Things Are Moving Faster Than Most People Realize

By Michael Every of Rabobank

Irish job in a China shop

The iPhone ‘ban’ by China story took on a new dimension yesterday. Several news agencies confirmed an earlier report from the Wall Street Journal that Beijing looks to expand its ban of the use of iPhones in sensitive departments of government to include government-backed or controlled agencies and state companies. Considering that there are a whole lot of those (especially the latter), it is no surprise that this had a material impact on not just on Apple shares, which have lost more than 6% in the past two days, but also on the broader tech indices. The S&P technology index declined nearly 2%, where the S&P500 was down 0.3%.

Given that said company is not just a key vendor of phones in China but also a big employer, it would also strengthen the view that ‘national security trumps economics’ nowadays. If this is China’s – belated – answer to the blacklisting of Huawei by the Trump administration in 2019, it certainly doesn’t spell much good for the international relation between China and the US. Not that we had ever believed that recent initiatives to re-start a dialogue were likely to be successful, but these developments will arguably nullify any gains made in recent months. As we pointed out in yesterday’s Global Daily, the logical conclusions are that the US will likely increase trade sanctions further. And so, more decoupling and (potentially) less growth and more inflation.

In fact, things may be moving faster than most people realize. For, barely a week after the introduction of a new phone by China’s Huawei containing a chip with 7nm technology (significantly below the threshold of 14nm that the US government has said it is willing to allow on national security grounds), US lawmakers have now said that China’s top chipmaker, SMIC may have violated sanctions by supplying components to Huawei. This recent dynamic also raises questions on “what’s next”.

Does the car sector qualify for a closer scrutiny on national security grounds? You may think that sounds silly, but aren’t modern (EV) cars – some of which look more like coming straight out of Star Trek – nothing more than ‘mobile phones with an engine built around it’? And this thinking is not just theoretical. In June already Reuters reported that Tesla cars were prohibited from entering a Chinese coastal district because of a “secretive annual summer party leadership conclave”. And wouldn’t such thinking come in handy for European/German policy makers, who increasingly fear they are losing the race with China on EV’s? For Germany in particular, with cars accounting for 16% of goods exports, this would have grave consequences. Although the German government recently, and a bit surprisingly, ditched its earlier announced plan to provide significant energy subsidies for its ailing industry, when push comes to shove we would deem it quite unlikely that the German government is willing to "throw its car sector under the bus"!

Of course, things never move in straight lines and this also holds for geopolitics. For one, there is also a bright spot on the horizon as the United Kingdom has re-joined the European Union's Horizon science research program. This represents a further thawing of UK-EU relations following Brexit, coming on the heels of the Windsor Framework that Prime Minister Sunak negotiated with Brussels in February. The EU had refused to discuss Horizon membership until tensions over trade rules governing Northern Ireland were settled. While this does not mean that similar deals with the bloc are imminent, it raises hopes that pragmatism continues to prevail between the two former partners. A key issue ahead is the looming post-Brexit deadline on electric vehicle trade.

You bet that Europe is eagerly hoping for a completely different deal to be struck as well, although it can’t do much other than waiting.

Although it appeared just two weeks ago that an ‘in principle’ endorsement by Offshore Alliance members of an agreement with Woodside Energy had nipped the risk of disruptive strikes in Australia’s gas (distribution) sector in the bud, workers at Chevron have held out so far. They have now started their long-awaited partial strikes at the Gordon and Wheatstone facilities, together good for some 7% of global LNG supply according to Bloomberg.

Europe doesn’t buy a lot of Australian gas (which is largely aimed at the Asian market), but liquid gas is fungible, and global demand and supply conditions are such that these developments do have a material impact on European gas prices. The latter have been increasingly volatile off late – the ‘curse of interesting times’ as our Energy analyst Joe DeLaura would put it. Having hit a ‘low’ of around EUR25/MWh over the summer months, Dutch 1m TTF forward prices spiked to over EUR40/MWh in mid-August, to retreat again to around EUR30 in recent weeks. However, the recent developments in Australia have helped push prices up to EUR35 again.

We have been arguing for quite some time that although Europe has made progress in cutting back on its gas consumption (according to our calculations, there has been a structural weather-adjusted reduction of between 15 to 20% in the Eurozone, depending on the exact comparison date) and is well ahead of schedule in filling up storage capacity, the Australian strike(s) only underscores Europe’s vulnerabilities. More storage capacity -and harder to achieve- structural gas saving is required to tackle those remaining vulnerabilities in this area.

Speaking of… how can central banks make policies - which often are all about tens of basis points – when even the economic statistics move more than that simply because of revisions? Case in point are the latest Eurozone GDP growth data from Eurostat, which were released yesterday. The headline figure for Q2, which was accompanied by a first estimate of spending components data, was revised down from +0.3 to +0.1 %q/q. In basis points it was c. 15bp. That’s half a rate hike! A key explanation for the revision was a sharp cutback in the Irish GDP numbers. Initially these had shown a 3.3% q/q gain, but the latest data show a much more modest 0.5% increase.

As my colleague Stefan Koopman points out in this short and sweet publication, yesterday was no exception. The Irish data have been a key source of volatility in the Eurozone data, sometimes even obscuring the underlying trend. Ireland's rise as a European hub for multinational companies in sectors like medical equipment, pharmaceuticals, ICT, and aircraft leasing has greatly impacted its GDP statistics. While part of this reflects real economic activity, the sharp increase in Irish GDP growth stems from assets being relocated to Ireland for tax purposes. The Irish data have been derided as "leprechaun economics" due to this distortion. However, we argue Ireland still warrants attention as it skews Eurozone economic data and narratives in non-trivial ways. The Eurozone’s GDP rebound after the pandemic, for example, is being inflated by global profits of multinationals, instead of reflecting real domestic growth. Similarly, looking at Eurozone industrial output, stripping Ireland out of the figures leads to an entirely different image: production volumes are down 4.4% on January 2019 instead of being up 0.8% as per the official statistics, a figure that, at least, better fits recent gloomy survey data.

Policy makers may not always be able to distinguish or correct for these disturbances. But in this case we believe it does support our view, as we explain here, that the ECB will hit the pause button in its next meeting as the growth outlook is deteriorating and overtightening is becoming a real possibility. But with inflation still high, the odds of another hike are more than just a tail risk.

Bonnus :)

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