By Michael Every of Rabobank
Yes, it’s payroll Friday again. Oooh, imagine if it’s a really weak number, as flagged by the ADP! Ooooh, imagine if it’s a really strong number, and the ADP is wrong! I could probably stop writing there. (And it would be considered a far better Daily by some critics.)
At least here in Asia it’s also payload Friday. Not just because that jobs report can deliver a mighty punch long after markets have closed, catching them on the chin if they have dropped their guard for the weekend; but more broadly because bombs keep being dropped. In some cases literally.
Metaphorically, but for markets most scary, the Bank of England –after Asia had closed yesterday– went through all of the pro-forma “transitory” inflation yadda-yadda; but it also had the temerity to suggest that at some stage ahead it will start to reverse, not taper, QE.
Let me just say that again: REVERSE, not TAPER QE.
So not just less bond buying – actual bond selling. Are you following me here? And that will apparently happen once interest rates have reached 0.50%, which is hardly a towering height. Yes, as Stefan Koopman covers here, those Britannia rules will likely kick in more than two years from now: but, boy will they make waves. Let me put it like this: if someone told you a major war was about to start in two years, what would your investment decisions look like?
True, the BOE is a minnow compared to the Federal Reserve whale that is still only flirting with tapering, and which may be flirting a whole lot more or less after payrolls today. But US Senator Manchin just urged Fed Chair Powell to “immediately reassess America’s stance on monetary policy and begin to taper the Fed’s ongoing stimulus in order to avoid saddling Americans with inflation taxes and overheating our economy.” So that sounds like a firm no on both QE *and* the $3.5 trillion stimulus bill then, eh?
To have a big central bank talking about a REVERSAL of QE and draining liquidity rather than play-pause-play-pause-play central-bank balance-sheet expansion is a bombshell: on central-bankery, which does not understand why it was forced to do so much QE; and on markets, which *do* understand how they forced central banks to do so much QE – for them.
The irony, of course, is that this ‘wot-no-Roaring-20s?’ bombshell is being dropped just as Covid re-explodes, meaning more of an economic hit, and so fiscal deficits staying larger for longer. So forget about Build Black BlahBlah: we have rates to raise –years after currently high levels of inflation have dropped back to much lower ones– and liquidity to taper, forcing the cost of borrowing for governments much higher in some, but not all, cases!
On Delta itself, Bloomberg reports the travails of Wall Street banks suddenly having to U-turn on their work-from-office-for-16-hours-a-day mandates as vaccinated employees get sick too. Side-stepping the virus discussion for a moment, let’s reiterate that these are the same ‘masters of the universe’ who are supposed to be able to see things coming, and whom prognosticate on the virus outlook to markets all the time: oopsie! Then again, they are the same geniuses who went all in on a Marxist economy without reading any Marx.
And on that front, bombs keep getting dropped too. In the last 24 hours alone we have seen China crackdown on: news algorithms, to not show salacious celebrity gossip, etc.; ‘fake news’ and citizen journalism; ‘vulgar’ live-streaming events; and even art and literary criticism – in short, social media needs to become socialist media; and also on liquor and e-cigarettes. Let’s see what is dropped on us today, pre-payrolls. Of course, whatever happens won’t phase Ray Dalio, the deep-thinking billionaire now explaining on LinkedIn that this is not anti-capitalism, just state capitalism. Perhaps. And perhaps Mr Dalio might like to dip into what Engels and Lenin had to say on the topic.
Meanwhile, shells were fired from Hezbollah- (read Iran-) controlled Lebanon into Israel yesterday, and Israel responded with its own bombing. That’s in line with regional norms but is rare on that front. It also sits alongside the new ultra-hawkish Iranian president; the drone attack on an Israeli cargo ship; the attempted hijacking of a tanker, which recordings say was Iranian-led; reports four other tankers were “not under command” for a period of time; Iran now having a pipeline so its oil can avoid the Straits of Hormuz (and plans for another); despite another US olive branch, further signs Tehran may not be interested in a nuclear deal; the Israeli defence minister saying he is prepared to strike Iran – and the defence budget just boosted; and that Tehran is 10 weeks away from the material needed to build a nuke (which would need a further 1-2 years to construct). If you think global shipping and energy are expensive now, project forward from here pessimistically.
Recall my question: if someone told you a major war was about to start in two years, what would your investment decisions look like? Perhaps we already see: just shrug. Unless QE is reversed in the meantime!
Want another bomb? Apple has announced it will from now on be scanning your phone to check if you have the wrong kind of photos on it. Yes, nobody should want the kind of photos they are looking for, so it is a ‘social good’. But suddenly we are having similar discussions about actions on both sides of the Pacific. And what stops that kind of invasive procedure there, and how does this sit with adverts for “iPhone = privacy and security”? Again, we are having similar discussions about actions on both sides of the Pacific. Or we aren’t, because we are too busy doing U-turns over where we work from as we decide to go all in on things we haven’t actually read about, and don’t read about places that may be about to go all in.
This morning saw the RBA’s Statement on Monetary Policy and a speech from Governor Lowe, which made clear the Bank is going to look through Covid lockdowns of 2/3 of the population (and with not enough vaccines to hit their target for months), but will respond if needed. For now, they are going to stick with the partial QE tapering the BOE and Senator Manchin are also talking up: the RBA ahead of the game, eh?! Inflation is not a problem with low wages, said Lowe, which is true if he means second-round effects. The SoMP also specifically says the RBA are “watching trends in household borrowing carefully”: it’s unclear if this means they will act if people are borrowing too much, or if they are not borrowing enough to keep pushing house prices higher.
US 10-year yields are back up to 1.23% at time of writing: let’s see where this increasingly-volatile benchmark sits post-payrolls, and any other payloads that hit markets.
But one final bombshell for lovers of sport and egg on face: Lionel Messi has left FC Barcelona – just after Spain’s La Liga sold 10% of their revenues and a 10% stake in a new commercial vehicle to PE firm CVC Partners for $3.2bn, on the view Messi would stay and that La Liga can become bigger than the English Premier League. More brilliant Wall Street-ery in action as we wait to see where Messi will next be in action: PSG? Man City? A Sunday league pub team?
Fri, 08/06/2021 – 08:20