijing is determined to downsize the tech titans to their size and to better master data. Its tilt to the tutoring market is designed to make education less pro-elite. China also wants to prevent the application of US accounting rules to their companies. If the United States persists, the retaliation will be swift and brutal.

“If greater hostility towards foreign capital persists, China will pay the price. So far, Beijing’s aspiration to make the renminbi a global reserve currency has been well served by its liberalized financial markets. Yet the next essential step – the liberalization of the capital account – was always going to be a challenge for the party because it involved a loss of control. It will become even more difficult if there are reduced foreign inflows to compensate for the capital flight triggered by wealthy Chinese who have no faith in the regime.

It is assumed that a crisis is brewing.

This is an excerpt from “The Rockefeller Morning Briefing”, which is much larger (about 10 pages). The Briefing has been published daily for over 25 years and represents experienced analysis and insight. The report offers in-depth information and is not intended to guide FX trading. Rockefeller produces other reports (spot and forward) for trading purposes.

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