Another Political Earthquake
By Benjamin Picton and Elwin de Groot, strategists at Rabobank
Argentines have elected libertarian Javier Milei President, as Peronist Finance Minister Sergio Massa conceded defeat in the second round of elections. The result potentially creates a test case in unfettered free market economics, as Milei has vowed to take drastic measures to tame inflation and cure Argentina’s long-running economic malaise. Among Milei’s campaign promises is abolition of the central bank, Dollarization of the economy, abolition of “dozens” of government departments, swingeing cuts to social welfare and a paradigmatic shift in foreign policy that could see Argentina become less receptive to overtures from Russia, China and Brazil,
Comparisons have been drawn between Milei and former US President Donald Trump, who celebrated the election result by posting “The whole world was watching! I am very proud of you. You will turn your country around and truly Make Argentina Great Again!” to his Truth Social account. Milei and Trump share an erratic, populist style and a pugilistic approach to foreign policy, but the similarities may end there. Milei’s pledge to dollarize the Argentinian economy and restrain social spending will likely lead to a painful period of deflation for Argentines, whereas Trump favors large-scale fiscal deficits (even in times of near full employment) and protection of social security benefits.
Foreign policy was elsewhere in focus over the weekend as news emerged that Australian sailors had been injured by a sonar blast from a Chinese warship while conducting dive operations in international waters off the coast of Japan. Australian officials criticised the “unsafe and unprofessional” conduct of the Chinese vessel, which they say was clearly warned of divers in the area. The incident has punctured the recent diplomatic thaw that culminated in the APEC conference last week, where President Xi Xinping met with US President Biden, and other heads of state (including the Australian Prime Minister).
The Xi-Biden meeting generated some optimism on the state of relations, although we believe that nothing really substantial or strategic has changed. At best one could say that some sort of a floor has been established in Sino-US relations. Both leaders expressed clearly that a conflict between superpowers should be avoided as they agreed to reopen military communication lines.
China’s banks left their benchmark lending rates, including the key 5-year loan prime rate, unchanged today. This followed last week’s decision by the PBOC to maintain its medium-term lending facility rate and news late last week that China is seeking to emulate Singapore’s housing model to arrest the real estate slump and further Xi XInping’s goals of ‘common prosperity’, while eschewing more financialized Western housing models.
Our China analyst Teeuwe Mevissen has been arguing that there’s one more (small) rate cut on the cards for the remainder of this year, as the economy is grappling with an ongoing real estate crisis whilst inflationary pressures turned into deflationary pressures in October, when both PPI and CPI fell in negative territory. However, the decision to hold on to current rates indicates that authorities may feel that their room to cut rates is limited, as it could fuel renewed weakness in the yuan and/or lead to capital outflows.
The PBOC and relevant authorities may also have kept an eye on recent developments in Japan, which has faced an increasingly weak yen in the past five months, which has been driven, among other things, by a growing perceived wedge between the stance of monetary policy of the BoJ and the Fed and resulting interest rate differentials. Yet these dynamics seem to have reversed off late as US markets have now turned their eye on rate cuts over the course of 2024. On Friday markets were pricing in almost 90bps of Fed rate cuts for 2024 as a whole. In this light, the PBOC might have thought that it is better to pause its ‘easing’ cycle. Apart from that consideration, the PBOC have told the biggest lenders and asset managers to meet all “reasonable” funding needs from property firms, signalling that it rather choses to extend and adjust the volume rather than the price of credit at this stage.
Last week also saw more volatility in oil markets after the FT reported that OPEC+ may extend or even enlarge production cuts into next year. Brent crude retraced much of the 4.6% lost in Thursday’s trade to close on Friday up 4.12%. The FT suggested that a number of OPEC+ producers are under pressure from their populations to ensure that the United States pays a price for its support of Israel in the war against Hamas in Gaza, even if the price falls well short of the drastic measures taken in the 1970s oil embargoes.
Let’s hope that is the case; one political earthquake is enough for one week.
