China – The crackdown intensifies.
Last week, the Chinese government increased its pressure on private businesses, this time directed towards the educational sector. Their actions over the past 6 months appear to tackle three concerns of the Chinese government: anti-trust, data security and social inequality. These actions indicate that the government is prioritizing addressing their concerns over the risk of capital outflows, both debt and equity. In the short term, China may be able to withstand market pain, given a strong economy, a strong currency and positive current account balance. Recently the PBOC cut the RRR rate, but at Friday’s Politburo meeting the government stopped short of announcing material easing measures. Asset prices in China have corrected significantly, especially in the sectors most affected: Property, technology, non-financial banks and education. Is it the right time to buy? We should not look at Chinese authorities with the same lens as European or US policymakers. Market volatility is unlikely to scare the CCP – firstly because China currently does not need foreign investment, and because the priority remains the party and the people. In the past, China has shown a much higher pain threshold relative to financial markets. In this context, it is interesting how both Western and Eastern governments are currently engaged in reforms to improve their respective economic models – and here, Chinese policymakers, in our view, are keen to avoid some of the imbalances which have plagued Western economies over the past decades.

Fed – Progress is conditional on labour markets.
Wednesdays Fed meeting was neutral, as for the first time the Committee acknowledged “substantial further progress” to its goals but pushed the taper timeline slightly further out. The outlook on the economy became more bullish, but the labour market remains the key focus for the Fed before tapering. 400k jobless claims last Thursday were slightly worse than forecasts, but this Friday’s NFP additions are expected to come in strong at 925k and we expect the labour market to continue accelerating as unemployment benefits roll off. Accordingly, we believe the Fed will hint at tapering at Jackson Hole in August, talk about it in September, make the announcement in November and commence in January.
Weaker GDP growth qoq and a general softer growth outlook post 2022 brings 10Y real rates to all-time lows of -1.17%. Nominals yields struggle to rise, as any widening is instantly met by short covering or incremental buyers – with dips becoming shallower and shorter across time.

US Fiscal – Bipartisan breakthrough.
The US Senate made significant progress towards Bidens $1.2tn infrastructure bill, thanks to a bipartisan agreement on $550bn new spending – roughly half of which is for transportation including roads, bridges and travel, while the other half is for other infrastructure including broadband and green energy. Market focus now shifts to the $3.5tn reconciliation bill that Biden wants to spend on human infrastructure including child care, which faces material opposition from Republicans and is expected to be voted on between October and December.

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