By Michael Every of Rabobank
For once the US payrolls report *was* worth talking about, as jobs only increased 194K vs. the moderate 500K expected, despite an upward revision of the previous month from 235K to 366K. You think this whole data series is bananas now, as job openings soar even as job creation doesn’t? Wait until we see the impact of the forced lay-offs that begin as vaccine mandates are imposed on the labor force. Also imagine what this will mean for strained supply chains: let’s lose a few thousand more truckers, for example, and see where it gets us.
The Fed’s Daly had comments on this over the weekend, noting “everyone is feeling the rising prices, and it’s painful.” However, “Inflation is directly related to Covid,” and hence to unwanted injections rather than unneeded monetary ones. Luckily, Daly doesn’t see this as “a long-term phenomenon,” yet at the same time, “If we continue to have supply bottlenecks and we keep spending, we will have more inflation.” Given stopping spending means a recession, which some suspect the roll-over in US consumer confidence already flags, presumably the onus is on containers, ships, ports, warehouses, roads, truckers, and rail to all just sort themselves out with shots in the arm. Really. Meanwhile, winegrowers in Argentina cannot bottle their grapes due to a lack of glass, a further painful reminder that our problems are far larger than vaccine holdouts.
The energy crisis also continues, with India and China both flagging blackouts that will hit supply chains from another angle - and China seeing massive flooding in the coal-producing region it is relying on to keep the lights running. While ‘gasflation’ is already in focus, energy is needed to make everything, especially the fertilizer needed for food production: and global fertilizer prices just hit the highest level since their 2008 peak, with China, the world’s largest exporter, no longer doing so. So, let’s hum “Yes, we have no bananas today,” while wondering if a pick-up in the Covid vaccination rate is really going to grow any for us.
On trade, Friday saw USTR Tai and China’s Liu He hold "candid, pragmatic, and constructive" talks. The US read-out noted the two sides would consult again on certain outstanding issues and “in addition, Ambassador Tai emphasized US concerns relating to China’s state-led, non-market policies and practices that harm American workers, farmers, and businesses.” The Chinese version added Liu “negotiated the removal of tariffs and sanctions.” Markets won’t have to wait too long to see who is right: but as the Financial Times underlined this weekend, tactical decoupling is already being seen in some sectors – and logic says it will spread even if Wall Street denies it.
- For the EU and UK, informed word is the EU will try to resolve the issue the Northern Ireland issue the UK says it is most worried about. However, the word is also that the UK may reject this olive sausage and trigger Article 16 – in which case the EU could use the trade nuclear option.
- Japan just created a new ‘minister of economic security’ role, tasked with shoring up supply chains, securing critical infrastructure, protecting tech advantages, and countering economic espionage.
- Even Forbes magazine argues ‘Dwindling US Merchant Fleet Is A Crisis Waiting To Happen’, concluding: “What the nation really needs is a bigger domestically-owned and operated commercial fleet that can be made available for defence-related cargoes in an emergency. The most practical way to accomplish this would be to mandate that a certain percentage of imports and exports be carried on US-flagged vessels.” Note this is *exactly* the maritime past as market-disrupting ‘ship of things to come’ floated in the recent ‘In Deep Ship’ report.
Meanwhile, 136 nations have agreed to a 15% minimum corporate tax rate. Now all they have to do is actually pass it into law – which may prove difficult in the US, one would suspect given the political undynamic there.
Yet globally, the political wind is clearly shifting. New Japanese PM Kishida is underlining ‘Kishidanomics’ is going to differ from Abenomics in that his “new capitalism” won’t just focus on monetary and fiscal policy, but on the R word – not structural reforms, but redistribution. Add that to Build Back Better, Level Up, Shared Prosperity, and Common Prosperity.
True, the latter is the only policy delivering so far – but with an enormous impact, forcing Wall Street denial --“regulatory changes”! 😉-- every bit as fervent as the ideological muscle with which it is being imposed. (i.e., China unveiled a proposal late Friday to bar private capital from the establishment and operation of news outlets, including news agencies, newspaper publishers, and broadcasters, with local reproduction of foreign media content also up for a ban. A screaming buy, obviously – or at least there won’t be any media saying otherwise.)
In short, we have a backdrop of weak US labor data; some calling recession risks; Western political logjam, but the policy direction mostly towards higher taxation and economic populism; global supply chains closer to collapse; energy prices soaring; food prices leaping; and trade stand-offs in key locations. Even so, the market believes the Fed will keep moving towards QE tapering, and the BOE is openly underlining it sees rate hikes ahead. US 10-year yields are up to 1.61%, despite the payrolls downside surprise; US 5s are at 1.06% when they started the year at 0.36%; and US 2s are at 0.32% when they began 2021 at 0.12%. Of course markets like Australia will trade on the back of that trend, rather than the RBA saying it has nothing to do for three years, especially with the RBNZ having already hiked.
If this is central banks talking tough in the hope of not having to act, the impact on borrowing costs in debt-laden, supply-constrained, politically-unrestrained economies is still painful: “Bananas in pyjamas; Are coming down the stairs; Bananas in pyjamas; Are coming down in pairs; Bananas in pyjamas; Are chasing market bears'; Cause on Tuesdays; They all try to; Catch them unawares(?)”
Yet if central banks follow through on promised hikes when it is the *physical* economy’s lack of bananas that is showing pre-2008-style contagion, not the *financial* economy with its excess liquidity, it’s a giant global banana-skin. More so because one needs to imagine it against our populist background. If central banks screw up *again* --and after recent scandals in the US-- can there really be no structural consequences? Equally, imagine if central banks back off at the last minute and show they are all talk and no action - and powerless.
Meanwhile, much of the political, geopolitical, and global market commentary we get is basically the title sequence to the Banana Splits:
“Tra la la, la la la la; Tra la la, la la la la; Tra la la, la la la la; Tra la la, la la la la; One banana, two banana, three banana, four; Four bananas make a bunch and so do many more; Over hill and highway the banana buggies go; Comin' on to bring you The Banana Splits Show. Makin up a mess of fun; Makin up a mess of fun; Lot's of fun for everyone; Tra la la, la la la la; Tra la la, la la la la; Tra la la, la la la la; Tra la la, la la la la.”
In short, yes, we have no bananas --and too many bananas-- today.