Macro Digest: Bond alert and why China rules the world
- China is en route to turn PPI positive by year's end
- US economic weakness may spark bond yield rally
- US deficit poised to deepen (even with defence cuts)
- Going underweight bonds is compellingly logical
- China and Japan dictate global economic trajectory
China is en route to turn PPI positive by the end of the year!
China has been a net exporter of deflation for many years. Indeed, the last time China had positive PPI was in 2012 and back then inflation was 4% in the US.
Of course this is by the end of the year and in between we will still see the US economy weakening again, but this is not good for long-term bond returns, and it could be the catalyst for a rally in yields.
It also comes as major investment banks and governments offices are busy adjusting their US and China infrastructure and overall fiscal deficits higher post the US election.
Two of these recent expansions of fiscal deficits are already apparent, indicating that the US deficit will deepen from circa 3% to 5% and that’s assuming defence cuts! It’s not only Japan that is getting ready to spend more money than it has.
This is a signal not to be ignored! Underweight bonds looks the most appealing in more than a decade on this news alone before even looking at the question of a bond bubble and failed “low for infinity” impacts from totally mismanaged central banks.
I spent two weeks in Asia recently and it remains absolutely clear to me that China and Japan lead all macro impulses. China's PPI and FX devaluation dictates world growth and inflation and Japan’s fiscal and monetary experiments leads the European Central Bank and the Fed into the dark age of ignorance.
Finally, a quotable quote from Sam Ewing: "Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair".
– Edited by Clare MacCarthy
Steen Jakobsen is chief economist and CIO at Saxo Bank