News flow felt sparse Thursday, as global markets “struggled for direction,” to employ the boilerplate language preferred by mainstream outlets. Same problems, different day for a worried world.
China again pledged to follow through on promises to support the economy as doubts persist about the feasibility of the Party’s growth target for 2022. PMIs for May weren’t terrible considering the circumstances, but they were contractionary (figure below).
The color accompanying the Caixin gauge wasn’t particularly encouraging. “The epidemic’s impact on market supply and demand has transmitted to the labor market, which further weakened,” Wang Zhe, Senior Economist at Caixin Insight Group, said. “Supply chains were disrupted, and logistics times lengthened further. The gap between costs and output prices further squeezed enterprises’ profitability.”
“The weakening trend in exports, lackluster demand for loans and weak infrastructure spending as funding is diverted to COVID measures, suggest manufacturing will not move back to expansion quickly,” TD’s Mitul Kotecha wrote, adding that the recovery in services “is likely to be even slower, with a combination of mass testing, quarantining and border restrictions, limiting retail activity and domestic tourism amid softening household incomes.”
Employment concerns remain top of mind for Chinese officials. Or at least some Chinese officials, including and especially Li Keqiang, whose prioritization of the economy makes for a stark juxtaposition with Xi’s quixotic efforts to rid the country of a highly transmissible, airborne pathogen.
On Thursday, the Ministry of Finance and the PBoC said they’ll redouble efforts to bolster growth. The central bank will accelerate the implementation of policies aimed at keeping the economy operating in “a reasonable range,” PBoC deputy governor Pan Gongsheng told a briefing. Financing costs for companies will be pushed lower and “stable returns” on yuan assets should “continue to attract foreign investments.”
I’m quite sure Pan is aware of this, but so far, 2022 has been a tale of outflows, not inflows, amid unstable returns. Net flows to Chinese bonds from overseas investors may have been positive last week, and foreign investors bought a net $2.5 billion in Chinese equities in May, but it’s been a rough stretch.
The Finance Ministry said Thursday it’ll “rapidly implement policies” in order to “make our due contribution to the stabilization of the economy.” For their part, the National Health Commission urged local officials to avoid “arbitrary” virus curbs, including measures imposed on citizens residing in areas deemed “low-risk.” Local governments “must strictly adhere” to protocol when curtailing production due to COVID, an official said, adding that China’s factories have “significantly ramped-up production” over the last several weeks.
Just under 83% of Chinese aged 60 and above were fully vaccinated as of June 1, the NHC said. Around 169 million of those have been boosted. This week, the Party gradually began lifting curbs on Shanghai and Beijing in an effort to rescue the economy a month into the second quarter. It’s touch and go.
Meanwhile, the Saudis are apparently prepared to increase oil production in the event Russian supply is curtailed by sanctions. That’s according to a handful of sources who spoke to the Financial Times, and it’s at odds with the Kingdom’s stubborn insistence that refining capacity and underinvestment, not oil, is the problem.
Although Riyadh “believes it needs to keep spare production capacity in reserve,” the Kingdom is concerned about “outright supply shortages” following new EU sanctions on seaborne Russian crude, the FT said.
If demand increases as China relaxes COVID curbs, it could drive an already tight market over the edge, the Saudis worry. Riyadh is “aware of the risks” and doesn’t believe it’s “in their interests to lose control of oil prices,” a source told the FT, whose reporting came a day ahead of OPEC+’s monthly meeting.
“This OPEC meeting is vital because of the inflationary knock-on concerns higher energy costs have, and higher oil prices permeate virtually all the goods and services we use,” SPI Asset Management’s Stephen Innes wrote. “There would be a sigh of relief around central bank boardroom tables if OPEC turned up the taps.”
Joe Biden is considering a stop in Saudi Arabia during an international jaunt that includes NATO and G-7 meetings later this month. Gas prices in the US have hit one record after another (figure above) ahead of the summer driving season.
At some point, Biden will need to smooth things over with Mohammed Bin Salman. Admittedly, that’s suboptimal. The entire world gave MBS the benefit of the doubt several years back when he attempted to present himself as a kind of progressive reformer. Of course, “progressive” is an extremely relative term in this context, and it was never obvious that MBS would be willing, let alone able, to subjugate the Wahhabi religious establishment to his modernization ambitions.
His tactics in Yemen and the murder of Jamal Khashoggi in the Kingdom’s Istanbul consulate stripped away the veneer. MBS is a tyrant. And Biden presides over a party whose future depends, in part anyway, on young voters who identify with Progressives (with a capital “P”) for whom the Saudi monarchy exemplifies backwardness on everything from women’s rights to climate change.
Long story short, Biden’s strategy of dealing exclusively with King Salman isn’t tenable. Especially not during a global energy crisis. The king can still pull rank, but he’s old. And he hasn’t shown much in the way of initiative when it comes to reining in the Kingdom’s golden child.
MBS is famously close to Vladimir Putin, and any decision on the part of the Saudis to pump more oil would effectively mean relegating Russia to second fiddle in OPEC+. Oil strategists wouldn’t put it quite that way, but the alliance serves as a perpetual reminder of Riyadh’s “working” relationship with Moscow. If the Saudis bow to Western pressure to offset Russian barrels declared contraband by the same Western nations asking for more crude, that’s politicization. And MBS would doubtlessly need to talk it over with his ally in the Kremlin.
Biden needs to somehow insert himself into the middle of that equation. It’s not as difficult as it sounds. We often speak of the Saudis’ requests for military guarantees as “demands.” As if the US is hostage to Saudi crude, rather than the Saudis being hostage to US weapons, US Treasurys and, ultimately, the US dollar. Another way to think about it is that without US security guarantees, the Saudis lose their military advantage vis-à-vis the IRGC. Russia won’t be helping with that, and neither will China. And the riyal is pegged to the dollar, not the ruble and not the yuan.
Biden continuously has to make the best of bad choices. It is reflected in his polling. The public is discontented but if they really thought about it Biden’s polling would be 15 points higher.
Yeah, but that’s the problem. The public doesn’t think about anything. If you look out across social media on any given day, it’s readily apparent that the national discourse (if you can call it that) is just a cacophony of divisive talking points, cartoonish identity politics, conspiracy theories, memes and generalized vitriol. If you talk to folks in academia outside of top-tier institutions, they’ll generally tell you that there are no more “good students,” where that means engaged students. Nobody reads, nobody reflects and everyone wants a scapegoat. It’s a truly unfortunate situation.
Scapegoat Nation does have an unfortunate resonance. But even the scapegoating is lazy — many don’t seem to know exactly who to blame, but they are dead certain that it is someone other than themselves or who they decide to support, and that’s basically the end of the inquiry.