‘Not A Lot To Cling To’

Risk sentiment faltered and the euro slipped to a two-decade low Tuesday, as recession worries eclipsed tentative optimism engendered by news the US may soon roll back some tariffs on Chinese goods to help fight inflation.

Janet Yellen and Liu He held a “candid and substantive” virtual meeting centered on areas of mutual concern to the world’s two largest economies, including the outlook for growth, commodity prices and food security. Yellen, a readout said, was “frank” about the conflict in Ukraine and what Treasury described as China’s “unfair, non-market economic practices.”

It was the first discussion between the two since October. China’s Commerce Ministry said Liu focused on sanctions and tariff relief, while emphasizing Beijing’s commitment to securing “fair treatment” of Chinese enterprises. If “enterprises” means companies and the standard for “fair” is the Xi approach, as exemplified by the crackdowns which kneecapped China’s tech behemoths, the Biden administration should have no trouble clearing the bar. It’s pretty low.

In any event, the tariff rollbacks aren’t likely to trigger a sustainable rally in US shares. Or any other shares for that matter. “Economic growth concerns will continue to limit appetite for riskier assets,” SPI Asset Management’s Stephen Innes remarked. On the inflation side, it’s too little, too late. Even White House officials are divided about the benefits.

“The downward impact this would have on inflation is likely to be quite modest [but] if such a decision were to coincide with the start of a downward trajectory in inflation (for entirely different reasons, such as ‘peak’ commodity prices), President Biden, who has also expressed great concern over cost of living issues for US households, may spin it as a vote-winner [ahead of] the midterm elections,” Rabobank’s head of macro strategy, Elwin de Groot, wrote.

We’ve come full circle in the US on the tariff issue. It wasn’t so long ago that “tariff man” (as Donald Trump famously christened himself) proudly touted the trade war at stadium rallies. Now, Biden looks poised to pitch voters on the disinflationary benefits of removing the levies.

Separately, China’s Caixin services PMI notched a big beat, printing 54.5, ahead of every estimate — “all” eight of them. It was another sign that China’s economy stabilized in June following strict lockdowns which crippled growth and (arguably) put the Party’s 2022 growth target out of reach. The Caixin print came on the heels of a large upside surprise on the official non-manufacturing gauge last week (figure below).

“Regional COVID outbreaks were brought under control, which contributed to the services sector’s recovery,” Caixin chief economist Wang Zhe said.

There are two caveats. Well, there are far more than two, but in the interest of brevity, I’d quickly note that the employment gauge spent a sixth straight month in contraction territory in the Caixin survey, and the specter of new lockdowns will continue to haunt China as long as Xi insists on some version of “COVID zero.” Lockdowns in Anhui and Jiangsu could dent activity anew depending on how new outbreaks evolve.

Last week, local equities were emboldened by news of shortened quarantine times, and mainland shares have handily outperformed their Western counterparts of late, but sentiment lives and dies by Xi’s decisions on virus containment.

“Although the worst appears to be behind us for the current wave, the risk of a resurgence should not be underestimated,” Nomura’s Ting Lu said. “China’s leadership has vowed to maintain its ‘zero COVID’ strategy, even though it carries some economic cost,” he added. The bank expects China to stick with the policy until March of 2023, “but with some adjustments in coming months due to mounting economic pressure.”

I’d note that rolling lockdowns in China which impact the global supply chain could easily offset any disinflationary effects from tariff rollbacks. “It’s not a lot to cling to,” ING’s Chris Turner said Tuesday, of the prospective tariff relief.