By Michael Every of Rabobank
This is the end of the Jewish festival of Sukkot, one of the less well-known holidays. (Also known as ‘The Feast of the Tabernacles’, it involves eating dinner in an outdoor booth, and waving palm, myrtle, and willow branches, with an etrog, a lemon-like citrus fruit. Really.) However, the Governor of the BOE seems to think it is another Jewish holiday, Passover, where the ceremony involves dipping one’s finger into a glass of red wine, naming the 10 plagues that afflicted ancient Egypt, and saying “dom” as a drop of wine is splashed onto one’s plate for each of: Blood; Frogs; Lice; Flies; Livestock sickness; Boils; Hail; Darkness; and the Killing of the First Born. (There is also usually matza-ball soup, so it gets better.)
Governor Bailey’s speech last night argued so many economic plagues are hitting the UK economy, that either Covid was responsible for amplifying them, “...or the gods really are against us,” before asking “When are the locusts due to arrive?” He noted the switch from spending on goods back to services “has not taken place to date on the scale expected”; “the number of high profile supply bottlenecks appears to be increasing”; energy prices are soaring; the labour market is a puzzle; and while inflation is “transitory”, it is still seen at 4% this year (as taxes are also rising); and, “It follows that the monetary policy response, if we need to make one,...should involve Bank Rate not QE. There is no reason to beat about the bush on this point.” In conclusion, “the yards will be hard I’m afraid, and we must stick to the task.” And *I* get accused of being a pessimist!
Of course, we have already have the locusts – just not in the UK, but in economies that can afford to see them least, and as food prices already soar.
We are hurtling towards Hail, because it’s the UK and winter is coming. Moreover, Darkness looms – because there is no sign of the global energy crisis abating. Indeed, dom, dom, dom! Logically, if supply vs. demand is now the underlying energy issue, this crunch cannot be resolved until natural gas production increases, taking us further away from 2030 targets, or green energy is brought on-line far more rapidly (where it can be), or we cut demand via a recession. Hard yards indeed – and not just for the UK, but for all of us.
Indeed, the PBOC says the recovery is “shaky and unbalanced” and will push real rates to fall further (via rate cuts or higher CPI?); the Evergrande-related slump in property is hitting a sector worth 1/3 of GDP; factories are forced to shut down for days each week because coal prices have soared, and electricity prices are fixed, so power plants are losing money; and expectations for China’s Q3 GDP growth are now slashed to zero. That’s exactly the kind of production backdrop which will exacerbate global bottlenecks and supply-chain problems, as now is peak demand for retailers trying to stock up for Black Friday and Xmas against a backdrop of ludicrous shipping rates, crazy energy bills, crippling labour shortages, and consumers facing higher taxes and prices. Someone is going to be eating a lot of unleavened bread ahead, so to speak. (If not for Xmas.)
It won’t be the “arrant nonsense” economists at the Fed, who *yet again* did not see any of this coming, but get to shrug and say “whocouldanooed?” Yet their bosses are going, as Rosengren, from the Boston Fed, and Kaplan, from the Dallas Fed, both resigned over stock-trading ethics violations. Fed Chair Powell has not resigned for doing the same with muni bonds, but the decision on who gets the top FOMC job still looms: do the other two resignations suggest a clean sweep, or two sacrificial lambs? US Treasury Secretary Yellen (whose own trading activity when Fed Chair, if any, has not been made public) is also refusing to take the calls of IMF Chief Georgieva, who is herself embroiled in a different ethics scandal. Does the White House really want to see new blood at the IMF and the Fed? To what purpose if so?
While waiting for ‘the call’, Powell is to deliver a speech to the Senate Banking Committee today that while far less colourful than the BOE version, will also stress that supply bottlenecks have been larger and longer lasting than anticipated, and that inflation pressures will remain high in coming months - before they ‘naturally’ “abate”. So, not as colourful as the BOE: and not as realistic? ‘This too shall pass’ is the eternal message from the gang who never see what is about to come to pass (except when it helps them trade their own portfolios).
Williams from the New York Fed also warned of an “extreme” market backlash if the US debt ceiling is not raised (hitting even FOMC members’ wealth!) - as Republican Senators blocked a Democratic Bill to raise it. This is of course all political posturing tied to the $1.2trn infrastructure bill and the $3.5trn Build Back Better bill, the Byzantine twists and turns of which do not look auspicious at the time of writing given one of the Democrat’s progressive members just stated: “We obviously didn’t envision having Republicans as part of our party,” when referring to Senators Manchin and Sinema, suggesting those two key votes are not there for at least the $3.5trn package – which the progressives insists is a prerequisite for the passage of the $1.2trn bill. Manchin’s reply: “I’m not really good on threats.” We shall find out more over coming days as we build towards what was promised as a Thursday vote.
In Europe, the German election looks like, perhaps, we will end up with a coalition of the SDP, FDP, and Greens. As Stefan Koopman notes, if the FDP’s Lindner becomes Finance minister, implications for the EU’s fiscal policy are large (and not expansionary); and he expects Germany to adapt to the harsh geopolitical environment slowly and reluctantly. The same could be said in a different sense of the French. Reportedly, ahead of the key first EU-US Trade and Technology Council tomorrow --and days after the Quad announced a tech/resources tie-up that makes a huge new block with all the green supply-chain inputs required, which Europe does not have secured from anywhere-- Paris is demanding a watering down of the conclusions to develop joint standards in favour of EU “Strategic autonomy”. Quelle mouche t’a piqué?
So what are markets making of this all? Well, benchmark US 10-year yields are up 8bp since Friday morning, while 2-year yields are up 4bp. That move and steepening bias says “Morning in America” more than “Darkness” – but is it a bet on US fiscal stimulus and then rate hikes, or just a reflection of entrenched global stagflation? The S&P isn’t at a record high for once – but then again, it’s well off its recent low; and in a world where so much appears to be capable of going wrong so fast, do you want to put your money as an inflation hedge in EM, or the US? Likewise, the USD is hardly stumbling, with EUR now below 1.17, for example, and USD/JPY over 111, although AUD is off its recent low due to commodities, and CNY is still doing its tired “none shall pass” shtick as if nothing serious is happening in its economy.
When you hear a buzzing sound it can be a busy, happy market. Or the beating of billions of tiny wings heading your way. Or unhappy consumers in long lines for fuel. Or, most terrifying of all, millions of Western children without the exact Xmas presents they wanted.