Rabo: Yesterday Was Some Kind Of Macabre Monty Python Sketch
By Michael Every of Rabobank
So yesterday was not the Fed-dy bears’ picnic. Rather, like some kind of macabre Monty Python sketch, the bears all turned up in their nice little waistcoats and boots…and were then devoured by the sandwiches. As Philip Marey covers here, the FOMC did not move the median dot plot expectation towards a rate hike in 2023, as had been the whisper, even if there was movement in that direction. The whipsaw result was a drop in US 10-year yields, a surge in equities, and a large (near 1%) swing lower in USD vs. many FX crosses. Of course, the sandwiches have only won a single victory over the bears. More bears will be back – and this time with mustard and pickles and Sriracha sauce.
Indeed, perhaps the most interesting thing is that the Fed, always relentlessly upbeat on the US economy, does not seem to see any sustained inflation. That’s a view that must ultimately require a sceptical view of both current fiscal stimulus, and a far deeper understanding of US political-economy dynamics than any Fed speaker I have ever heard refer to. I doubt the Fed are suddenly reading Marx or Kalecki, even if Gramsci is making more and more appearances.
As the sandwiches strut their stuff, don’t forget that ultra-easy Fed and US fiscal policy, and the kind of USD move we saw yesterday, both help push up global commodity prices, including of much of the stuff that goes into a picnic. A recently released report –(“Biblical, Lean, and Mean”)– discusses hypothetical global scenarios that could play out if we saw agri commodity prices do even a little of what oil prices did in the 1970s: in short, ‘Yom’ Kippur moved us from a highly-regulated to a deregulated neoliberal global world, so could a ‘Yum’ Kippur help swing us back the other way? Oh, and energy prices themselves are also trending higher.
(By contrast with the Fed, and showing the realpolitik of the global economy, key food producer Brazil just raised rates 25bp to 2.75%.)
For those who think the answer is automatically ‘No’, consider what’s going on with virus vaccines. As the Eurosceptic Daily Mail reports it: “the EU [yesterday] effectively declared vaccine war on the UK by threatening to block exports of Pfizer’s jab.” That as the EU’s Von der Leyen again stated all options are on the table, including blocking exports from private companies based in the EU to countries who have bought and paid for vaccine, but which have higher vaccination rates than the EU – which has itself been openly lobbying against one of the vaccines it does have (because it’s made in the UK, many allege; because of safety issues say others, not looking at the UK data to the contrary). Meanwhile, the UK are also accusing the EU of trying to set up a border in the Irish Sea, and food is again at the heart of that issue – though of course the loss of a favourite sausage from Northern Ireland supermarket shelves is not the same scale of crisis as Covid-19 or the scenarios discussed in our report.
But staying with food, the title of today’s Daily is ‘Baked Alaska’. For those of you unfamiliar, this is a dessert comprising a hot exterior and an ice-cream interior – which ironically was at its popular heyday in the UK during the oil crises of 1970s. So it’s red hot on the outside and ice cold on the inside: that sounds like what the Fed is trying to peddle to us…while claiming it is serving up healthy fruits and vegetables and not more sugar for Wall Street. Our view of a cold US interior recognizes how unhealthy the present recipe is, and how it will end in meltdown one way or the other, or with neoliberal capitalism being devoured entirely.
Baked Alaska is also useful when considering today will see US and Chinese officials meet in that location for a tête-à-tête. The Wall Street Journal, seeing snow and thinking it is meringue, is ‘exclusively reporting’ (leaked from the Chinese side) that Beijing will be asking the US to roll back Trump-era restrictions on Chinese firms and tariffs on Chinese goods. Other media are unexclusively reporting the US instead intends to list all of its complaints to China: about Xinjiang, Hong Kong, Taiwan, and Chinese trade practices, etc.; and the Financial Times is reporting the US will even make clear it will no longer turn a blind eye to Chinese buying of Iranian oil. Which seems an odd area to take a tough stance over when one is also trying hard to persuade said Iranians to restrike a nuclear deal by being much less hawkish in other areas. The key message is that markets are likely to look for upside headlines, and some media will probably have sources happy to provide them – yet the underlying dynamic does not run in that direction at all.
There is an upside though: we can safely assume the meeting won’t end up with the US saying that the Chinese side are killers with no souls. Which isn’t true of US public diplomacy with Russia, for example. The Russians, who can see Alaska from their house, will be watching today as closely as the rest of us, while they “analyse future relations with Washington”.
Let’s conclude with another food producer who will be watching the US-China talks with binoculars: Australia. Today’s jobs data Down Under were their usual magical selves. With just under two weeks until the key JobKeeper scheme ends, apparently 89.1K jobs were created in February, which is the kind of figure the US needs to see on a population-adjusted basis for its own projected magical recovery. The Aussie unemployment rate also fell from 6.3% to 5.8%! If one actually believed this data were true, then how is it in any way compatible with the RBA’s stance that rates are on hold until 2024, and that the labor market is ice cold and not red hot? Obviously, AUD is up, up, and away on the back of that Fed inaction and the local data: but are the RBA also now secretly reading Marx and Kalecki and grasping why rates can’t go up and wages never will? Come on – they prefer Marks & Spencer!
As with the Fed, they are proffering a cyclical solution to a structural problem that actually makes the structural problem worse unless the overall recipe is changed.