By Michael Every of Rabobank
Where's the beef? (And pork and chicken?)
Yesterday US stocks had the temerity to go down. Not a lot: S&P -0.13%, Dow -0.2%-- but red, not green. It’s apparently headline news. More significantly, markets are worrying the all-time high in stocks might not last for all time. The chatter / whisper is of a possible correction which, to be fair, it has been for a long time as stocks have kept levitating regardless. Meanwhile, as Treasury yields dropped to reverse the previous day’s climb, 3-month USD LIBOR is still only just above the lowest level this year at 0.11% vs 0.24% at the start.
For markets, where is the beef? The LIBOR trend is nothing new, and reflects excess liquidity via QE, as already evident in reverse repo action, etc. On stocks, the issue is again QE: when does the music stop? On that front, the analogy of musical chairs is a good one. (As it is for the potential Fed Chairs, Powell and Brainard, too.)
Vis-à-vis QE, the Fed’s Beige Book was long “shortages”. “The US economy strengthened further from late May to early July, displaying moderate to robust growth,” beiged the book, an upgrade from “moderate” in the spring. However, “Supply-side disruptions became more widespread, including shortages of materials and labor, delivery delays, and low inventories of many consumer goods”; that as global shippers underline supply chain snarls will last well into 2022 at least. Indeed, as the ‘force majeure’ news in fertilizer production this week made clear further hefty US food-price increases can be expected well into 2022 too, the National Economic Council’s Deese was rolled out to explain that if you exclude beef, pork, and poultry, price increases “are more in line with historical norms.” (No hedonic adjustment to chickpeas to solve the CPI problem?)
More directly worrying for markets was the New York Fed’s Williams saying that “it could be appropriate” for the Fed to start tapering this year, with Kaplan adding the announcement could come as soon as the September 21-22 FOMC meeting for an October start. More beef was that Williams said “right now, asset valuations are very high.” Was it a boast or a problem? Perhaps if the QE timetable is as suggested, that won’t be an issue for much longer.
Then again, as is repeated often here, are the Fed really going to taper if the fiscal picture is unclear? On which, the question is not “where’s the beef?” but “where’s the pork?” And the latest news there is “stuck in a supply-chain snarl”. Indeed, Senator Manchin, for one, has made clear only $1.0-1.5 trillion of the $3.5 trillion stimulus proposed is acceptable to him, which shows just how far apart the Democrats are internally. But is this good news for stocks (and bonds) after a dip and the obligatory dip-buying referred to yesterday?
But back to beef, where the market is also fretting the ECB might take a hawkish turn today. Our ECBeebies believe the Bank will keep rates unchanged and the APP (“bond buying”, for those who don’t speak Euroacronym) steady at EUR 20bn/month, but with the target pace of PEPP purchases (“more buying”) to be slowed to EUR 60bn/month for Q4, and the PEPP envelope unchanged at EUR1,850bn. Any decisions regarding the 2022 policy mix will probably be postponed until December. Importantly, however, they also think the ECB will want to make clear that this is not the start of a taper or a signal that PEPP ends in March 2022. Let’s see if the ECB can make all things clear: the track record is not good - far more gristle than meat is often the case. Meanwhile, the latest German opinion polls suggest outgoing Chancellor Merkel’s CDU is slumping, and assembling a viable coalition after the upcoming election could be problematic. Then again, which major EU economy does have a strong functioning government at the moment? Which is why we all listen to the ECB so much.
And so to the next portion of animal protein: “where’s the chicken?” US Secretary of State Blinken is now stating that the US is getting 'closer' to giving up on Iran nuclear deal. So the US isn’t prepared to keep negotiating like Brian in ‘The Life of Brian’ forever(?): “How much, quick? It's for the wife” “Oh, uh, 20 shekels.” “Right.” “What?” “There you are.” “Wait a minute!” “What?” “We're supposed to haggle.” “No, no, no. I've got to get…” “What do you mean, no?” “I haven't got time.” “Well, give it back, then!” “No, no. I just paid you!” “Burt, this bloke won't haggle!” What comes next if the US-Iranian transaction does not end up with a nice gourd being thrown in?
On which, economic historian Adam Tooze argues in “The New Age of American Power” that some see the US debacle in Kabul marking the end of its global power projection: that as the AP reports “Taliban form all-male government of old guard members”, as if shocked this is what they meant by “diverse”, and whispers that the PLA is looking at Bagram airbase. However, Tooze posits the US is instead refocusing on Russia/China, and on two key areas it dominates: finance and tech, concluding: “They aim to secure US military dominance even as the centrifugal effect of global economic growth reduces America’s relative weight in the world economy. Ultra-advanced technology, not GDP, will be the decisive factor. As Washington torques the sinews of power, the entire world will feel the effect.” This comes on the back of increasingly bipartisan arguments for the adoption of US industrial policy, where one ambitious proposal is even a Factory Bill modelled after the Farm Bill that supports US agriculture and its supply chain.
Moving in that direction -- the US dollar as weapon, decoupling tech, and the US becoming a manufacturing power again to match its agricultural power -- is more of a potential economic, market, and geopolitical earthquake than QE tapering. Dare the US act like that, given the impact? Post-Kabul, as hegemon, dare it not?
However, this is a longer term issue than QE or fiscal stimulus. For now, focus on the beef, or lack of beef, and the pork, or lack of pork. Just don’t forget the real game is actually chicken.
Meanwhile, very much related to this hypothetical discussion, Chinese inflation data today saw headline CPI up just 0.8% y/y, down 2 ticks from last month, while PPI was 9.5% y/y, 0.5ppts higher than expected and up from 9.0%. That is even more of a margin squeeze – and we now have to wait for the more detailed data breakdowns to be released so we can see what beef, pork, and chicken were doing. Mr Deese may want to take some notes.