Tuesday, November 02, 2010
So the RBA decided to stick it to the market once again, this time by hiking, accompanied by a pretty hawkish statement highlighting in particular that the slowdown in China looks to be less severe than previously thought. Indeed, TMM cannot help but think that yesterday's PMI data out of both the US and China have firmly moved the RBA back into hiking mode more broadly. A re-acceleration of the industrial cycle in the US is clearly bullish for its export partners (we're looking at you Mexico...), and what appears to have merely been a mid-cycle slowdown in China means that there is unlikely to be much let up in demand for things in "God's Country". But the increasing meme of Asian inflation which was added to by the Reserve Bank of India citing food prices for its own hike overnight and the possibility of QE-leakage is all adding to our previously mentioned fears of asset bubbles in Emerging Markets.
About a year ago, TMM heard a bit of shoe-phone that at a meeting of Chinese Mandarins, after one such mandarin gave a presentation upon the risks to the economy from the stock market and other potential asset bubbles within China, Premier Wen simply replied something along the following lines: "I've seen the stock market go from 2000 to 6000 and then back to 2000 and now back up to 3000... I know how to deal about that... What I want to know about is food inflation". And so, with China's Food CPI running at 8% YoY (see chart below), and slightly-less-manipulated data that TMM look at suggesting it is running far higher, the alarm bells are ringing.
But it's not just Asia. Turkey printed an upside surprise in CPI last week, with Food price inflation running at an eye-watering 15.33%, and headline CPI now running at 9.24% vs a low of 7.6% in July. Yet 5yr Xccy Swaps (see chart below) are sub-8%...
...And India, with Wholesale Prices rising at just shy of 17% (see first chart below), the 5yr OIS is hovering around 7% (see second chart below).
Now TMM totally get the QE-leakage story in terms of capital flows into Emerging Markets, but the idea that EM rates markets will be bulletproof in the face of an inflation scare seems baloney to them. The flip side of the QE-leakage story is that inflation is fueled by attempted FX intervention and domestic money supply expansion. The RBI's, and the PBoC's, recent rate hikes merely signal further moves in this respect. It seems to us that the trade here is to pay rates in EM vs being long the currencies, rather than just sitting long of both the currency and the bonds on the "search for yield" argument.
It's all looking a bit too much like 2006 in EM for TMM.
Elsewhere TMM are somewhat bemused by the Anglo/French defense deal. Would it not save a lot of time, money and angst if the UK went direct to doing a defense deal with the Chinese? Apart from the obvious benefits of making a pact with the biggest bully in the playground, we are unaware of any large national monuments in the UK dedicated to famous triumphs over the Chinese that will obviously need renaming. Unlike Trafalgar Square and Waterloo Station and surrounding environs. Of course we would happily rename the British Boxer dog in case they felt it was anything to do with a rebellion.