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The Chinese Have Their Own Policy ‘Dots’

Summary:
The FOMC’s “hawkish” dots for their June 2021 assessment weren’t an acknowledgement of recent inflation data in the US. That’s how many are characterizing the change, modest as it actually was. Inflation is about emotion in most places, especially when CPI’s and PCE Deflators, a healthy dose of producer prices, all seem to point to an overheating economy on the verge of the long-predicted fiery blowout. No, the Fed’s dots were again reiterating the central bank’s position that the price deviations we’re seeing right now are due to temporary factors. If anything, the dots like, say, recent behavior in commodities and broad cross-section of economic data further corroborate. A true spike for inflation in the first then second halves of 2021 would’ve made a whole lot more dots move a lot

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The FOMC’s “hawkish” dots for their June 2021 assessment weren’t an acknowledgement of recent inflation data in the US. That’s how many are characterizing the change, modest as it actually was. Inflation is about emotion in most places, especially when CPI’s and PCE Deflators, a healthy dose of producer prices, all seem to point to an overheating economy on the verge of the long-predicted fiery blowout.

No, the Fed’s dots were again reiterating the central bank’s position that the price deviations we’re seeing right now are due to temporary factors. If anything, the dots like, say, recent behavior in commodities and broad cross-section of economic data further corroborate. A true spike for inflation in the first then second halves of 2021 would’ve made a whole lot more dots move a lot farther than what little so few did.

Instead, the dots are indicating US central bank officials growing more confident that downside risks are abating; contrasted to the narrative upside inflation risks are rising. Over the next few years, with almost certainly fewer perhaps zero COVID cases the potential for another setback due to governmental overreaction has seriously diminished. That’s not inflationary, it would be seriously good.

While I think the Fed – and I can’t believe they’re being reasonable this time at least in this case – is right about “transitory” they are simultaneously making the same mistake as officials had committed back in 2018 and eventually 2019. Downside risks aren’t just about corona case counts, rather they are more likely to take on global factors as they had a few years ago.

The Chinese Have Their Own Policy ‘Dots’ The Chinese Have Their Own Policy ‘Dots’


That’s both sides of low bond yields – ignoring the current CPI’s because there is every reason to suspect less of an upside after the way the global economy has performed up until almost the middle of 2021. As the months pass by, regardless of US inflation figures, the evidence piles up that the post-2020 rebound’s best days may already be behind us.

The Chinese don’t have a set of dot plots; they don’t need them. Authoritarian governments simply tally up their viewpoints and then act on the totality. What’s absolutely clear – even before May – is that authorities in China are acting as if what I just wrote was true.

We’ve already seen as good as it was going to get.

Not because they believe in the inflation story, rather because they see global economic potential as having been more seriously impaired that it already was before last year. Having learned from 2016’s “stimulus” debacle (just ask Li Keqiang, assuming he could answer honestly without risking Xi’s police action ire), China’s economy is stuck in an even lower gear right now compared to five years ago and yet officials continue to – have been for months – unwind all their crisis efforts.

The Chinese Have Their Own Policy ‘Dots’

I previously chronicled this point from the point of view of monetary authorities at the PBOC. The latest updated economic data from the Chinese National Bureau of Statistics (NBS) merely add more confirmation. Public sector or State-owned Fixed Asset Investment (FAI) has slowed to the point of now, in May 2021, being likely less than it had been in May 2020 (assuming my calculations for the monthly estimate is close, which it reasonably might be we just don’t know given how the NBS reports only accumulated FAI totals and changes the sample size and makeup each year).
The Chinese Have Their Own Policy ‘Dots’ The Chinese Have Their Own Policy ‘Dots’

Take Xi (and today’s Li) at his word; they’re getting out of the “stimulus” business even as China’s economy, as you’ll see very quickly, appears stuck at an alarmingly low level of output and activity. Precisely Xi’s point and therefore his directive.

Industrial Production, for example, increased just 8.8% year-over-year last month. The 2-year change, factoring out base effects, works out to the same lackluster 6.5% Chinese industry had been stuck with for years – the same lack of growth which had led Xi to make his radical change to economic plans in the first place (19th Party Congress). And that’s with a whole bunch of “transitory” 2020 boosts to industry.
The Chinese Have Their Own Policy ‘Dots’

Retail Sales are substantially more concerning, which otherwise you’d think authorities would be ramping up their “stimulus” efforts given how they’ve made China’s consumers the priority of whatever “quality” growth might be achieved. Yet, again, no. The “quantity” growth in consumer spending since last year’s deep recession pales.

According to the NBS, retail sales in May 2021 increased only 12.4% when compared to May 2020 when overall sales had been 2.8% less than in May 2019. The 2-year (compounded annual) change in retail sales, therefore, less than 5% for eight out of the past twelve months. Even those other four the 2-year change had been only near 6%.

Prior to the past few years, retail sales growth in modern China had on only one occasion come out lower than 7%; before 2018, there had only been a tiny few months below 10% and those triggered serious concerns and not just in Xi’s mind.
The Chinese Have Their Own Policy ‘Dots’ The Chinese Have Their Own Policy ‘Dots’

The Chinese economy is operating at a materially lower level, already not good, more and more confirming that whatever rebound is going to happen probably already did. Finally, Xi’s top level has continuously declared how they aren’t going to do anything about it; on the contrary, they’ve been scaling back for some time now. Not just speeches and words, though, more evidence of serious (lack of) action.

So, the Fed thinks downside risks to the US economy beyond this year have abated – COVID-wise, that’s probably accurate. Other risks, global risks like those which had wrecked everything a few years ago, not so much.

Yields, not dots.

 

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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