Rabobank: We See Central Banks iPooing Themselves
By Michael Every of Rabobank
This week, the RBA were dowks (dovish hawks), and somehow couldn’t link rates to high house prices; the Fed were dowks, and somehow couldn’t link rates to high stock prices; so, of course the BOE, who had talked up market expectations of a 15bp rate hike, were also dowks, sending bond yields tumbling as they left rates on hold.
As BOE-watcher Stefan Koopman notes in the aptly titled “Forward Misguidance”, the near-term inflation forecast was revised up to 5%(!) in April 2022, and while this is seen as “transitory”, that claim is not even backed up by the Bank’s own forecasts. Growth was also revised down, even as the Bank warned a rate increase will be necessary “over coming months” – with labor market data to perhaps prove key. Stefan warns monetary tightening into a negative supply shock could turn out to be a mistake, and that the consequences of successive forward misguidance is that front-end yield curve volatility will remain elevated.
The Old Lady of Threadneedle Street, as the BOE is still known, is trying to thread the needle. In fact, with Halloween just behind us, it is doing far more than that. Like the 2011 South Park episode ‘HumancentiPad’ –where Kyle doesn’t read the user terms and conditions on his iPad, and so gives his consent to being stitched to two other people– the BOE is using a needle to stitch itself into an RBA-Fed-BOE Centralbank-iPad, hoping it scares the market – and the plunge in yields, and surge in stocks and the US Dollar this week says it is working so far. After all, the market never reads the terms and conditions. For its part, the RBA’s Statement on Monetary Policy today noted that “a rapid trajectory of recovery seems unlikely,” wages are “only expected to increase gradually,” the Bank is “prepared to be patient on rate rises,” and the first hike is still not seen until 2024: the Aussie market was pricing in over three hikes before that release, forcing another volatile repricing.
Or the BOE will stitch itself to the RBNZ and hike rates, which Stefan clearly sees as a potential looming policy error. However, it mostly seems only emerging markets are taking inflation, and monetary policy, seriously, with the Czechs hiking 125bp yesterday, for example, while Brazil recently did 150bp in one go. Does this DM/EM divide show structural outperformance, or institutional underperformance? Or, just how unfair it is that DM can run inflation of 5% while saying “transitory”, yet EM get smacked if inflation is slightly above target for five minutes?
Yes, today “is all about US payrolls”. But it literally seems five minutes since I last wrote how boring it is to keep saying how important this number is, when most of the time it really isn’t. The market is expecting 450K for October, up from 194K – but after all the DM central-bankery this week, do you seriously think the Fed are going to shift hawkish on the back of a stronger print?
Moreover, the White House just set 4 January as the deadline for a large business vaccine mandate, with SMEs seemingly to follow. Note that people who haven’t gotten vaxxed so far didn’t forget: they don’t want to. We will therefore see the White House/firms threaten those who don’t get jabbed with loss of work; and empowered workers threaten businesses and GDP if they are jabbed at. Let’s lose another 20-30% of truckers, for example, and see where we end up economically. Unless the Supreme Court reads the terms and conditions and shoots it all down. (As it also edges towards allowing Americans to shoot things up, in terms of firearms.)
Politics, like the Thailand souvenir T-shirt few can now buy, is not ‘iPad’, but ‘iPooed’: PM Johnson has performed yet another U-turn, this time on independent sleaze investigations; as the Wall Street Journal puts it, ‘Indictment of Igor Danchenko Casts New doubts on Sourcing of Steele Dossier’; despite another promise of stimulus bills being passed imminently, at time of writing the Democratic Party still seemed to be a legislative circular firing squad; and the front page of the FT this morning is the White House blaming OPEC for risking imperilling the economic recovery, not its own actions on domestic fossil fuels.
This week has also seen the Pentagon report to Congress on Military and Security Developments Involving the People’s Republic of China, laying out the staggering scale of China’s recent advances; as Chinese state-owned media announce that from 1 January, its military expenditure will be expanded to provide free or preferential medical treatment to military families, as part of efforts to “maintain a focus on war preparation” and “strengthen troops’ cohesion and combat power.”
Meanwhile, markets have lots to chew on in matters they do pay attention to:
As Reuters puts it, ‘US toymaker looks beyond port logjams to the risk of gluts’, rightly worrying that if US consumer stimulus passes, high inflation and shortages are locked in, but if it doesn’t, then what is now a shortfall of everything could soon be a glut of everything. At no point here do we see a nice, easy return to a 2% CPI world. I suspect we therefore see Central-Banks-iPooing themselves.
In China, junk bonds yields continue to soar, and even no-red-lines-crossed property developer Kaisa was suspended from trading in Hong Kong this morning, after its bonds collapsed yesterday: it was mixed up in wealth management products. Is this really “contained”?
And as the US and EU plan ‘green tariffs’ on Chinese steel and aluminium, and the US is talking about higher China tariffs on some key value-chain areas, from 1 December, 32 nations will no longer grant favorable tariff treatment to Beijing, which will hit labor-intensive enterprises. Textiles and footwear exports still account for a notable slice of total Chinese shipments. Remove those hefty dollar earnings and net inflows (which, as Bloomberg reports today, mysteriously don’t show up in FX reserves) could look a lot smaller – unless Wall Street, which never met an iPad or an iPoo it didn’t like, can channel even more US funds into Chinese assets.
Fri, 11/05/2021 – 11:25