Forks In The Road

By Michael Every of Rabobank

We stand at a fork in the road clouded in deep fog on many conflated fronts. Central bankers are aware forks are likely to be stuck deep into them by politicians if they choose the wrong path; the latter fear the same fate from voters; and voters increasingly fear similar from foreign threats.

This morning, the RBNZ’s Chief Economist Conway said, “given uncertainty, we will need to ‘feel our way’ as the Overnight Cash Rate gets closer to our estimate of neutral”. However, he was clear that rates at 4.25% were restrictive and would come down further. Likewise, the RBA and Aussie government will have been thrilled by Q4 CPI data, because they were weak enough vs consensus to refocus conversation back to “RATE CUTS!” Headline CPI was 0.2% q-o-q vs. 0.3% consensus, and 2.4% y-o-y vs. 2.5%, with the trimmed mean and weighted mean q-o-q prints both a tick lower. If only higher house prices were a cure for Australia’s underlying problems, like low productivity, rather than part of the problem…

On the other hand, the BOJ’s December meeting minutes out today saw discussion of where the neutral rate sits – and ‘nobody knows’ is the answer. One voting member thinks it needs to be far higher, however, and changes to the monetary policy committee could also shift it in a hawkish direction.

Today next sees the Bank of Canada (who the markets says will cut 25bps to 3%), the Fed (on hold at 4.25% - see our preview here), and the BCB (seen hiking 100bps to 13.25%), as well as earnings from most big US tech firms.

But that fog is still getting thicker.

We just got a temporarily court-halted temporary US federal spending freeze, and a ‘Fork in the Road’ offer to buy-out the contracts of 2m federal workers, with expectations 5-10% may quit, saving $100bn annually. That’s as DOGE says it’s already saving $1bn a day and wants to save $3bn, which would slash the US deficit by $1 trillion. Those with one conception of how the state works argue this means chaos – which may be right; those with another conception think the fewer federal workers the better – and might also be right.

Moreover, President Trump is proposing a switch from income tax to tariffs to fund the state, as was the US fiscal model a century ago, as the White House says it plans to follow through on 25% Canada and Mexico tariffs on Saturday.

Monetary and market implications much? Is this all still a hypothetical for the BOC and FOMC or something to include in their projections for next week? Or will they wait and see what Secretary of State Rubio says after meeting the Canadian Foreign Minister this afternoon?

It’s not as if central banks need long to update ‘their’ views now: Stephanie Kelton shows DeepSeek calculated the impact of a potential 25% tariff on Canada in seconds, writing a better report than most analysts. As such, it’s the geopolitics that’s uncertain, not the econometrics.

Relatedly, as markets DeepCope at what just happened in AI, some echo my view that this is a Sputnik moment only in the sense of colder Cold War US policy, such as an AI arms race, and far tighter tech export controls and bans on DeepSeek – like the US Navy just implemented. Indeed, the real-world central bankers pretend they understand is all pitchforks in the road:

• The US will withdraw its troops from Syria, as the White House continues to back the relocation of Gazans to Jordan and Egypt, and ICC-indicted Israeli PM Netanyahu is named as the first official visitor to the White House next month.
• A US F-35 crashed in Alaska, seeming to plummet straight down.
• The war taking place in central Africa right next to critical green minerals is getting no attention from those in Europe focused on the green transition.
• Another Baltic undersea cable was just cut; another Chinese-owned vessel is being blamed.
• Two more Russian oil refineries are on fire after apparent Ukrainian drone attacks.
• Italian PM Meloni, Trump’s favorite European interlocutor, is being investigated for aiding and abetting a crime following Italy’s release of a Libyan wanted by the ICC.
• France may send troops to protect Greenland(!) after Denmark offered €2bn for the same goal.
• French pilots report in air-to-air combat their best jets would last just three days due to a lack of ammunition and face no chance vs. the F-35’s 5G sensors (as China flags a 6G jet).  
• And the EU doesn’t understand what the ‘Call of Duty’ means in statecraft given Brussels says it may ban exports of X-Box and PlayStation… as Germany ramps up Russian LNG imports via EU ports, having banned them from its own.

Day ahead

Today has no major data: just central banks… and fog.