A "Pause" That Does Not Refresh

By Michael Every of Rabobank

Yes, the Fed embraced a “Possible Pause”, as Philip Marey puts it, after hiking rates 25bps to 5.25% as expected. That’s not the early autumn rate cuts the market is pricing for while saying ‘Hike in May then go the other way’. Indeed, Powell will still be watching the data closely, especially as the ADP employment report came in hot at 296K vs. 150K expected, ISM services prices paid was 59.5 with new orders at 56.1, and the separate US services PMI noted: “there are indications that resurgent demand for services is reigniting inflationary pressures. Average rates charged for services are now rising at the sharpest rate for eight months, as firms report a greater ability to pass increased costs on to customers.” Worse, looking beyond the Fed, we aren’t seeing a pause but an escalation:

• The International Chamber of Commerce 2023 Trade Report said ‘A fragmenting world’, and stressed: geopolitical tensions will continue to shape supply chains and trade dynamics; businesses are already adjusting their inventory strategy and diversify their suppliers; fragmentation is accelerating; the rise of subsidies, export controls and investment restrictions are contributing to trade fragmentation; digital fragmentation is both driving and mirroring geopolitical tensions; debt fragmentation could lead to a debt crisis; payment fragmentation could increase instability and erode the role of the US dollar; and the cost of fragmentation could range from 1.2 to 12% of global GDP.
• Shares in another Californian bank tumbled a further 60% after hours. Bloomberg notes Wall Street now sees this crisis has further to run, and further industry consolidation is likely. Those who join dots and see political economy have been saying ‘Gosbank’ for some time.
• US regulators will now force hedge funds to disclose loss-making positions in three days, or “as soon as practicable,” not every three months: that’s more admin and may reduce trading.
• Oil prices collapsed a further 7%, offering hopes goods deflation can offset services inflation: so, Fed hikes are *working as planned*, but many don’t see the plan or don’t like it. Especially Mid-East oil producers snubbing the US and US dollar while building 400m * 400m *400m giant cubes encasing ski-slope-sized TV sets.
• Iran seized a second oil tanker in the Straits of Hormuz in a week. Once, that would have seen oil up 7%: perhaps they need to seize two at once now to get the same effect given the US dollar yields 5.25%? Yet this is more evidence of emerging structural supply-side shocks, even if economists can’t find Hormuz on a map or in their inflation models.
• Russia said Ukraine was behind a Kremlin drone assassination attempt on President Putin. As I said with Nord Stream, it doesn’t matter who blew it up: what matters is we are in a world where someone did – a fact most economists oddly see as exogenous to inflation models. If this was a Ukrainian attack, we will get massive Russian escalation - former President Medvedev has spoken of ‘taking out’ President Zelenskiy and his ‘clique’. If it was Russian maskirovka operation, the same is still true.
• Bloomberg’s Shuli Ren said ‘Don’t Bother Investing in China Unless You’re Chinese’, adding that only a local can properly circumvent the country’s infamous firewall, and that even asset managers in Hong Kong no longer have a clear picture of the mainland.
• US Senate Democrats are proposing new China-focused measures likely to get bipartisan support and House backing, including:
  • Limiting the flow of advanced technology to the Chinese Government by strengthening export control laws and identifying opportunities for new sanctions.
  • Curtailing the flow of investment to the Chinese Government by screening investments in key sectors to block US capital from going to Chinese companies.
  • Securing domestic economic investment beyond the CHIPS and Science Act to back biotech and biomanufacturing, while identifying other key areas of technology to fund.
  • Underscoring US commitment to economic allies to remain the preferred economic partner of the vast global majority, while challenging China’s Belt and Road Initiative.
  • Safeguarding US allies’ and partners' security and maintaining our strategic alliances, including further aiding Taiwan’s defence planning.
• Three reports eviscerated the US military’s preparedness for a Great Power conflict where heavy losses could be taken without the ability to rearm again. Hal Brands, in ‘How the American War Machine Ran Out of Gas’, underlines defence spending used to be twice as high as it is now and that US allies must help fill that gap; another points to ludicrous practice over F-35 contracts; a third that US shipyards can't build destroyers fast enough. No military hegemony, ultimately no FX hegemony. So expect lots of rearmament ahead, folks.
• However, there was no movement towards resolving the looming US debt ceiling, just apocalyptic warnings of what happens if it is hit.
• Two senior Republicans allege President Biden was involved in corruption and bribery from a foreign agent while serving as Vice-President in the Obama administration. Yes, the 2024 election looms: and some might wonder if some force, or just karma, is trying to clear the deck on both sides to find candidates who can build bridges, not burn them.

What else is the above but steady escalation in our global metacrisis on multiple conflating fronts? I don’t expect that message to get through to most in markets with their myopic mono-focus on this, that, or the other. Regardless, it will be transmitted to them in turn, painfully, over the course of 2023, and likely for many years after that.

This truly is the ‘possible pause’ that does not refresh.