By Michael Every of Rabobank
Joining Dots and Plots
As we focus on the Fed, and prospective dot plots, can you also join the following market dots from the past 24 hours?
First, China announced it was effectively banning its banks from allowing crypto currencies;
Second, there was a massive collapse (-30%) in crypto, before the usual combination of tweets, book-talking, and magical thinking helped to push many back up 30% again, hence ‘only’ ending down around 10% on the day – nothing to see here, move along(!);
Third, the Fed’s April minutes suggested, as Philip Marey puts it, that: “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases. So we are heading for a summer of taper talk!” - and we all know how taper talk can play out in markets. The Fed also argued, again, that inflation was “transitory” – but as Philip notes, that came before the spike in consumer inflation expectations in the Michigan confidence survey;
Fourth, a PBOC official stated China has to give up its control over the currency’s exchange rate eventually if it wants to achieve greater global use of CNY; that the exchange rate will have to be determined by global market participants; and this will allow China to have free cross-border capital flows and pursue an independent monetary policy. “We need to admit that under the condition of yuan internationalization, we won’t be able to control the exchange rate, and China’s central bank has to let go of exchange-rate goals in the end,” Zhou Chengjun, director of the People’s Bank of China’s finance research institute, added. So far so obvious – and always elusive for China for the very obvious reason that giving up control means giving up,...control! Yet crucially, Zhou added CNY will appreciate against the USD in the long term as a result of China’s economic growth vs. the Fed’s repeated monetary easing, according to the speech.
See a pattern forming? It looks like both the Fed and the PBOC are deeply concerned about commodity inflation: indeed, the PBOC have been vocal about it for some time. As such, they are perhaps happy to coordinate to some extent – or it’s just a happy coincidence… The above steps/messages confront their current joint threat in that:
The PBOC crushing crypto, or at least clipping its wings, stops the (silly) market meme that Bitcoin, or Dogecoin, or whatever, are about to ‘replace the US Dollar’ as global reserve because of their exponential market cap growth, in the same way the price of gold could embarrass paper currencies under Bretton Woods. Ironically, gold will outperform crypto in this case – but is obviously not seen as a real threat to the US Dollar by the Fed;
Crypto-crushing sends a strong signal across other frothy areas of global markets, like profitless companies, etc.
The Fed suggesting this summer might be the right time to start thinking about talking about how to potentially do tapering is cut from the same cloth (are they really going to reach Jackson Hole and still be saying “2024” like an election mantra?); and
The PBOC suggesting it will allow CNY to float (and, in brackets, to replace the US Dollar – on which, don’t hold your breath any more than on Bitcoin) is a deflationary, not inflationary, promise within the Chinese economy.
In short, the Fed and the PBOC want this supply-side inflation surge to stop ASAP – but can such a policy actually work for more than a few weeks/months?
We shall see: but it appears unlikely. Until global supply chains are untangled, and unless we get no further fiscal stimulus, it seems hard to believe that a sudden return to lower/stable commodity prices can last. Perhaps, like crypto, they can be forced down by diktat: but they may well pop back up again. It’s not as if the ‘more money than sense’ attitude in markets is not abundantly clear elsewhere: for example, behemoth Chinese property developer Evergrande, straining under an equally-massive debt load, is trying to reinvent itself as an electric car maker --because why not?-- and despite not selling a single vehicle already has a market cap of USD87bn.
Perhaps this is something else battered cryptonites can learn from yesterday: take your tech disruption to the maximum, and declare yourself to be an electric car maker rather than a teacher, builder, hair-dresser, etc. - and kerching! Yes, you may not have any electric cars, or factories to build them: but how dare markets not give you a market cap of at least, say, USD10m – after all, who knows where you will be in 2025 with all the disruption you are planning, and all the magical monetary policy we are still seeing?!
Meanwhile, as this currency game plays on, so does the related geopolitical spinning and whirling. US Secretary of State Blinken met his Russian counterpart, and rather than calling him a “killer”, offered him the prospect of “stable, predictable” ties ahead. And NordStream 2, obviously, as reported yesterday. Six months ago, this would surely have been enough to have *R*U*S*S*I*A* as the banner headline of US newspapers and TV news shows: not today, it seems. Yet one wonders how eager Moscow will be for a real relations re-set, when trying a ‘reverse Nixon’ geostrategically is more than a little late and a quid with no immediate pro quo.
Of course, this could still help some things along. In Vienna, the 4th round of the JCPOA Iranian nuclear talks saw “good” and “significant” progress, and are still lumbering towards what some observers believe is a pre-ordained 5th round end-point of removing sanctions and letting Iranian oil flow again: Russia help could get this over the line. In which case, the Fed, ECB, and PBOC will all sigh over lower energy prices and ‘lowered tensions’: and much of the Middle East will wonder which regional conflicts the new Iranian oil revenue might flow towards, and when. Rumours whirl of a ceasefire between Israel and Hamas within days – but yesterday four missiles were fired into Israel from Lebanon, which experts note could not have happened without Hezbollah approval, which in turn could not have happened without Iranian approval.
The EU Parliament is set to officially pause the EU-China CAI deal today, dealing a blow to Macron and Merkel. Indeed, the motion will reportedly call on the EU to step up coordination with the US against China, while stressing that any trade deals with Taiwan “should not be held hostage” by the CAI deal with Beijing. Do not expect flowers and chocolates from Beijing when this happens today. Still – at least Merkel’s doggedness has got Germany all the gas (and potential future Russian headaches) of NordStream 2.