Another Round In The "Fed And US Dollar Vs. BRICS Commodities" War Looms
By Michael Every of Rabobank
Black Sea, Red Sea... spot the pattern?
Markets focused on the US JOLTS labour data yesterday… because it was weaker than expected. It’s a questionable series that few have ever taken seriously, but if it’s moving in the right direction for lower bond yields and (if not on the day, surely soon) higher asset prices, then let’s look! However, as the Financial Times ran beneath their main headline about job openings being the lowest in over two years: ‘the jobs market is still tight. And bitcoin is booming again.’ Indeed, as the FT’s Janan Ganesh op-eds that ‘Voters don’t want to hear the fiscal truth’, it’s markets who don’t want to hear the macroeconomic truth. The US economy is not going to need generous rate-cuts in the near future when the ISM services survey is 52.7 and new orders are 55.5; such cuts will only be via a deep downturn that smashes equities and credit.
Markets also don’t want to hear the geopolitical truth as ‘Houthi attacks on vessels in Red Sea sound alarm for global trade’. Indeed, missile and drone fire at shipping --and the US Navy(!)-- if continued, will see trade divert away from the Suez Canal round the Cape of Good Hope. The market’s blasé attitude shows that trading floors have learnt nothing about the real world of supply chains over the past few years.
If 30% of global shipping has to go via Africa rather than Suez, delivery times are going to be extended by weeks, and ocean carrier pricing is going to rise substantially. In parallel, the Panama Canal is so clogged up that a shipping company paid $4 million to jump the line, when a year ago a slot cost $173,000. That means inflation is already rising upstream, though with winners and losers in terms of who can now export what most easily. Overall, it’s a supply shock. At the same time, Middle East energy supplies could also yet be hit. Markets clearly don’t see those risks now, with oil prices so low that Russia is stating it and OPEC+ could cut output more if needed – another round in the ‘Fed and US dollar vs. BRICS commodities’ looms, it seems. Watch this space.
In response, there is already talk of the US Navy task force chaperoning merchant ships through the Red Sea: the US cannot escort non-US flagged ships without a remit, just assist after an attack, which is hardly going to reassure insurance companies. Yet if the US Navy steps up to an expensive and open-ended patrol, it raises a problem flagged by me in 2021: why should the US protect Chinese shipping? Especially when the perception is of a China-Russia-Iran-North Korea axis emerging, within which Iran is backing the Red Sea attacks. Perhaps it’s only Western, or Israeli, shipping that is vulnerable: in which case global dividing lines are again clear - and that’s as a maritime expert suggests China might even use the crisis to try to offer cheap insurance for ocean carriers, increasing its role in this vital area of global commerce.
The usual way out of this mess is the US flexing its muscles to stop Houthi action – which also means stopping Iran arming the Houthis. However, there is an election in 11 months, and a regional war which the White House is determined not to see escalate: so it won’t act. Politico notes US officials are frustrated by the Biden administration’s response to the attacks in the Red Sea, and @Charles_Lister tweets: “Two DOD insider sources told me today that the #Biden White House has placed (in the words of one) “every possible handcuff” on the DOD’s ability to respond to #Iran proxy attacks. The scale & scope of these attacks are unprecedented — and we’re just taking the hits. Dangerous.”
It's ok, Iran is illegally exporting record amounts of embargoed oil to China so nothing will happen. If it stopped, oil would hit $120 overnight https://t.co/905bjoFGfT
— zerohedge (@zerohedge) November 18, 2023
It is dangerous. If the US is not going to calm this situation by a show of strength, it will be taken as weakness, which will ensure a grinding escalation in attacks – and then possibly a tipping point hit. Global trade will have to deal with massive disruption once again: and as the maritime chokepoints of Panama, Hormuz, Bab-el-Mandeb, and Suez all come under threat, how long until the Cape of Good Hope (in BRICS), and Malacca (as tensions rise in the South China Sea) do too? At least the Danish and British are behaving themselves in Oresund, the English Channel, and Gibraltar.
Meanwhile, as one can see online chatter among logistics experts discussing the pros and cons of the US reintroducing letters of marque, i.e., finders-keepers state-sanctioned piracy, one other way to square the West’s circle is being floated:
A US Senator wants illegal immigrants to be given the opportunity to join the military in return for citizenship. “Do you know what the recruiting numbers are at the Army, Navy, and the Air Force? They can’t reach their quotas each month. They can’t find enough people to join our military forces. And there are those who are undocumented who want the chance to serve and risk their lives for this country. Should we give them a chance? I think we should,” said Senator Durbin. How very late-stage Rome. Or Starship Troopers (“Service guarantees citizenship”). For those very reasons, among others, I strongly suspect that this kind of idea has real sea-legs - and not just in the US.
To bring this all back to the landlubbers who liked the JOLTS report, the last thing that Western economies need if a weaker US hegemon means logistics and goods prices rise again is lower rates that boost asset prices and consumer demand, especially when firms have shown they will pass on any upstream shocks.
But of course markets will focus on JOLTS, not real-world jolts. Or Aussie Q3 GDP undershooting at 0.2% q-o-q vs. 0.5% consensus --with 0.4ppts being contributed by inventories, so contraction without it-- even as somehow GDP was still up 2.1% y-o-y vs. 1.9% expected.
Also worth noting is that Aussie GDP per capita fell 0.5% even as the local press is full of stories of how obscenely high property prices are (“Home buyers would need to earn up to $90,000 more than they did early last year to afford to buy a median-priced house as rising interest rates slash buyer budgets.”). Regardless, ‘let them eat The Block’ policy remains firmly in place, as does a net migration flow which comfortably exceeds net house building each year. Look up at Europe or the US to spot the potential political pattern building there: Black Sea, Red Sea, The Block, see?
