By Michael Every of Rabobank
There are push-backs all round right now, and they are going to buffet markets – largely because they aren’t all pushing in the same direction.
We still have the “this inflation is transitory” mantra from the Fed, seeing market expectations for any tapering at Jackson Hole rolled back. And, to be fair, we are also seeing a continued decline in the price of most agri commodities, representing a real push back against the inflation narrative – or at least for food-eating US consumers. China temporarily cancelling a shipment of corn imports from the US is an extra little finger in that push in the last 24 hours. An Iran nuclear deal, regardless of the longer term risks involved, would also help on the oil front, which is another reason why it is being pursued even as Iran is playing hard ball.
Yet the RBNZ, are pushing the other way. The Kiwis just flagged that their first hike is likely to be in H2 2022, and that all being well they hope to be well into a normalising cycle by the end of next year, and to have hiked six times by the end of 2024. The BoC are also tapering, and the BoE are flagging a rate hike by the end of 2022. Somebody here is wrong (the Fed, or other Anglo economies): or we are going to see really high inflation and a really low USD vs. those crosses.
Serious people, like Stephen Roach, are looking past the latest dip in agri markets and still talking about 1970’s inflation coming back purely from the supply side, which is wrapped up in geopolitics, as I explained yesterday. Underlining the point, Germany’s Angela Merkel was yesterday wailing her country cannot produce the chips needed to complete the cars which are the crown jewels of its industrial economy: who has been running the place for fifteen years and yet didn’t see a scenario coming where there could be a shortage?
Meanwhile, crypto refuses to do what US, Chinese, Turkish, now Iranian, and perhaps Indian regulators want it to – which is to drop off our radar screens. This sends an embarrassing message to central banks that in the public eye, inflation rules, and they don’t. For example --and I am sure the person involved won’t mind me sharing this anecdote-- crypto is a market in which one can invest X in “diarrhoea coin”, and see it go up to 10X in a single day. Which should make anyone saying there isn’t too much liquidity out there feel sick to the stomach. Why bother schlepping when you can make instant 1,000% returns trading something of no intrinsic value? This may be something that China, the US, and all other central banks can agree on being opposed to, which would be a rare element of global cooperation we don’t see echoed elsewhere.
For example, US President Biden, in response to CNN reporting he had shut down a pre-existing Trump White House investigation, has now declared US intelligence services have 90 days to unearth the origins of Covid-19. Will it be Russia, given their recent form? Joking aside, this is the hottest of possible potatoes for agencies already up to their necks in politics. What will the domestic push-back be if the report is fudged? And what will the international push-back will be if it comes to at least one clear conclusion? 90 days, folks. Set your alarm clocks.
Meanwhile, at a time of heightened tensions around the South China Sea, due to the US leaving Afghanistan in July --opening up USD1-3trn in mineral resources for anyone brave enough to dive in-- the US Navy is shifting the aircraft carrier Ronald Reagan to help with the logistics. For the first time in a long time, the US has no aircraft carrier in the Pacific. The symbolism is clear: and it leaves some wondering what might happen if push comes to shove.
Indeed, Australia is reportedly considering manufacturing and storing US ballistic missiles in Darwin (next to a port with a 99-year lease owned by a Chinese firm). That’s “levelling up” industrial policy of a sort: military-industrial policy; and at least we have a clearer idea of the targets for the potential Chinese missile strikes against Australia the Global Times recently threatened. Against this backdrop, the tail risk to supply-chains should be clear – even pacifist NZ now sees it.
On which front, an Air France flight to Moscow yesterday insisted on diverting around Belarussian airspace, in line with the new EU directives following the skyjacking of the Ryanair jet; but Russia refused to allow an alternative channel to be used, and the French flight was cancelled. Coincidence, or a push back against the EU’s own recent shove? If it is the latter, again we see the EU’s attempt to go on the front foot geopolitically has seen its ante upped, as happened with China and the now-frozen CAI deal. Russia may be implying if Belarus airspace is boycotted, it can prevent overflight of Russian airspace in sympathy: that used to be called ‘Workers of the World, Unite!’ until neoliberalism came along and took away all the (wage) inflation and threat of international conflict.
If so, the EU either has to back down, or face losing access to more than just Belarussian airspace (and, by the way, 90% of goods coming in to the EU from China via train also pass through Belarus). Or, the only logical strategic alternative would be for the EU to go on the offence and unilaterally cut off air travel to/over Belarus AND Russia, to encourage Moscow to force Minsk to change tactics.
Yet when you base your economy on importing gas from Russia, and exporting luxury cars to Russia, one tends to go weak at the knees at the idea of such realpolitik. Which is why Germany will remain at the mercy of global pricing on chips, among other things, and the EU’s “open strategic autonomy” will be mainly just “open”.
More broadly, this is the kind of ‘resilient’ decoupling the whole liberal world order is still refusing to act on “because markets”. Which, as noted yesterday, is why integrated supply chains aren’t shifting Westwards; and which means Build Back Better really means Back Imports Better, regardless of the push-back that will generate from voters; or that nasty supply-side inflation, regardless of the push-back (and “diarrhoea coins”) that will generate.