"I Wish It Could Be Christmas Every Day"

By Michael Every of Rabobank

I wish it could be Christmas every day

It’s not even December, but in the UK you always know Yuletide season has arrived when Slade’s ‘Merry Xmas Everybody’ and Wizzard’s ‘I Wish It Could Be Christmas Every Day’ start to play.

For markets, everything is already wizzard, and we are there regarding Christmas, it seems. Especially now hawkish members of the Federal Reserve are offering goodwill to all asset classes.

In particular, we’ve just heard the Fed’s Waller state: “I’m increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%. I’m encouraged by what we’ve learned in the past few weeks - something appears to be giving, and it’s the pace of the economy.” Moreover, there was this gift: “If you see this [lower] inflation continuing for several more months, I don't know how long that might be --3 months? 4 months? 5 months?--you could then start lowering the policy rate because inflation's lower."/-

In Nobby Holder’s immortal, gravely, Brummie voice: “IT’S RAAAAAAATE CUUUTS!”

And perhaps as soon as H1 2024: even Bill Ackman, so bearish bonds so recently, now thinks it’s Q1. Indeed, Bloomberg notes those who have been at the brandy or eggnog a little early are pricing for the possibility of the Fed cutting by 250bps in 2024(!)

That backdrop is all tinsel, mistletoe, presents under the tree, roaring log fires, tipsy staff parties, eating chocolates in your pyjamas at noon while watching classic movies,…

…and yet just as logically, much higher corporate bankruptcies and leaping levels of unemployment, much lower pay rises or pay cuts, and a looming cold January immiseration just ahead of the 2024 US elections.

Unless you believe in Santa and a soft landing for the US economy – which some clearly do.

Jubilant markets who listened to Waller didn’t follow up by listening to Bowman warning that “It’s quite possible that Fed policy will need to be at a higher level than before the pandemic to foster low, stable inflation.” Bah, humbug to all that kind of thing!

Equally, markets chose to overlook that ahead of the OPEC+ decision on more potential supply cuts, benchmark oil prices leaped 2% right after Waller spoke. It was Christmas there for sure.  And that’s just a foretaste of what we can expect to see in all kinds of commodities and assets if the Fed, then every major central bank, U-turn back to financialisation over physical production.

Most so given the US is in a Cold --with hot patches-- War with China (whose dual-use items are on the Russian side in Ukraine), Russia (who wants to building a tunnel to Crimea with China), Iran (who is buying Russian military jets and selling them its drones), and North Korea (who is selling ammo to Russia, and moving heavy arms to the border with South Korea). Those Party guests may help every jingle-bells step in a commodity rally with deliberate supply destruction: we wait for that OPEC+ news; and now Russia might impose a ban on grain exports if their stocks fall to 10m tons, Izvestia reported on Tuesday.

But then again, Russians have their own Christmas as a funny time, so we can all ignore it, right?

Meanwhile, even with rates and real yields (in CPI terms) whe*+re they are -- back in line with what used to be normal until 2008, rather than the post-2008 aberration-- financialisation has rolled on anyway.

Yes, the US stock market is flat except for the Magnificent Seven, but they are waaaay up; bonds are back in the money given the sudden plunge in yields that is already easing financial conditions before the Fed does; and in Australia, housing continues to go through the roof at crazy auction after crazy auction.

Imagine what things will look like if we really are going to see 250ps of rate cuts within 12 months! And I don’t mean that in a good way.

That said, Australia’s October inflation surprised to the downside at 4.9% y-o-y vs. consensus of 5.2%. Ben Picton notes the series is heavily weighted to goods, and we are now seeing deflation in clothing and footwear, and just 0.4% y-o-y growth in furnishings and household goods, which looks like disinflation imported from China. However, services inflation remains an issue the RBA is worrying about in public. Even so, Ben thinks this material CPI miss supports our current forecast of 4.35% being the top in the Aussie cash rate, despite hawkish talk from Governor Bullock. The sun is always shining on an Aussie Xmas, after all.

Ben also notes the RBNZ left the OCR at 5.50% today, as expected by the market and in line with our forecast. Yet there was a lump of coal in the stocking given an upgrade to its forecast rates path, with the average now seen peaking at 5.69% in Q3, and expected cuts pushed back until mid-2025. The new government’s promise to change the RBNZ's dual mandate back to a singular focus on price stability, and an exploration of a more concrete definition on how long inflation can be allowed to remain above target might explain some of that. Even so, Governor Orr noted population growth is increasing inflation risks and he retains an upwards rate bias.

(By contrast, the RBA continues to say immigration is both inflationary and deflationary: which implies it pushes up rents and house prices, but pushes down wages – a combination some suspect voters may eventually go somewhat ‘Wilders’ about.)

In short, I would like to underline, again, that this ‘raaaaaaaaate cuuuuuuts!’ party really started with a US CPI print that was 0.1% below expectations month on month only because of ridiculous statistical assumptions about price of health insurance (which it didn't actually measure). To which I say, what a load of baubles!

-----

Are you hanging up your short calls on the wall? It's time for all fund-managers to have a ball

Do they ride the green line higher? Do they make a ton twice a day?

Do they ask for a nice bump-up in their pay?

So here it is, Merry Christmas; Everybody's having fun

Look to future rate cuts now; the bubble’s only just begun

Are you waiting for fund stragglers to arrive? Are you sure you got enough leverage on side?

Does your trader always tell ya; That the old moves are the best?

Then he's up and buy-the-dipping with the rest

So here it is, Merry Christmas; Everybody's having fun

Look to future rate cuts now; the bubble’s only just begun

Are you hanging up your bear calls on the wall? Are you hoping that some prices start to fall?

Did you ride on down the yield curve; On a narrative you’d made?

You landed on your head; but rate cuts mean you’re saved!

So here it is, Merry Christmas; Everybody's having fun

Look to future rate cuts now; the bubble’s only just begun

It’s RAAAAAAAATE CUUUTS