By Michael Every of Rabobank
Sein-tral Banking
As a regular Global Daily reader recently commented to me, "In Canada, we have a new comedy show that has launched over the past few months: The Bank of Canada's Policy Rate Announcement Press Conferences. Journalists basically ask, "When rate cuts?" in a myriad of creative ways, and the Governor, smirking and rolling his eyes along with his Senior Deputy for all to see, responds with equally creative iterations of the punchline "not telling ya!""
My response is that this comedy show seems to be widely franchised, like Seinfeld - and is like Seinfeld. It's "about nothing" the more you listen. More importantly, it remains to be seen if it's “no rate cuts for you!” or if we are “cuts worthy" and get “serenity now!” in a Festivus for the Rest of Us - which is being accompanied by global airing of grievances and feats of strength already.
On the latest data, US CPI was 0.3% m-o-m headline, 0.4% core, so 3.2% y-o-y headline, 3.8% core, and 3.9% core services, up from 3.6% the previous month.... and yet the punchline didn't change: "stock traders bracing for worst brush off hot CPI", as Bloomberg put it.
New Zealand inflation today were also not friendly across the board. Food prices were down, but fuel and rent both up; that's with the economy likely in recession. Markets were again little moved. After all, rate cuts are still starting in June regardless say central banks (which is why it's "about nothing") - though note our Fed watcher Philip Marey says the risks are increasingly toward later, not sooner.
For now, central banks, like the Seinfeld cast, are competing to hold back from indulging their natural urges - in this case, to cut rates. They know services inflation is still too high, and that they can't rely on permanent goods deflation. They know cutting too soon could cement inflation above 2%, meaning even more loss of reputation. So, like the king of no reputation, George Costanza, they are doing the exact opposite of what their inner voice tells them to do, and holding firm a bit longer.
But they also know that this risks tipping the economy into a deep downturn - and they must not double dip! Doing so risks them then crying, "You're killing independent George!"
For now, they may think they can cut once or twice and then wait and see with no harm done. However, they don't want an economy that thinks sustained high rates are as ridiculous as Jerry's puffy shirt to fall over as a result. And they forget markets and rate cuts are like Kramer and Kenny Rogers chicken: once they start, they can't stop; one or two promised cuts rapidly becomes seven priced in, easing policy far too much.
As such, central banks are having difficulty meaning what they appear to say and saying what they appear to mean. As with Jerry and the pen:
JERRY: What kind of pen is that?
JACK: This pen?
JERRY: Yeah.
JACK: This is an astronaut pen. It writes upside down. They use this in space.
JERRY: Wow! That's the astronaut pen. I heard about that. Where did you get it?
JACK: Oh it was a gift.
JERRY: Cause sometimes I write in bed and I have to turn and lean on my elbow to make the pen works.
JACK: Take the pen.
JERRY: Oh no.
JACK: Go ahead.
JERRY: I couldn't
JACK: Come on, take the pen!
JERRY: I can't take it.
JACK: Do me a personal favor!
JERRY: No, I'm not...
JACK: Take the pen!
JERRY: I cannot take it!
JACK: Take the pen!
JERRY: Are you sure?
JACK: Positive! Take the pen!
JERRY: O.K. Thank you very much. Thank you. Gee, boy!
HELEN: Jack, what are you doing?
JACK: Stop it!
JERRY: Thanks again.
JACK: Come on! (Leaving)
HELEN: (as soon as the door's closed) What did you take his pen for?
JERRY: What, he gave it to me!
HELEN: You didn't have to take it.
MORTY: Oh my God! She's gotta make a big deal out of everything.
JERRY: He offered it to me.
HELEN: Because you made such a big fuss about it.
JERRY: I liked it. Should I have said I didn't like it?
HELEN: You shouldn't have said anything. What did you expect him to do?
JERRY: He could have said: "Thank you, I like it too" and put it back in his pocket.
HELEN: He loves that pen.
MORTY: Oh come on!
HELEN: He talks about it all the time. Every time he takes it out he goes on and on about how it writes upside down, how the astronauts use it.
JERRY: If he likes it so much, he never should have offered it.
HELEN: He didn't think you'd accept.
JERRY: Well, he was wrong.
That kind of conversation now happens after every rate decision and press conference. Did they say what they mean? Did they mean what they say? Should we accept what they are offering? Should we return it?
And meanwhile, the airing of grievances and feats of strength are upon us:
The annual US intelligence threat assessment talks of an "increasingly fragile world order"; yet the latest Pentagon budget includes real terms spending cuts, a sharp rise in civilian bureaucrats in the Navy, a drop in active sailors, and a cut in submarine production that undermines the AUKUS treaty supposed to anchor security for Australia.
McKinsey, who might lose US government contracts for helping China with its state-capitalism, just won a deal to help US Air Force strategy: because management consultants know all about defense. Will it involve selling off US planes and letting China or Mexico fly them instead?
Mercedes Benz's CEO is lobbying against proposed EU tariffs on Chinese EVs produced by mercantilist state capitalism, because he favors “free trade” (and selling cars in China).
BRICS+ buddies India and China just saw the former send 10,000 more troops to their contested mountain border and dare Beijing to “bat an eyelid”.
And dissident Russian troops have invaded Russia. That's twice it's now invaded itself, if you include the Prigozhin episode.
