By Michael Every of Rabobank
Whatever "it" takes
The market take at the start of the year was rapid, deep Fed cuts were coming. 38 days into in 2024 we have seen some stick to a similar take, but also:
- Red-hot payrolls, even if some say ‘Goskomstat’;
- Powell say no cut in March, bringing June into play as the earliest start-date;
- Red-hot ISM services prices paid;
- The RBA’s first meeting under new rules and new governor Bullock say it could raise rates again if needed (see more on that from Ben Picton here);
- The Fed’s Bostic say the long-term rate of US unemployment might be lower than assumed;
- Kashkari say neutral rates may be higher and he’s keeping his fingers crossed the Fed are done;
- Red-hot German factory orders despite a collapse in auto output; and
- Mester say the Fed should gain confidence to cut “later this year”;
On balance, it’s still reasonable to expect some rate cuts in 2024, but not the “NEW NORMAL HERE WE COME!” wave of their own saliva that some hoped to ride imminently. But stumbling New York Community Bank, now downgraded to junk, saw the “banking crisis!” surf-board polished, and yields and the dollar dip: the Fed *must* cut rates to save them, right? But how does cutting rates bring people back to work in the office or change new regulations in the New York rent-controlled apartment market? More Fed acronyms like BTFP are surely more logical again(?)
Moreover, the BOC’s Macklem said monetary policy can’t solve housing shortages, which opens the door to not even looking at shelter inflation anymore. That logically means it might be able to cut rates sooner; which will of course push housing prices even higher – but that won’t be looked at anymore, so ‘whatever’. (And note the BOC’s ‘non mea culpa’ follows that of the government: apparently *nobody* in Canada is responsible for unaffordable housing. And not just Canada, of course. The ‘whatever’ is global.)
Chinese markets are truly surfing the Big One, however, on news Xi Jinping is going to meet with market regulators. This dull headline prompted drooling comments on Bloomberg that the authorities were doing “everything they can” except say “time to buy”, and, yes, “whatever it takes.” In short, the algo, headline, political trend is your friend.
The problem is these are all ‘whatever’ takes given nobody has a clue what “it” is that can reverse the $5.6 trillion slump seen in stocks. $278bn didn’t move the needle, nor did $1.4 trillion, so is $7 trillion next to continue the exponential? Where does this money come from? The Beijing promise to help stocks has no details yet, except more short-selling bans and forced SOE buying. And you can’t sort Chinese stocks without sorting Chinese property: and that needs much more than $7 trillion.
There’s also a key link between China and the US that few market takes cover properly. Part of the reason for the drop in US inflation is the slump in China: the Fed doesn’t get that as its economic staff barely understand their own economy. Conversely, China is waiting for the US to start easing before it launches its own stimulus: Bloomberg notes PBOC Governor Pan Gongsheng stating Fed cuts “will expand space for China’s monetary policy operations.” So, when the Fed thinks inflation is done, China will push demand/commodity prices higher again!
Indeed, I contend tighter Fed policy narrows US geopolitical rivals’ room for manoeuvre, keeps commodity prices low, and the dollar top dog: note Powell’s comment Sunday about the importance of the US global economic and security role – maybe he also sees that a little(?)
In geopolitics, the prospect of a ceasefire between Israel and Hamas is fading given the latter’s demands that it means an end to a war.
In response, the Houthis say they will escalate their attacks on global shipping: there are reports they might cut key Red Sea internet cables too. Meanwhile, Bloomberg reports Chinese carriers are getting discounted insurance to sail through the Red Sea, which increases their commercial advantage. Some will say ‘whatever, lower prices’; others, ‘Deep Ship’ at the geopolitical implications.
As if that weren’t enough, we have a slew of other market ‘whatever’ “it” takes on:
- The SEC ruling many hedge funds trading US Treasuries have to register as dealers, increasing bureaucracy and oversight. (Is this really just about the basis trade, or is there a bigger game being played?)
- Former President Trump’s appeal against his DC January 6 court-case being denied, as expected. (However, it still remains uncertain if this trial can proceed before the election given the options Trump has open to him --tradition says the DOJ may not want to proceed, if so--and the possibility that the Supreme Court steps in in some form. Given the crucial importance of this trial to the election, and the election to economic policy, one might think the market would be listening to the most experienced legal takes, not bullet-point headlines: but whatever.)
- The DOJ reportedly being set to give President Biden only a slap on the wrist for having his own stash of classified documents dating from when he was vice president in his garage – Trump is being charged over holding his in Florida. (While the two cases are not the same, this is still likely to polarize US political debate even further into the 2024 election.)
Take from all of this whatever you will!
