Sentiment was muted in Asia Thursday, and only slightly better than that in Europe, as traders assessed a hodgepodge of developments which together spoke to everything that’s made 2022 so challenging for markets. A rally in US shares, welcome though it most assuredly was, did little to improve the overarching macro mood.
The outlook for China’s economy worsened after Premier Li Keqiang delivered yet another sharply-worded warning, the latest in a series of exhortations to officials and policymakers, who were tasked with doing whatever they can to stabilize growth. “In some aspects and to a certain extent,” the country’s problems “are greater than when the epidemic hit us severely in 2020,” Li said.
He was particularly concerned about the second quarter. April’s credit and activity data were grim, and high-frequency data for May suggests little, if any, improvement. Earlier this month, during a nationwide teleconference, Li delivered a dark assessment of the country’s employment outlook, which he described as “complicated and grave.” He reiterated that in Wednesday’s emergency meeting, which included officials from some 2,000 counties and city districts.
“The nature and scale of this conference is quite unusual,” Goldman’s Maggie Wei said, adding that between the “high-profile teleconference held by Li, this week’s State Council meeting and the PBoC’s teleconference,” it’s clear that policymakers in China are urgently trying to support the economy against a “backdrop of very weak activity growth, anemic recovery month-to-date in May and rising unemployment rates.”
A few days ago, China released a 33-point action plan that included more than $20 billion in tax rebates and twice that much for railway construction bonds. Late last week, the PBoC prodded banks to reduce the longer-tenor loan prime rate in a bid to reinvigorate the housing market.
On Thursday, Morgan Stanley slashed its outlook for the Chinese economy. The bank now sees 2022 growth of just 3.2%, down from 4.2% previously. Every day, someone else cuts their forecasts. That’s barely an exaggeration. It’s impossible to keep track of the cuts.
Morgan’s Robin Xing said the recovery is falling short this month, and noted that improvements in supply chains are incremental, at best. The bank sees just a 0.5% expansion YoY in Q2 and a 3% sequential contraction. The bank’s base case is that China exits “COVID zero” after the 20th Party Congress, but Morgan said growth will “only rebound visibly” in Q4, at the earliest.
Commerce ministry spokesman Gao Feng on Thursday pledged to “make every effort” to facilitate the transport of foreign goods and bolster exporters and importers impacted by the pandemic. Logistics bottlenecks are easing “gradually,” Gao said.
The Party’s growth target for 2022 is a pipe dream. “Fortunately,” growth is whatever Beijing says it is, so I suppose if we’re talking about reported growth, 5.5% is still eminently achievable.
Meanwhile, the Bank of Korea hiked rates for a fifth time in nine months (figure below) and lifted its 2022 inflation outlook markedly to 4.5%. In February, the bank said inflation would be 3.1%. The growth outlook was slashed to 2.7% from 3%.
“If inflation expectations broaden, real wages will fall and financial instability can increase, hurting vulnerable groups over the medium- to longer-term,” new Governor Rhee Chang-yong cautioned. Plainly, the bank is prioritizing the inflation fight over growth.
In all likelihood, the BoK will raise rates at least two more times. Thursday’s hike came a day after RBNZ leaned in with another 50bps move and an aggressive new rate path.
Turning quickly to Hungary, Viktor Orban is rapidly transitioning from autocrat to dictator. After opening the door to rule-by-dictate with an amendment to the constitution, Orban promptly declared a state of emergency, citing (without irony) the invasion of Ukraine by his autocratic ally in Moscow. “We need the ability to take action immediately,” he said, days after regaling CPAC (held in Budapest and bizarre even by CPAC standards) with a blueprint for commandeering democracies. At the gathering, Orban told a who’s who of American conservatives that “My friend Tucker Carlson’s show… should be broadcasted day and night. Or as you say ’24/7.'”
His first decree under the state of emergency: Companies from the airline, banking, energy, insurance, retail and telecom industries are compelled to hand over the “bulk of their extra profit” to Orban. “We expect those who made extra profit in this time of war to help the people and contribute to the national defense budget,” he said.
Although Brussels has attempted to check Orban’s ambitions with funding cuts tied to rule-of-law concerns, he doesn’t care. As Bloomberg wrote, the “excess profits” decree “will help consolidate the Hungarian budget as the EU imposes an effective funding freeze against Orban’s government, which it accuses of flaunting European norms.”
Finally, coming back to the US, Apple is planning to keep iPhone production flat in 2022, not exactly a vote of confidence. Nvidia, which was on pace to be America’s next $1 trillion tech darling just months ago, guided for revenue below estimates, citing supply chain problems in China and, of course, the war. “We’re doing our best,” CEO Jensen Huang told analysts, on the call. That’s about all anyone can do in 2022.
Good luck, Viktor Orban. You’ll need it. Six or nine months from now, perhaps fewer, when your buddy, Vlad, in Russia is left licking his wounds from devastating sanctions and heavy war losses – if he’s not dead, and if he’s even in power – he will lean on you, his geographically closest friend, for help. And he will not be asking merely for moral support. But your actions today undermine your standing with the EU, so you’re biting the hand that feeds.
I wonder if your own people agree with your approach. You’re view of yourself as in charge and in control only works sometimes. It is fundamentally an illusion, whatever the system of government you employ.
Wow, the CPAC thing is surreal even after all we’ve seen.
“His first decree under the state of emergency: Companies from the airline, banking, energy, insurance, retail and telecom industries are compelled to hand over the “bulk of their extra profit” to Orban.” I don’t think you could come up with a much better textbook example for fascism.