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Will PMIs Show Economies Hit Bottom? Are US-China Tensions Rising Again?

Will PMIs Show Economies Hit Bottom? Are US-China Tensions Rising Again?



March was when the markets froze up.  Many, including myself, thought closing the markets was possible as has been done during other big shocks and without jeopardizing the reputation of exchanges or officials.   Central banks and governments around the world began responding in earnest to the impact of economic shutdowns the market disruptions.  The MSCI All Country World Index (ACWI) bottomed on March 23.  So did the S&P 500, while Europe's Dow Jones Stoxx 600 bottomed a week earlier (March 16), and the MSCI Asia Pacific Index recorded its low a couple of days later (March 19).

April was about further policy response.  Efforts were increased in terms of size, scope, and/or time.  Officials were successful in removing the far left-hand tail risk.  Punishing volatility in the markets eased.  Stress in the funding markets relaxed.  The compression of demand, supply chain disruptions, the contagion in the US meat processing industry, and some peculiarities with the settlement of the deliverable futures light sweet crude oil contract, distorted the commodity prices.  The negative oil prices were quickly reversed and were near $20 a barrel by the end of the month.

The first half of May was characterized by the main equity markets consolidating the previous month's strong bounce. None of the major benchmarks (cited above) rose above the highs set in late April.  The dollar had weakened against most of the major currencies in April (except the euro and Swiss franc) and strengthened in the first part of May.  The lack of a strong EU response and a German Constitutional Court ruling made it more difficult for the ECB to keep the peripheral premium from widening over Germany and throwing a spanner into its transmission mechanism.

May is when the high-income economies may hit a trough as many countries begin relaxing their lockdowns.  Of course, the difference between relaxing lockdowns and economic recovery may be quite stark, but the first thing that happens is that contractions slow and stop.  In the monthly cycle of high-frequency data, the first evidence will likely be seen in soft data like surveys, like the Empire State Survey released at the end of last week.  It rose from a catastrophic -78.2 in April to a horrific -60.0 in May.  

The data highlight of the week ahead will be the preliminary May PMI reports. Marginal improvement is generally expected, and we will see if the underperformers are punished.  The Philadelphia Fed's manufacturing survey and Germany's ZEW investor survey will also provide tests of the hypothesis.  

The idea of a "V" recovery has long been abandoned, though apparently it still makes for a good foil. Still, imagine what a chart of growth will look like if, after a dramatic contraction in Q2, the economy is flat Q3. Alternatively, the idea of a "K" bottom has much to commend itself.   It recognizes that as often is the case, economic and financial pre-conditions matter in determining who can take advantage of the opportunities the fluidity of events creates.

It does not mean that more stimulus will not be needed.  Federal Reserve Chairman Powell was pretty clear on the need just as the House Democrats drafted the fourth fiscal response, assembling a $3 trillion package.  Despite the record refunding and the new supply that should be anticipated, US rate 10- and 30-year yields fell last week (four and seven basis points, respectively).  On May 19, both Powell and Treasury Secretary Mnuchin testify before the Senate Banking Committee.  A bipartisan group of Senators wants the Fed to buy long-dated local government bonds.  Currently, the Fed does not purchase muni bonds with maturities greater than three years. 

In fact, the recovery itself may need new spending, not simply replacing lost incomes during the shutdown.  Europe may again move to center stage next month as the EU plans for a recovery effort are expected to reach fruition and ECB loans (TLTRO) that could have a yield as much as minus 100 bp if certain lending criteria are met.  Also, as early as next month, the ECB could extend its Pandemic Emergency Purchase Progam.  Though it need not be in a hurry, it would likely have to be done by late Q3.  The Bank of England's new governor, Bailey, hinted that its asset purchase program may be extended next month as well.  

Some of the Federal Reserve's programs are only now coming into operation.  Still, it is making small, seemingly frequent adjustments.  It is dropped the three-month repo operation, for example, as the market showed little interest.  The Fed has also reduced its Treasury purchases to a $6 bln a day, down from a peak of $75 bln a day.  The Reserve Bank of Australia has slowed its bond purchases, while the Bank of Japan is buying fewer ETFs and REITs.  

Governor Bailey at the Bank of England, the new Bank of Canada Mecklem, and several Fed officials, including Powell weighed-in against negative interest rates.  Nevertheless, the UK two-year bond yield finished the week with an implied yield of less than zero,  In the US, beginning with the March 2021 contract, the fed funds futures strip is also implying slightly negative rates.  In the US, this seems peculiar to the futures contract.  The more liquid Eurodollar futures do not show negative rates, and the US 2-year yield has been gyrating in the trough between 10 and 20 bp for a couple of weeks.  The Reserve Bank of New Zealand explicitly kept negative rates on the table, and its two-year yield was halved last week to six basis points.  What the RBNZ did was double its bond-buying program.  

In addition to the economic data, two events could usher in a new phase in the US-China rivalry.  The first is the World Health Organization pandemic conference.  While the substance is obviously important, there is an important subtext.  Will Taiwan be given observer status as several countries, including the US, have vocally advocated over Beijing's objections?  The Wall Street Journal called it a "test of America's leverage in its broader political struggle with China."  Even if this is hyperbolic, as Taiwan's success in combatting the coronavirus is noteworthy in its own right, it may suggest a greater willingness to go against China's wishes, even if it means retaliation (e.g., Australian barley and beef sanctions).  

The second event is the National People's Congress at the end of next week.  It will likely provide formal support for additional fiscal and monetary support for the economy.  The event is also important because it may clear the deck, so to speak for the US to issue several reports.  The Treasury's report on the foreign exchange market was due last month, and while there have been some more pressing matters, it is expected in the coming weeks. While the dollar is holding above CNY7.0, whose penetration was cited by the US when China was labeled a currency manipulator (and then reversed itself), so clearly took the veneer off the primarily political judgment as to render it of little strategic value.  In any event, after weakening in March, alongside nearly every other currency against the dollar, the yuan has been trading quietly in range.   

Also, soon the State Department will issue its evaluation of Hong Kong's autonomy.  If it is not affirmed, Hong Kong will lose its special trade privileges, which exempt it, for example, from the tariff on the mainland products levied by the US.  This seems like a strong measure, and it may not be used at this, the first opportunity.  As the recent arrests of some of the leaders of the protests demonstrate, however, Hong Kong officials are repressive in their own right.   Meanwhile, a bill is making its way through Congress that empowers the president to sanction individual Chinese officials for human rights violations, where the treatment of Uighurs has been a catalyst.

Tensions with China are likely to rise in the weeks and months ahead.  This seems to be typically the case at this point in the US political cycle.  Last week, the US granted a 90-day extension of its temporary reprieve from the ban on using Huawei equipment.  It is difficult to know if the reprieve will be extended again, but the purpose is to facilitate a transition away from Huawei.  At the same time, the US blocked global chipmakers from supplying Huawei, and some retaliation by Beijing seems likely, albeit asymmetrical. In the context of other official US rhetoric, fears of an escalation of tensions may throw a spanner into risk appetites. 


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Why so sad?

Over the past few years, consumer sentiment has increasingly run far below the level predicted by models based on economic data. The Economist illustrates…



Over the past few years, consumer sentiment has increasingly run far below the level predicted by models based on economic data. The Economist illustrates the issue with a graph:

The Economist attributes the gloomy outlook to the lingering effects of Covid.  I suspect the actual explanation is growing political polarization.  Consider the growing partisan gap in how voters evaluate the economy:

Back in the 1990s, there wasn’t much partisan difference in how voters evaluated the condition of the economy.  This was before the public had come to view people with different points of view as the enemy.  I suspect that the responses to polls were more honest back then.  After 9/11, opinion became more polarized.  After Trump was elected, polarization increased even further.  Today, voters in the two major parties live in completely separate worlds, consuming media that is tailored to fit their prejudices.  Thus it’s not surprising that they have radically divergent views of the world.

Voters seem to rate the economy much more highly when their preferred candidate is in power, perhaps partly due to the mistaken assumption that presidents somehow control inflation and the business cycle.  (A myth that is encouraged by our media.)

Until 2021, the biases of the two parties roughly offset, leaving the overall rating roughly equal to the rating one would expect based solely on the economic data.  This changed after Joe Biden became president.  Unlike with President Obama (who inherited a weak economy), Democratic voters are only lukewarm on the current president. 

In contrast, Republican voters have an extremely negative view of President Biden.  With only lukewarm sentiment from Democrats, there is nothing to offset the extremely low economic rating of Republicans.  This leaves the overall rating for the economy far below the level you’d expect with rising real wages, 3.8% unemployment, and 3.7% inflation.  At one point in 2022, consumer sentiment fell below the lowest reading of the early 1980s, when the economy was in far worse shape.

I don’t believe these consumer sentiment figures represent the actual views of the public.  Consumer spending is still very strong, an indication that people feel pretty good about the economy.  Actions speak louder than words.  I suspect the low reported sentiment is mostly a reflection of GOP voters expressing anger at the current political situation.

My own view is that recent economic policy (since 2017) is quite bad, but the negative effects will show up in future years, at a point where we will need to confront the effects of an out of control federal budget.  If people think the current economy is bad, wait until they see what’s coming down the road in a few years!

PS.  Note to commenters:  If you think the economic model is wrong, you need to explain why it fit the data for the 40-year period from 1980 to 2020.


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Menendez indictment looks bad, but there are defenses he can make

The indictment of Sen. Bob Menendez is full of lurid details – hundreds of thousands of dollars in cash stuffed into clothes among them. Will they tank…




Senate Foreign Relations Committee Chairman, Sen. Bob Menendez, D-N.J., right, and his wife Nadine Arslanian. AP Photo/Susan Walsh, File

Reactions came quickly to the federal indictment on Sept. 22, 2023 of New Jersey’s senior U.S. senator, Democrat Bob Menendez. New Jersey Gov. Phil Murphy joined other state Democrats in urging Menendez to resign, saying “The alleged facts are so serious that they compromise the ability of Senator Menendez to effectively represent the people of our state.”

The indictment charged Menendez, “his wife NADINE MENENDEZ, a/k/a ‘Nadine Arslanian,’ and three New Jersey businessmen, WAEL HANA, a/k/a ‘Will Hana,’ JOSE URIBE, and FRED DAIBES, with participating in a years-long bribery scheme…in exchange for MENENDEZ’s agreement to use his official position to protect and enrich them and to benefit the Government of Egypt.” Menendez said he believed the case would be “successfully resolved once all of the facts are presented,” but he stepped down temporarily as the chairman of the Senate’s influential Committee on Foreign Relations.

The Conversation’s senior politics and democracy editor, Naomi Schalit, interviewed longtime Washington, D.C. lawyer and Penn State Dickinson Law professor Stanley M. Brand, who has served as general counsel for the House of Representatives and is a prominent white-collar defense attorney, and asked him to explain the indictment – and the outlook for Menendez both legally and politically.

What did you think when you first read this indictment?

As an old seafaring pal once told me, “even a thin pancake has two sides.”

Reading the criminal indictment in a case for the first time often produces a startled reaction to the government’s case. But as my over 40 years of experience defending public corruption cases and teaching criminal law has taught me, there are usually issues presented by an indictment that can be challenged by the defense.

In addition, as judges routinely instruct juries in these cases, the indictment is not evidence and the jury may not rely on it to draw any conclusions.

A man in a suit pointing at a poster board with various photos on it.
Damian Williams, U.S. Attorney for the Southern District of New York, speaks during a press conference on Sept. 22, 2023 after announcing the Menendez indictment. Alexi J. Rosenfeld/Getty Images

The average reader will look at the indictment and say “These guys are toast.” But are there ways Menendez can defend himself?

There are a number of complex issues presented by these charges that could be argued by the defense in court.

First, while the indictment charges a conspiracy to commit bribery, it does not charge the substantive crime of bribery itself. This may suggest that the government lacks what it believes is direct evidence of a quid pro quo – “this for that” – between Menendez and the alleged bribers.

There is evidence of conversations and texts that coyly and perhaps purposely avoid explicit acknowledgment of a corrupt agreement, for instance, “On or about January 24, 2022, DAIBES’s Driver exchanged two brief calls with NADINE MENENDEZ. NADINE MENENDEZ then texted DAIBES, writing, ‘Thank you. Christmas in January.’”

The government will argue that this reflects acknowledgment of a connection between official action and delivery of cash to Sen. Menendez, even though it is a less than express statement of the connection.

Speaking in this kind of code may not fully absolve the defendants, but the government must prove the defendants’ intent to carry out a corrupt agreement beyond a reasonable doubt – and juries sometimes want to see more than innuendo before convicting.

The government has also charged a crime calledhonest services fraud” – essentially, a crime involving a public official putting their own financial interest above the public interest in their otherwise honest and faithful performance of their duties.

The alleged failure of Sen. Menendez to list the gifts, as required, on his Senate financial disclosure forms will be cited by prosecutors as evidence of “consciousness of guilt” – an attempt to conceal the transactions.

However, under a recent Supreme Court case involving former Gov. Bob McDonnell of Virginia for similar crimes, the definition of “official acts” under the bribery statute has been narrowly defined to mean only formal decisions or proceedings. That definition does not include less-formal actions like those performed by Sen. Menendez, such as meetings with Egyptian military officials.

The Supreme Court rejected an interpretation of official acts that included arranging meetings with state officials and hosting events at the Governor’s mansion or promoting a private businessman’s products at such events.

When it comes time for the judge to instruct the jury at the end of the trial, Sen. Menendez may well be able to argue that much of what he did not constitute “official acts” and therefore are not illegal under the bribery statute.

This case involves alleged favors done for a foreign country in exchange for money. Does that change this case from simple bribery to something more serious?

The issue of foreign military sales to Egypt may also present a constitutional obstacle to the government.

The indictment specifically cites Sen. Menendez’s role as chairman of the Senate Foreign Relations Committee and actions he took in that role in releasing holds on certain military sales to Egypt and letters to his colleagues on that issue. The Constitution’s Speech or Debate Clause protects members from liability or questioning when undertaking actions within the “legitimate legislative sphere” – which undoubtedly includes these functions.

While this will not likely be a defense to all the allegations, it could require paring the allegations related to this conduct. That would whittle away at a pillar of the government’s attempt to show Sen. Mendendez had committed abuse of office.

In fact, when the government has charged members of Congress with various forms of corruption, courts have rejected any reference to their membership on congressional committees as evidence against them.

Three men in suits, standing in front of a fire engine.
NJ Gov. Phil Murphy, left, seen here in 2018 with fellow Democrats Sens. Robert Menendez and Cory Booker, has called on Menendez to resign. AP Photo/Wayne Parry

How likely is Sen. Mendendez’ ouster from the Senate?

Generally, neither the House nor Senate will move to expel an indicted member before conviction.

There have been rare exceptions, such as when Sen. Harrison “Pete” Williams was indicted in the FBI ABSCAM sting operation from the late 1970s and early 1980s against members of Congress. He resigned in 1982 shortly before an expulsion vote. With current Democratic control of the Senate by a margin of just one seat, Sen. Menendez’ ouster seems unlikely even though the Democratic governor of New Jersey would assuredly appoint a Democrat to fill the vacancy.

“In the history of the United States Congress, it is doubtful there has ever been a corruption allegation of this depth and seriousness,” former New Jersey Sen. Robert Torricelli said. True?

That seems hyperbolic. The Menendez case is just the latest in a long line of corruption cases involving members of Congress.

In the ABSCAM case, seven members of the House and one Senator were all convicted in a bribery scheme. That scheme involved undercover FBI agents dressed up as wealthy Arabs, offering cash to Congressmembers in return for a variety of political favors.

In the Korean Influence Investigation in 1978 – when I served as House Counsel – the House and Department of Justice conducted an extensive investigation of influence peddling by Tongsun Park, a Korean national in which questionnaires were sent to every member of the House relating to acceptance of gifts from Park.

Going all the way back to 1872, there was the Credit Mobilier scandal that involved prominent members of the House and Vice President Schuyler Colfax in a scheme to reward these government officials with shares in the transcontinental railroad company in exchange for their support of funding for the project.

Stanley M. Brand does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von der Leyen just said what?…

This past Wednesday, President of the European…



Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von der Leyen just said what?...

This past Wednesday, President of the European Commission Ursula von der Leyen delivered a speech before the 2023 Atlantic Council Awards in New York, where she sounded the alarm over the specter of nuclear war centered on the Russia-Ukraine conflict. But while invoking remembrance of the some 78,000 civilians killed instantly by the atomic bomb dropped on Hiroshima at the end of WWII, she said her warning comes "especially at a time when Russia threatens to use nuclear weapons once again". She  actually framed the atomic atrocity in a way that made it sound like the Russians did it. Watch:

There was not one single acknowledgement in Von der Leyen's speech that it was in fact the United States which incinerated and maimed hundreds of thousands when it dropped no less that two atomic bombs on Japanese cities.

Here were her precise words, according to an Atlantic Council transcript...

You, dear Prime Minister, showed me the meaning of this proverb during the G7 summit in Japan last year. You brought us to your hometown of Hiroshima, the place where you have your roots and which has deeply shaped your life and leadership. Many of your relatives lost their life when the atomic bomb razed Hiroshima to the ground. You have grown up with the stories of the survivors. And you wanted us to listen to the same stories, to face the past, and learn something about the future.

It was a sobering start to the G7, and one that I will not forget, especially at a time when Russia threatens to use nuclear weapons once again. It is heinous. It is dangerous. And in the shadow of Hiroshima, it is unforgivable

The above video of that segment of the speech gives a better idea of the subtle way she closely associated in her rhetoric the words "once again" with the phrase "shadow of Hiroshima" while focusing on what Russia is doing, to make it sound like it was Moscow behind the past atrocities.

Via dpa

Russian media not only picked up on the woefully misleading comments, but the Kremlin issued a formal rebuke of Von der Leyen's speech as well:

In response to von der Leynen's remarks, Russian Foreign Ministry spokeswoman Maria Zakharova accused the European Commission president of making "no mention whatsoever of the US and its executioners who dropped the bombs on populated Japanese cities."

Zakharova responded on social media, arguing that von der Leyen's assertions on Moscow's supposed intentions to employ nuclear weapons "is despicable and dangerous" and "lies."

Some Russian embassies in various parts of the globe also highlighted the speech on social media, denouncing the "empire of lies" and those Western leaders issuing 'shameful' propaganda and historical revisionism.

Tyler Durden Sun, 09/24/2023 - 13:15

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