ON DECK FOR TUESDAY, AUGUST 2

On Deck for Tuesday, August 2

KEY POINTS:

  • Markets in risk-off mode on the Pelosi factor
  • Why is Pelosi in Taiwan?
  • You’ve seen nothing yet by way of supply chain disruptions and inflation…
  • …if conflict escalates around Taiwan
  • RBA hikes 50bps, markets may be misinterpreting forward guidance
  • Fed-speak, US vehicle sales and JOLTS on tap
  • Global Week Ahead reminder

As a reminder, please see the Global Week Ahead—Into the Dog Days that was first sent on Friday. The publication is here and the companion deck is here.

Key topics in the Global Week Ahead:

  • Are US nonfarm payrolls still resilient?
  • Could Canadian jobs rebound?
  • BoE will likely hike 50bps
  • RBA to step further toward neutral
  • Brazil’s CB still on a hiking path
  • Other global macro

Markets are in mild risk-off mode on the Pelosi factor (see below). Sovereign bonds are gently rallying across all major markets. US equity futures are off by between ¾% and 1% across the benchmarks with Toronto down by nearly 1% and European cash markets down by as much as 1%. Asian equities sold off by 1–3% across benchmarks with declines led by mainland China’s exchanges. The USD is slightly firmer against most crosses except for the yen that is also picking up safe haven flows. Oil prices are about 1% lower.

US House Speaker Pelosi (Dem) is thought to possibly arrive in Taipei by mid-morning or a little later eastern time (various sources are all over the map on the exact time). China and Taiwan have both been engaged in some military posturing. China’s media and President Xi Jinping’s remarks on a call with Biden last week have put forth thinly veiled threats of unspecified actions if she does indeed land. What she says when she’s there matters less than the optics.

So why is she there?

  • On the one hand, perhaps the US wants to make it clearer to China that it has Taiwan’s back than was the case with Trump’s shameful failure to do so with Russia and his supportive comments for Putin during his term.
  • On the other, perhaps the US is poking the bear and being unhelpful by going out of its way to embarrass China at home and abroad. This is of course the line that Russia is taking this morning as one dictatorship that has invaded a sovereign nation sides with another.
  • It’s also entirely possible that Biden is looking to shore up his foreign policy creds into the mid-terms as one of the oldest playbooks in US politics. Enter yesterday’s drone attack on an Al-Qaeda leader that has obvious merit but at least coincidental timing in the lead-up to mid-terms. A danger here is that this timeline roughly overlaps with Xi Jinping’s quest for a third term that is likely in the bag unless but could face risk if his response is perceived as being weak.

The potential ramifications of conflict around Taiwan would obviously invoke further damage to global supply chains given Taiwan’s important role in supplying semiconductors and electronic components. That would mean more inflation.

The RBA hiked 50bps to a cash rate target of 1.85%. The market’s interpretation of the forward guidance led to a sell off in the A$ and a rally in Australian government bonds. The 2-year yield fell by about 4bps post-statement but is still cheaper than last Friday’s close (Australia was on a bank holiday yesterday). We’re seeing central banks alter their language as they enter neutral rate ranges and guide that how much further they go and at what pace will be more data dependent. In Australia’s case, it involves noting they are not on a pre-set path. Markets are incorrectly interpreting that as dovish pivots in my opinion and therefore at risk of getting caught flat-footed yet again should central banks hike by more than priced as in the case of the Fed. As for the RBA, they totally blew it on inflation much like the Fed so I don’t know why any analyst or trader would pay much attention to their forward guidance anyway.

Chart 1: Markets Reduce RBA Pricing

The US calendar only includes vehicle sales for the month of July that are expectedly to post a modest rise late in the day. Lagging JOLTS job openings and quit rates for June won’t help with Friday’s nonfarm payrolls but watch for further signs they are pulling off while I’ll bet many of them are now zombie postings anyway. A trio of Fed-speakers round it all out including Evans (10amET), Mester (1pmET) and Bullard (6:45pmET).