No Such Thing As Bad Publicity

By Bas van Geffen, Senior Macro Strategist at Rabobank

Trump has been found guilty of all charges in his hush money trial. While this may prevent Trump from voting for himself in November, it is questionable if this conviction will meaningfully lower his odds in the Presidential elections. In fact, as my colleague noted yesterday, perhaps the opposite is more likely. Trump may gain huge publicity and can claim to be the victim of political ‘lawfare’. Indeed, in the hours after the guilty verdict, the large inflow of new donors crashed the website for donations to Trump’s campaign.

Recall that our US strategist has assumed a Trump victory as the base scenario for our outlook beyond this year. And, taking Trump’s threats of universal tariffs seriously, that would further accelerate the trend towards protectionism and bifurcation of global trade that is currently ongoing:

• China has just restricted the exports of certain components and technologies used in the aviation and aerospace sectors;
• China has threatened “richer and more powerful countermeasures” if the US carries on endangering China’s sovereignty and security interest; and
• the European Commission’s probe into Chinese EVs is drawing to a close, although a decision on punitive import duties may be delayed until after the European Parliament elections.
• If and when Europe imposes such tariffs, expect China to respond in kind.

Such anti-dumping probes and countermeasures may only become more prevalent. Chinese data released overnight highlighted the risk that China’s domestic challenges may have global repercussions.

China’s manufacturing PMI raised a few eyebrows, particularly considering that Chinese authorities have been trying to invigorate growth by encouraging companies to renew equipment with tax-breaks and subsidized loans, and investment spending by state agencies. Despite these policies, the manufacturing index for May slipped back below the neutral mark. The index fell to 49.5; a full point below the consensus estimate. New (export) orders were especially weak. Notably, there was a clear distinction between large, medium and small enterprises. The latter group saw weaker activity whilst the large companies (which are more likely to be state-led) actually reported a slight improvement.

These observations point at weaker-than-expected growth of Chinese domestic demand despite measures to increase supply. On the one hand, this obviously raises the risk of renewed deflationary pressures – which may also have a global impact if China seeks to sell more of its oversupply abroad. But in our view the biggest risk is actually that a widening imbalance between demand and supply in China would spur more protectionist measures in the US and Europe to prevent this rising overcapacity from reaching Western shores in the first place.

We’re not the only ones concerned by this. According to a recent survey by the European Round Table for Industry, 54% of European companies and 77% of Chinese CEOs indicate that China’s industrial overcapacity will remain the biggest point of friction between China and the EU.

Such protectionist measures are strictly necessary to rebuild critical European manufacturing capacity, but they may also keep inflation elevated in the short- to medium-term. Recall that goods prices have been the main driver of European disinflation to date.

German HICP inflation accelerated sharply this week, from 2.4% to 2.8%. Part of this acceleration had been anticipated, since April data were artificially lower due to the timing of Easter. On top of this, higher energy prices drove up the inflationary impulse from energy-related costs, as did higher services inflation. The latter follows last week’s report that German negotiated wages increased sharply.

The ECB was quick to downplay the latest wage data with a blog post to “put these in perspective.” We agree with their assessment that part of this acceleration was due to catch-up effects and one-offs, but the ECB’s new wage tracker still indicates wage growth trending between 3.5% to 4.5% this year. That does leave the question to what extent businesses can and will pass these costs on to end users.

Yesterday’s release of the Eurozone business confidence surveys may encourage policymakers somewhat: although employers expect higher selling prices in the coming months, the expected rate of price hikes continues to trend lower. This suggests that companies are absorbing some of the higher costs in their margins.

That said, resilient consumer demand could still change this picture. French and German consumer spending data for April underscored that retail sales will not recover without some bumps. French consumer spending fell 0.8% m/m whilst German retail sales fell 1.2% m/m, although the March figure was revised up significantly to 2.6%. Despite weak consumer demand in April, the outlook continues to brighten due to the recovery in real wages and good job prospects. Yesterday, Eurostat reported the lowest unemployment rate ever recorded since the advent of the euro.