Macron's Long Telegram

By Benjamin Picton, Senior Macro Strategist at Rabobank

The focus of markets last week was, quite rightly, on US inflation figures. US 2-year yields posted gains every day to close the week just over 25bps higher at 4.73%. The move was prodded along by stronger-than-expected US CPI on Tuesday, strong PPI on Thursday, and then rising prices for goods imports on Friday.

So, it was a trio of bad news on the inflation front, with the goods imports inflation providing the cherry on top because disinflation in internationally-traded goods has been doing the heavy lifting for the Fed (and others) up until now. Perhaps unsurprisingly, market pricing on the quantum of cuts expected from the Fed this year fell from 4.2 last Monday to 3.3 as of this morning. The S&P500 picked up on the vibe by closing lower for the second week in a row. That hasn’t happened since October of last year, which happened to be the cyclical low before Jerome Powell’s ‘pivot’ lit the fuse on a whopping Santa rally that has survived well into 2024.

This week will be dominated by central bank actions, even though we fully expect that actual action in the form of shifting policy rates will be pretty thin on the ground. The BOJ will be a major point of interest on Tuesday, with markets now pricing in a 55% probability of an end to the negative interest rates policy (NIRP). A return to ZIRP (zero interest rates policy) is seen as a 70% probability by the April meeting, or 96% by June.

Markets have been gradually bidding up the implied path of the BOJ’s policy rate for weeks as Japanese unions deliver strong wage gains for their members. Rengo, Japan’s largest labour union, last week secured wage increases of ~5.25% for members. That’s the first time in more than 30 years that wage gains have exceeded 5%. BOJ Governor Kazuo Ueda has stressed in the past that he would need to see evidence of persistent wage growth to be convinced that inflation will converge on the 2% target. Given the events of last week, a lift in the policy rate tomorrow is a certainly a possibility but given past dovishness it seems more likely that the BOJ will hold fire until April.

Tomorrow also brings the RBA’s March policy meeting. We expect no change to the policy rate or the bank’s slight hawkish bias, especially since the RBA meeting will predate the February labour market report by two days. We’re forecasting the unemployment rate to dip to 4%, and for the economy to have added 24,500 jobs last month. That will be sufficient to trigger the Sahm Rule, which might explain why Aussie Treasurer Chalmers has recently started the softening-up process for a more growth-oriented budged in May. The RBA’s Financial Stability Review on Friday will also make for interesting reading, especially with regards to Australia’s gravity-defying mortgage market.

Of course, the main event for the week will be the outcome of the March FOMC meeting on Wednesday. Our Senior US Strategist Philip Marey expects no change to the Fed Funds rate this week and maintains our call for the first cut of the cycle to arrive in June. Philip notes that the Fed will give in-depth consideration to the pace of balance sheet runoff at this week’s meeting. Any lowering of $95bn ‘passive QT’ combined monthly cap for Treasuries, MBS and agency debt would be an encouragement for equity managers looking for a fresh round of monetary stim.

The Bank of England also meets this week and will publish their decision on the Bank Rate on Thursday. We’re expecting no changes there either. Stefan Koopman, our Senior Macro Strategist covering the UK thinks that the BOE will trail both the Fed and the ECB in delivering any policy easing, despite signs of softening in labour markets.

If equity markets do take encouragement from central bankers this week, it will be in defiance of a geopolitical environment threatening escalation. Crude oil last Thursday joined other asset classes making year-to-date highs. That coincided with Russian state media reporting claims that the Houthis now have a hypersonic missile, and comments from Houthi Supreme leader Abdul Malik al-Houthi where he said that the group will begin targeting ships heading around the Cape of Good Hope at Africa’s Southern tip.

If the Houthis DO possess a hypersonic missile (a big ‘if’), it could only have come from Russia (by way of Iran) and would pose a worrying risk to US and allied navies operating in the area. The targeting of commercial shipping taking the long route to Europe via the Cape of Good Hope would be a further detriment for insurance costs and would deal a blow to prospects of an ECB rate cut in June.

Last week also saw a stunning interview delivered by French President Emmanuel Macron. We touched on this on Friday, but it bears repeating that Macron is now taking a much firmer line on the War in Ukraine. Macron’s interview follows Vladimir Putin’s well-publicized history lecture of Tucker Carlson, and news that Russia has shifted tactical nuclear weapons westward into Belarus. It also came just before the weekend’s Russian elections, where Putin dubiously secured 88% of the vote. In this context, there are echoes of George Kennan’s ‘Long Telegram’ that established the US policy of Soviet containment in the 1940s.

Macron’s speech reads like a greatest hits of Realpolitik. Europe must do ”whatever it takes”. “If Russia wins this war, Europe’s credibility will be reduced to zero.” “If Ukraine were to fall, our security is threatened. And so, the time has come to resist.” “If the situation were to deteriorate, we have to be ready, and we will be ready. We will be ready to make the decisions to ensure that Russia never wins.”

These comments arrive in the context of Macron’s earlier refusal to rule out committing French troops to fighting in Ukraine. That was met with threats from Putin and denials from European counterparts that “boots on the ground” could ever happen. Seemingly addressing this, Macron said: “Two years ago we said we would never send a tank. We did. Two years ago we said we would never send medium-range missiles. We did. We said we would never send planes. Some are now in the process. We set too many limits.”

Christine Lagarde is famously on the record saying that the ECB’s commitment to the Euro has “no limits”. Macron is making the same commitment on security.