By Michael Every of Rabobank
We all see what we want to see.
Last Friday’s Michigan consumer survey was bipolar: 5-year ahead inflation expectations for Democrats leaped to 4.2% from 2.6% under President Biden, while for Republicans they plunged to 1.5%, from 3.4%. Who is right?
On Superbowl Sunday, President Trump ended production of US pennies, which now cost 2.8 cents to make. Just like that, a monetary norm was up ended. Trump also hinted at irregularities with some US Treasuries, so “maybe we have less debt that we thought.” That was either a fumble or a play towards the possible repudiation of some Treasury holdings, which would up-end the norms of the entire global monetary system. Can you decisively say which?
Scientists are reporting a 2.2% chance of an asteroid striking Earth in 2032. Most people are dismissing this entirely or saying that’s a low probability event: those who understand probability, and what an asteroid smacking into the planet did to the dinosaurs, are far more concerned.
As Elon Musk bids for OpenAI, a new paper finds leaning on one can “result in the deterioration of cognitive faculties that ought to be preserved,” and “higher confidence in GenAI is associated with less critical thinking, while higher self-confidence is associated with more critical thinking.” I’m shocked, shocked! And if you think we have lazy, first-order market takes out there now, wait until we get to that Michigan 5-year ahead mark.
Meanwhile, we now have 25% US tariffs on steel and aluminium, which could rise, hitting Canada hard, with immediate disruption to global supply chains. The US will be producing more, at higher cost, and imports into it will be more expensive, filtering downstream. There will also be a lot of steel and aluminium looking for a new home: which lucky countries will lose their remaining industries just as the national security argument for both is the strongest for half a century? Logically, that would imply lots of counter-protectionism. And inflation.
We also got the hint of a potential US tariff carve-out for Australia after Trump talked to Australian PM Albanese. It’s possible that’s because Trump got confused between aluminum and aluminium; or Albo was the last person to talk (nicely) to him; or because of the AUKUS defence partnership – in which case, the geopolitics is clear, and it’s good news for the UK, but bad news for Europe and NATO.
We haven’t had universal U.S. reciprocal tariffs yet, but they may come today or tomorrow.
Within the US, IRS agents may now have to work as ICE agents, as big a signal of orders changing as one can expect. So is the new burst of judicial action against the Trump administration: it just stalled Venezuelan prisoners from being sent to Guantanamo; aimed to immediately restore any frozen federal funding and end any funding pauses; and barred even the Secretary of the Treasury(!) from accessing Treasury databases and allowing DOGE from seeing those contents and informing the President about them. The constitutional precedents implied here are seen by lawyers as every bit as remarkable as the revolution Trump is pushing through at record speed.
Abroad, the US has just watered down a law stopping foreign bribery which, in an unpleasant way, levels the playing field for it somewhat abroad… and leaves squeaky-clean Europe in the changing room again.
The Financial Times talks about Russian, Chinese, and US imperialism, missing a few others’ out. In that new (old) world, Trump just talked to China’s Xi, but we have no details on the call; China is seen mirroring its actions in the South China Sea in the Yellow Sea disputed between it and South Korea; India’s PM Modi is in France talking AI; incoming US ambassador to Israel Mike Huckabee speaks of changes of “Biblical proportions” in the region; Gazans are told they won’t be allowed back once they depart; Hamas is breaking its hostage deal with Israel - something Israeli PM Netanyahu’s critics accuse him of also wishing to do; and Trump just told Israel to cancel the deal entirely if all the remaining hostages aren’t home by Saturday, at which point, “All Hell will break out.” And the Suez Canal will most likely be impassable for western ocean carriers again.
Like I said, we all see what we want to see.
The ECB’s Lagarde told the EU parliament that European disinflation is on track while warning of a “challenging” economic environment, as global trade frictions pose risks – right before US tariffs began, and Europe indicated it will retaliate in kind.
Question: why do all those who decry tariffs as a gun-to-own-head tax on consumers respond to others tariffing them with the same ‘illogic’? The only logical answer is tit-for-tat realpolitik… which is exactly the kind of thinking which those who reject tariffs ignore in all other key policy areas.
But back to inflation: what about Europe’s TTF gas benchmark at €58, the highest since late 2022, and the equivalent of $100 oil? And if “global trade frictions” pose risks, what about the return of global imperialism? Is that equivalent to 0.1ppt or 0.2ppts on CPI? Good luck trying to run econometric models on that from the datasets we have, but I can help with the big picture: those who do imperialism well tend to have low, if variable, inflation; those who do it badly, or are on the wrong end of it, have high, if variable, inflation. What does that imply for monetary policy, in all kinds of ways?
“Let’s not see it,” seems to be the answer, even if I repeat that if lines on maps can move, lines on screens can and will do so more than people think.
The BOE’s Mann, who has flipped from hawk to dove, said UK demand conditions are quite a bit weaker, and firms have lost some of their pricing power: now let’s see what happens if import costs are forced higher by a global trade war regardless. As emerging markets will tell any developed market mirroring them that is prepared to listen, domestic demand can be at rock bottom, and yet inflation can still be sky high.
Moreover, today it’s Fed Chair Powell in the hottest of hot seats as he gives his semi-annual testimony to Congress. So many questions: and, quite probably, so few answers.
In markets, some see the dollar as the place to go as this all plays out; others are pivoting from CAD to JPY as side-plays. Some see gold as an even better bet than any fiat play; others, looking further ahead, see crypto as the go-to alternative. And, of course, some still see good old “rate cuts!” and “buy all the things” as the play.
Others see all the above views as sympathetic – just not in a way that those who only see “rate cuts!” and “buy all the things” would like when an AI explains it to them.
We shall see when the penny, Treasury, and asteroid finally drops for them.
