Washington's "Don't" Carries Little Weight In Proportion To What It Once Did

By Michael Every of Rabobank

Let's try to keep things in proportion

The IMF has put Australia “on notice”, the Fund arguing if the government keeps spending, rates will have to stay high. Who knew? The economics editor of the Australian Financial Review says, “The holding of [RBA] confidential meetings [with private parties like investment banks] can backfire when some people think that others are getting advantage access to the central bank’s thinking.” Who knew? And a Green Party Senator with a PhD in economics who used to work at the RBA states, “I’ve been under no illusion for 40 years that interest-rate setting by the Reserve Bank is a political exercise. To say that it’s above politics, and there’s some kind of completely independent machine that sets interest rates – that’s not true.” Again, who knew?! But let’s keep this in proportion – Australia is obviously unique, and what is true for the RBA doesn’t apply to any other central bank anywhere, ever. Honest.        

In Macron/macro-land, France’s PM Barnier proposes €60bn of tax hikes and spending cuts which would only reduce its fiscal deficit to a 5% proportion of GDP if it passes; the constitution also says if the budget is pushed through without a vote, parliament gets a no confidence call on the new government, which it may not survive. Next door, some ask if there will be any German car manufacturers in China’s market in five years, others in the German market; yet German automakers are lobbying against EU tariffs on Chinese EVs expected to be approved tomorrow.

The European Commission proposes postponing EU Deforestation Regulation implementation to December 30, 2025 for large companies and June 30, 2026 for micro and small enterprises, inviting the European Parliament and Council to adopt this proposal by end-2024. This it “to allow a phasing-in period to ensure all stakeholders will be ready for effective implementation.” Agri commodity and pulp/paper markets are relieved, with prices easing. In short, at the margin it is pro portions.

Our ECB team now see an additional 25bps rate cut in October. Lagarde commented this week that, "the latest developments strengthen our confidence that inflation will return to target in a timely manner". Barring the risk she's trying to win back the "for-worst guidance" trophy from Powell (ahead of his 50bp cut), this is a clear signal the ECB is preparing to move despite core inflation remaining quite persistent - and the global backdrop looking proportionately worse.

The first US East Coast port strike since 1977 will have a global impact that builds daily. President Biden just sided with the union, as has Trump, so there is no political pressure for a resolution. The White House is calling for surcharges major shipping lines brought in on October 1 to be removed (e.g., MSC applies a $1,000 - $1,500 on all shipments from Europe to US East and Gulf coasts), but this won’t stop congestion and goods and container shortages ahead.

PM Ishiba and BOJ Governor Ueda implied Japan’s hiking cycle is over. USD/JPY zoomed past 147 again briefly and the Yen carry trade is back, throwing liquidity into global markets. That doesn’t have to mean anything for the real economy, but asset inflation is a spark near socio-political tinder damper than two years ago but still drier than at any other time in four decades.

The US backs a “proportionate” Israeli strike on Iran for its recent missile attack to avoid escalation. This is not Israel’s strategic doctrine, and it’s determined to cause Iran political and economic pain, implying nuclear or oil targets. The US wants military ones which won’t stop escalation and logically still end up with nuclear and oil, with a less propitious backdrop for Israel. Note Jerusalem ignored US prohibitions when acting against nuclear programs in Osirak in Iraq in 1981 and Deir-ez-Zor in Syria in 2007 and deliberately didn’t inform the White House of its recent attacks vs. Hamas and Hezbollah in advance. In other words, a US “Don’t” carries little weight in proportion to what it once did, and markets might want to bear that in mind.

The G7 also says there will be more sanctions on Iran (which in recent years they wound back or refused to vigorously enforce). Do they expect Russia and China to comply, or are they going to impose secondary sanctions on them? That sounds like escalation too.  

You barter believe as countries de-dollarise in the face of sanctions threats that we won’t just compare USD/XXX, but apples to oranges. TASS reports chickpeas and lentils will be exchanged for tangerines and potatoes because the Russian and Pakistani parties “are experiencing certain difficulties in making mutual payments.” One will supply 15,000 tons of chickpeas and 10,000 tons of lentils, the other 15,000 tons of tangerines and 10,000 tons of potatoes. That’s a nice easy proportion for global trade, but somehow I don’t see it working all over. Sing along now: ‘All they are saying is give chickpeas a chance’. But how do you hedge? How do you store value? How do you do accounting? Moreover, those in either country expecting dollars to finance Eurodollar debts should check their pulses.

But back to oil: Saudi Arabia warned of it falling to as low as $50 if OPEC+ members keep flouting production curbs. Is this another structural bearish signal? But is it also a market against which an Israeli attack on Iranian oil could be devastating for the latter without meaning the same for global energy/the economy/the US election? Does that depend on if Iran acts on its recent implied threat to set aflame oil in [checks notes] its new BRICS-member ‘friends’ like Saudi Arabia and the UAE? It’s not all sunshine and roses and chickpeas and tangerines in that camp, it seems.

On camps, the US plans 300% tariffs on Chinese solar firms operating in Southeast Asia after a Commerce Department investigation found illegal trade practices. 300% is the new 200%, it seems. I can recall when a 30% tariff was seen as headline grabbing. I can also recall when I warned of bifurcating global supply chains it wasn’t headline grabbing.

With China out on holiday, Hong Kong stocks saw a down move, the Hang Seng -3.3% and its tech index -5.9% at time of writing. Is this just taking some profit off the table after the first big rally in ages (the latter is still up over 30% in a month), or is the market realizing it read China’s recent policy ‘bazooka’ out of all proportion to what the real economy benefits are?