6 July

Wrap

The markets got totally spooked by a range of ISM reports today. The services index came in very weak, compared to recent months, which I would have though would have been expected. Labour costs were expected to rise, suggesting that labour shortages were the problem. For me, this points to inflation, but the ‘weaker growth’ narrative dominated and yields fell further across the board. The weighted US ISM survey for manufacturing and services fell from a recent high of 14% to 5%. Presumably the weighting is by contribution to GDP in which case these figures will be mainly services activity. I these are “diffusion indexes,” which are based on asking purchasing managers on their expectations of future economic activity. I don’t suppose these individuals have a crystal ball that is clearer than anyone else’s.

Anyway, the market seems to have taken the figures to heart and pivoted in the predictable deflationary direction. Nearly all equity indexes down, commodities down quite heavily, bond yields down, USD up. Exceptions are that the VIX was up a bit and the NDX eked out a gain, presumably in response to the idea that it’s a long-duration asset.

Why is Japan like it is?

Japan’s working-age population has been declining for decades. This will reduce demand, a bit. But a lot of those retirees are still consuming stuff. Meanwhile, the labour supply is drying up. Assuming the magnitude of the first effect is less than that of the second, surely this would result in increasing wage costs and inflation. Obviously, I’m missing something, but what?

China

Something is pretty odd about China. Didi, which just IPOed in NY, suddenly got removed from the app store. I think this means that new drivers can’t sign up. But what it really means is that the Emperor Xi will not tolerate dissent. How anyone can invest in equities in China is beyond me. I can see the appeal of sovereign local currency bonds, as it’s unlikely to default and current interest rates are bound to go down. OK, maybe they’ll go up for a while, but China has had its industrial revolution and is now following Japan down the path to deflationary despondency. Well, that’s my view, obviously.

On the Didi fiasco, maybe the authorities were sending a signal “List in China, or else feel the effect of our wrath!” The stock is down 30% within days, and other China US issues are in doubt.