Rabo: "At Least The PBOC Is Doing Something, While The Fed Will Do Nothing At All"

By Michael Every of Rabobank

It’s the Fed today but the rest of the world is rudely busy elsewhere.

In geopolitics:

India’s military struck “terrorist infrastructure” in Pakistan. Islamabad called this “an act of war” and claimed to have shot down 2 Indian fighter jets, disputed by India. There is little danger of these nuclear powers escalating to that level, but we now have three major global military actions/wars underway, again disrupting supply chains and “because markets” thinking.

Conversely, the US will stop striking the Houthis, claiming they will stop attacking ships in the Red Sea: did President Trump take the Houthis out, or did the Houthis taqiyya Trump out? If true, this could see freight rates fall as Suez reopens to business.

However, this bilateral ceasefire doesn’t apply to Houthi attacks on Israel, who got no heads up of the Trump decision. On that note he added, “I’ll discuss that if something happens.” Like international airports being hit, as just happened to both sides (one much harder than the other)?

A Sudanese paramilitary is attacking the Red Sea’s Port Sudan and its airport. All aid comes in from there, which Houthi action had already disrupted. Without it, 25 million Sudanese face starvation risks… with minimal western media coverage or public outrage.

Trump stated, “It’s crunch time for Iran,” then teased, “A very BIG announcement… and it’s really positive… One of the most important announcements in many, many years,” ahead of his trip to the Middle East starting Monday. Who knows what that means.

Trump also said he didn’t need any Canadian products before meeting Canadian PM Carney; then flattered him; then told him perhaps the USMCA trade deal wasn’t needed anymore; then replied, “Never say never,” when told Canada was never going to be for sale. A Canadian take was: “Mr. Trump did not move on his trade war with Canada. Not an inch. In the Oval Office, Mr. Carney wasn‘t nearly as tough-talking as he had been when campaigning for office.”

The Wall Street Journal reports ‘US Orders Intelligence Agencies to Step Up Spying on Greenland’, where this “Effort underscores the seriousness of Trump’s intent to acquire the island from Denmark.” That’s at least consistent – and again, welcome to Monroe Doctrine realpolitik.

German Chancellor Merz humiliatingly failed to be elected by the Bundestag at his first attempt, only getting there second time round, and still with a few defectors from his coalition. Not the best of starts for what’s supposed to be a transformative period of leadership, as the AfD rises above his CDU to become the most popular party in the country.

In geoeconomics:

The UK agreed an FTA with India allowing citizens from both to avoid paying National Insurance (NI) if working in the other for three years, which hugely favours India. This is sold as a win by the Labour Party that cut winter fuel allowances to pensioners to look tough, raising little revenue but smashing its popularity. This deal adds £4.8bn to UK GDP by 2040, so under 10 pence a week per capita, and is opposed by the Conservative and Reform parties and even some Labour MPs privately, given the government just raised NI on workers. The Daily Mail puts it: “Fury at 'two-tier Keir’s’ tax break for Indian workers that will make it cheaper to employ foreign staff.”

From the India side this is being acclaimed as a big win, and it is. Moreover, in their eyes the chances of the UK now flooding them with manufactured goods, as happened with their ASEAN FTA, is minimal given the UK doesn’t make much they need. Note their underlying assumption that FTAs are aimed at net exporting more while the UK seems to think they are a good thing, “because markets.”

US Treasury Secretary Bessent again said the US is close to trade deals with 17 countries, and again these could be announced soon. He added the US doesn’t wish to decouple from China, just regain production in key sectors.

He and the USTR are to travel to Switzerland later this week to meet Chinese economic officials, including Vice Premier He Lifeng, for talks. These are apparently aimed at de-escalation rather than a trade deal. However, China’s Commerce Ministry said these must be “equitable and mutually beneficial [and] China will safeguard its national interest and won’t compromise principles for an agreement.” Where that leaves room for compromise remains to be seen, but markets will love it regardless.

Politico says, ‘EU countries soften push to stop Chinese tech buyouts’ as “Capitals are set to weaken rules that would require them to scrutinize foreign investments in sensitive technologies such as semiconductors and AI, a draft document shows.” Really, what could go wrong there as the US makes clear it *will* decouple from China in these areas, and China’s Xi heads to Moscow to wave next to Russia’s Putin?

Notable for its zeitgeist, the FT’s Martin Wolf appears to have had a Damascene conversion in his latest op-ed. He now wants the US and China to lose the trade war because the latter is a mercantilist (who knew!) – but he still believes it must shift to domestic consumption ahead, “because markets.” Which is of course how all mercantilists think and act, right?

In markets:

The PBOC cut its 7-day reverse repo rate from 1.5% to 1.4% and trimmed banks’ Reserve Requirement Ratio another 50bps, alongside a 25bp cut for targeted lending to priority sectors like tech and green finance and to housing loans, as well as increasing facilities like the Securities, Fund, and Insurance Swap Facility and share buyback lending programs by CNY800bn. It also pledged to maintain “ample liquidity” through tools like the Medium-term Lending Facility (MLF) and open market operations. However, none of the above measures individually or collectively have managed to reverse the trend lower in underlying GDP growth rates and consumer sentiment so far, and they look even less able to lean against the tectonic plate-shifting going on in geopolitics and geoeconomics.

Then again, at least the PBOC are doing something, when the Fed today is likely to do nothing at all.

China’s central bank cuts key rates, injects 1 trillion yuan 3 hours after agreeing to trade talks to prop up economy and give communist party ammo for negotiations.

Tomorrow the Fed will do precisely none of that.

— zerohedge (@zerohedge) May 7, 2025