By Michael Every of Rabobank
Two Ronnies in a Packed Programme Tonight
The market is having second thoughts. Wisely so, as there are many ways to interpret what we see and hear. In a classic Two Ronnies sketch, “fork handles” is heard as “four candles”. In the same way, markets are hearing “rate cuts” as the Fed says “rates up”. Market cheerleaders need to understand the difference between disinflation (i.e., your rent went up 20% last year, and is going up 5% this year) and deflation (i.e., your rent goes down 10%). The latter is the prerequisite for the imminent slashing of rates we are now seeing priced in.
In reality the US labor market remains tight, as Friday’s payrolls are likely to show, and a court just ruled gig food-delivery jobs must pay a minimum of $17.96 an hour. US construction spending is holding up, and most households aren’t experiencing the pain of higher mortgage rates without moving – so they aren’t. While the market focuses on the ISM, Freight Alley notes: “when you see a development in both container and trucking datasets, it suggests that something macro is happening. That is what I am seeing in container and trucking. YoY volume comps in both datasets both inflected in recent months, suggesting that inventories have burned off and the goods economy recovery may be on the way.” All this is as US core sticky inflation ticks up on a 3-month annualised rate; the NFIB small businesses’ ‘plans to raise prices’ are heading up; Michigan consumer inflation expectations have spiked; and we just experienced the largest easing in financial conditions in decades, seeing speculation roar back.
Yes, look at four candles on charts: but handle needing to stick a fork in this bond rally, because it’s overdone.
To think otherwise is to believe the Fed is willing to repeat the ‘cut-first’ errors of the 2010s, 2000s, 1990s, and the 1980s, and the ‘ignore inflation’ error of the 1970s. Maybe that is the trend to follow; but it would make Powell quite the Mastermind, another classic Two Ronnies sketch, in which the contestant answers the question before last each time.
MAGNUS: And so to our final contender. Your name, please?
SMITHERS: Good evening.
MAGNUS: Thank you. In the first heat your chosen subject was Answering Questions Before They Were Asked. This time you have chosen to Answer the Question Before Last each time. Is that correct?
SMITHERS: Charlie Smithers.
MAGNUS: And your time starts now. What is palaeontology?
SMITHERS: Yes, absolutely correct.
MAGNUS: Correct. What is the name of the directory that lists members of the peerage?
SMITHERS: A study of old fossils.
MAGNUS: Correct. Who are David Owen and Sir Geoffrey Howe?
Are the Fed really going to be fossilized berks in trying to fight the ‘deflationary crisis’ before last when we now face structural, geopolitical inflation?
Yes, oil continues to fall despite promised OPEC+ cuts, protestations that the Saudis can’t afford their linear city, year-round ski resort, and new footballers, and the US DOE wanting to buy “as much oil as it possibly can” for the SPR. Yet the oil-price is the Fed winning the battle of the dollar vs. commodities via higher rates. There is no geopolitical/geoeconomic room for it to slash rates: and that geopolitical backdrop is easy to interpret, and isn’t funny, even if it sounds like a Two Ronnies newsreader skit in the recent headline: ‘Miss Universe winner claimed to be at centre of alleged plot to overthrow Nicaraguan government’.
- The US is admitting it can’t match military production with rival ‘arsenals of autocracy’. Markets still don’t grasp the enormity of what a failing US hegemon means.
- A former US ambassador and National Security Council official has been charged with secretly acting as an agent of the Cuban government. One wonders how many more will follow.
- The US says money for Ukraine runs out at the end of the year, and the EU might leave Ukraine without any support as soon as next week. So much for the West’s ‘whatever it takes’ to save the liberal world order? The ramifications are enormous, if so.
- The Polish security chief says NATO’s eastern states have three years to prepare for a Russia attack: others say five to ten. Nobody says we should slash military spending.
- A COP28 headed by a massive fossil fuel producer is --shockingly-- in favour of massive fossil fuel production, suggesting a deeper split between the West and the Middle East.
- Israel is moving against Hamas in south Gaza. Although Hezbollah has so far restrained itself, tensions are high, and Israeli Defence Minister Gallant was allegedly blocked from attacking it first given his view that fighting a two-front war should begin with the more dangerous enemy. It still seems unlikely Jerusalem --which has strategically shifted to assuming its enemies will act, rather than seeing their forces as just a deterrent-- will be held back vs. Hezbollah or Iran in the long term by US concerns over regional escalation. Indeed, Israel killed two Iran Revolutionary Guards Council generals in Syria in a recent airstrike, for which Iran has vowed revenge.
- There might have been insider trading of the 10/7 Hamas attack on Israel, which raises some awkward questions of who knew what and when.
- Iran-backed Houthis have attacked more commercial shipping and the US Navy around the Bab-el-Mandeb, the Red Sea chokepoint one cannot avoid when using the Suez Canal.
- Turkey has warned Israel not to assassinate Hamas leaders based there, perhaps prompting some to ask why Hamas leaders are openly present in a NATO member.
- Venezuela held a referendum on annexing Essequibo, a huge oil-rich swathe of neighbouring Guyana, with a 97.5% positive vote (the other 2.5% go “right to jail”). Venezuela is not in a position to do much about it now: but should its economy recover, it would be, and again the world is seeing countries move lines on maps to control key commodities.
- Hal Brands argues the US must revive the 200-year old Monroe Doctrine to ensure its security.
- China ripped US Commerce Secretary Raimondo for calling it an “enemy”: but what does China say domestically about the US and the outlook for liberal democracy and capitalism?
- Australia has signed a visiting forces agreement with France. From AUKUS to FAUKUS?
In short, if you think that’s all deflationary then you haven’t read history. Or you watch ‘news’ like this.
It’s goodnight from me. And it’s goodnight from him.