Rabobank: Biden's Dire Rating On His Handling Of The Economy Is Remarkable

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by Tyler Durden
Monday, Apr 29, 2024 - 03:40 PM

By Benjamin Picton, senior strategist at Rabobank

The S Word

Last week the data caught up with the public mood. Annualized US GDP for Q1 was +1.6%, well below the 2.5% consensus estimate and even below the most pessimistic estimate of +1.7% in the Bloomberg survey. Meanwhile, core PCE printed at 3.7%. Well up on the Q4 print of 2% and substantially above the consensus estimate of 3.4%.

Lower growth and higher inflation has sparked conjecture that the United States is headed for – if not already experiencing – the S word: stagflation. The data generated plenty of excitement amongst the commentariat along those lines last week, but on Main Street the news that the economy is slowing - but prices aren’t – appears to have come as no surprise.

The latest CNN poll puts Donald Trump six points clear of Joe Biden at 49-43, but the most telling result in the poll is respondent’s perceptions of Biden’s handling of the economy and inflation. On those points, only 34% and 29% of respondents respectively think the President is doing a good job.

Superficially, Biden’s dire rating on his handling of the economy is quite remarkable. After all, this is an economy with a 3.8% unemployment rate, strong growth (at least up until now), employment figures that regularly beat estimates and a government continuing to pour in largesse via a 6.4% fiscal deficit. Usually figures like that should lead to happy consumers, but not this time.

There is an FOMC meeting scheduled for this week, and the Q1 national accounts are sure to the main feature of conversation. Our resident Fed watcher Philip Marey published a note on Friday following the release of the March PCE figures reiterating his view that the Fed will cut twice this year, and then only twice again next year. Philip’s forecast is informed by our house view (supported by the CNN poll) that Donald Trump will win the election and enact inflationary universal tariffs, along with our expectation that the US is headed toward recession later in 2024.

Market pricing has now overshot Philip’s forecast at the short end. The OIS curve suggests fewer than two rate cuts this year, while the 2-year yield rose 1.2bps last week to 4.99% and 10-year yields gained 4.5bps to see the curve bear-steepen.

Meanwhile, the world’s largest gold producer – Newmont Mining – saw a 12.5% lift in its stock price on Thursday after reporting better than expected Q1 results. The gold price itself is well off the all-time-highs of two weeks ago, but has consolidated above the $2300/oz level, which could be the new support for another run higher if market perceptions do shift to pricing in a stagflationary scenario of lower-for-longer real rates. Interestingly, the renewed bid under the world’s top gold miner coincides with Meta and Alphabet reinventing themselves as dividend-paying stocks. The idea that companies should actually generate cash and distribute it to shareholders feels like a very “back to the ‘70s”-style inflation hedge to me.

Moving back to the FOMC, last time Powell spoke he indicated that the Fed hasn’t been talking about the potential for further interest rate hikes, only the potential for holding rates where they are for longer. That’s not the case in Australia, where a stronger than expected Q1 inflation report released last week has seen all prospect of rate cuts in 2024 stripped out of the futures curve and replaced with a 50% implied probability of a rate hike by September.

If pundits are worried about stagflation in the USA where annualized growth was 1.6% in Q1 and core inflation 3.7%, what are their thoughts on the situation in Australia where annualized Q4 growth was 0.8%, core inflation is 4%, and the central bank policy rate is only 4.35%?

Higher for longer rates in the USA poses the risk of a lower for longer exchange rates in the Lucky Country and elsewhere, thereby blunting the effectiveness of the exchange rate channel as an inflation fighting tool and raising the prospect that central banks who are still battling inflation could be forced to deliver rate hikes in the face of recessionary local economic conditions to defend their currency (as Indonesia did last week).

Japan isn’t battling tearaway inflation, but it’s there that the strength of King Dollar is most evident. USDJPY has smashed through the 160 this morning, which many have speculated to be the red-line for central bank intervention. This move comes on the back of the decision on Friday to leave monetary policy settings in Japan unchanged, as noted in a comically brief statement issued by the BOJ.

So, will the intervention come? Or could lower than expected CPI forecasts issued last week stay the BOJ’s hand for the time being? That lateral thinkers among us might point out that a sharp devaluation in the JPY is a very fine thing for team West in the great game of geopolitics, as that particular Asian manufacturing and export hub gains competitiveness – and sucks in capital – from struggling neighbours. Those neighbours may in turn be forced to respond by devaluing their own currencies (and buying US treasury bonds? Or gold?), which would provide convenient cover at the WTO for retaliatory tariffs.

Quite aside from the game being played in foreign exchange markets, secularly higher US rates will have balanced sheet effects that reverberate throughout the world economy. Remember the bank failures of last year that led to a new bailout facility (BTFP) being created by the Fed? Well, that bailout facility is no longer accepting new applicants, and right on cue another bank was seized by regulators on Friday after experiencing deposit outflows and substantial declines in the value of its mortgage portfolio (courtesy of high interest rates) that could no longer be securitised and pledged at par.

This is a problem that has not gone away. With loan books full of assets accumulated on valuations conducted under the make-believe interest rates of 15-years of QE, some banks may find themselves preoccupied with another S word as rates normalize in the years ahead: solvency.