Rabo: Powell Had The Opportunity To Put To Rest Concerns He Is Losing Control Of The Curve: He Didn’t
By Michael Every of Rabobank
Bums on seats
We live in a world with open questioning of the relative efficiency and even the morality of the economic system both in the West, and between the West and China. Both of those sides are making a play for global opinion. As in the arts, both want to see ‘bums on seats’.
The interim National Security Strategy underlines US priorities: Defend and nurture underlying sources of American strength; promote a favourable distribution of power; and lead and sustain a stable and open international system. The details make it clear whom this is aimed at (China and Russia). They also make clear what will need to be done about it – the all- caps pledge that “OUR TRADE AND INTERNATIONAL ECONOMIC POLICIES MUST SERVE ALL AMERICANS, NOT JUST THE PRIVILEGED FEW.” That is *really* going to throw a spanner of current global trading patterns if it’s actual US policy now if you understand the implications. Despite claims to the contrary, this pledge is only being included as national security because no US trade deal has done anything other than benefit the top income decile at the expense of most of the lower, and this has both undermined US economic and social strength, as the world can see: yet rectifying that is logically going to imply on-shoring and/or US mercantilism, not free trade, which does not sit alongside pledges of building alliances.
Meanwhile, the world watched as Fed Chair Powell had the opportunity to put to rest concerns he is losing control of the yield curve: he didn’t. The rhetoric was that he hasn’t seen anything to worry him yet in markets; that the policy focus has to be on those who are left behind; and that he sees no inflation threats. Technically, Powell is right on inflation. We have long lived in a global lowflationary environment because labor has no power vs. capital; and despite all the capital the Fed is pumping out, and even USD1,400 stimulus checks, nothing is going to change on that front. Unless, that is, the National Security Strategy is now the economic policy document we should all be listening to. (And I suspect it eventually will be.) Near-term, however, pretending ultra-loose monetary policy helps deal with structural inequality is guaranteed to see said liquidity flow into whatever hedge against inflation presents itself: commodities, perhaps, which will push inflation higher – hurting billions globally.
Or art. Or how about ‘Crypto Art’ using blockchain technology to guarantee it is a one-off? (Yet isn’t this just –bad– art? Art you can’t even hang on the wall at home to show off in the penthouse bought with the excess liquidity necessary ‘to help those who are left behind’? Apart from being unstealable by future Nazis, where’s the upside?) Note that this kind of digital ‘art disruption’ means galleries are no longer necessary; or middle men; or art critics. It’s one big on-line market, but only for artists who embrace the new medium, a few of which will become huge, while all the rest struggle to keep their heads above water. What is they say about life imitating art?
But here’s an ugly picture for you: markets pushing US (and global) bond yields higher. There was so much shorting of US Treasuries yesterday that they traded negative on repo; and at the longer end, 10-year yields hit 1.57%, up 9bp on the day, and over 40bp in a month. This is hurting equity markets – and it won’t help finance the new US National Security Strategy either. However, it appears the Fed is going to wait until stocks crash or inflation rockets before stepping in with some form of de facto Yield Curve Control and jawboning – let’s call it Operation Twist and Shout.
In the meantime, the USD continues to rise, most so against EM FX. That always tends to focus the world’s attention on the US too.
In short, as the US struggles to understand exactly how it is going to be for all the things it says it is for without internal or external contradiction, the world looks on in equal confusion. Is this a ticket to put global bums on US seats? Even Wall Street and American big businesses are buying seats for both sides’ shows. Let’s see if the box office rules change in the future as a result.
Meanwhile, in China we see the start of the ‘two sessions’ political meeting, where the new Five Year Plan’s details will be rolled out. Many bums will be on seats there as this is expected to turbo-charge local markets in the areas it showers sate largesse on, and which will likely mirror the US national security strategy – a message that markets should note, but won’t.
The Plan will also turbo-charge the debate between those who believe in such planning and those who don’t. Indeed, the business-friendly Heritage Foundation 2021 annual Index of Economic Freedom no longer ranks Hong Kong, which had been #1 for all but one of the last 26 years: it is not seen as independent enough to merit its own rank, and joins China in being ranked #107.
All razzmatazz aside, China, just like the US, is struggling with its own internal and external contradictions, in its case between the planned and the market sides of its economy, and between productive (not loss-making) investment and bubbles. The two-sessions has already just announced that a GDP growth target of above 6% y/y has been set for this year, which is easily attained by helpful base effects. The key issue is if we see further such high targets for following years, given the underlying growth rate may be no higher than 2-3% at best, with the balance being over-supply shipped out to global markets, or residential properties sitting empty. The higher the targets are, the more inflationary –and distortionary– for China and the world, just as the Fed is de facto doing the same thing. Yet neither side seems to be paying much attention to the other.
With all the focus on the Plan today, one still has to note the extreme Chinese Covid testing policy for foreigners announced yesterday: is this really the best way for China to win over the world? Perhaps if the money is right it doesn’t matter: the CEO of Ryanair once infamously stated he would wipe the bottoms of his airline’s passengers for five pounds each. Yet while most businesses don’t want to choose a side, they would presumably still like to choose a swab.
Europe is trying to show that it bends for no-one, however. Former German Chancellor Schroeder, who now works for the Russian state gas company, gave a media interview yesterday in which he reiterated Europe shouldn’t buy a ticket to anyone’s show but its own, underlining China now accounts for 40% of German car sales. All well and good: except the US provides the door security, and the nominee for Deputy US Secretary of State, Wendy Sherman, just pledged “I will do everything I possibly can to ensure NordStream2 does not go forward.” This implies that for all its new alliance rhetoric, the US is fully capable of smacking bottoms too if needed. EUR watch out.
Something to ponder as we wait for US payrolls, seen 198K – so only 400K short of where things need to be in order to achieve the employment goals set by Treasury Secretary Yellen.