Rabo: Bulls and bears both jolted awake
"If rates were to tumble, many commodities are likely to rise even more."
TL/DR
MARKETS
Bullish Data for Bonds
Rate cuts may boost commodity prices
GLOBAL EVENTS
Mexico: far-left president
India: potential hardline shift could impact geopolitical relations.
Turkey: Application to join BRICS
NATO Spending
MSM OPINION
Financial Times Op-Ed: Discussion on nationalism and neoliberalism
Bulls and bears both jolted awake
by Michael Every for Rabobank
Another day, another bullish set of data for bonds. First, German unemployment rose more than expected, but more important was a slowdown in US JOLTS job openings. All the old arguments for a US slowdown, so lower rates, so booming assets were rolled out again. Chekov would note they were always on the table waiting to be used, just covered in a thin, blood-stained muslin cloth used to stem the bleeding from repeatedly going long on such instincts until now. The market focus now shifts to the ADP report today, and the services PMIs and ISM non-manufacturing surveys, including the employment and prices paid components.
We’ve already had commentary and data swinging back the other way: the RBA’s Bullock said she won’t hesitate to act if inflation is stickier, as Q1 GDP came in lower than consensus at 0,1% q-o-q, 1.1% y-o-y, but with upwards revisions to Q4 and a big drop in the household savings rate to 0.9% from 1.6%, which the RBA has been focusing on as a sign of consumer froth. Elsewhere, China’s Caixin services PMI was 54, stronger than the 52.5 expected and as seen last month.
To be clear, if rates were to tumble, many commodities are likely to rise even more. There may not have been as much demand inflation as some thought, at least outside the US, but that doesn’t mean we don’t still have structural supply-side inflation. Those of a cynical bent will also wonder what the US Treasury can rustle up to juice both the economy and markets for the next six months given what some perceive as the stakes in the 2024 US election.
To repeat a point made yesterday, we are no longer in a world where elections don’t matter because neoliberal technocrats are replaced whack-a-mole style to implement the same market-friendly ideology. We are in a new world of whack-a-market.
Mexico, an EM stalwart, is still seeing markets reel as it tries to sell sceptical investors on the message that a far-left president with a near two-thirds congressional majority capable of implementing her views is happy with the policy continuity of letting global capital do its thing: the Sheinbaum appears to off Mexican assets until that situation is clearer. The geopolitics is also a curveball. Near-shoring to Mexico from China was a no-brainer for the US, but what if Mexico were to shift policy markedly, or even say it wants to join the BRICS?
India saw stocks collapse after exit polls proved disastrously wrong. PM Modi is still likely to retain power, but without a parliamentary majority for his BJP party, marking a potential return to the messy coalition politics which slowed India’s economic growth in the past. The geopolitics are just as significant: India doesn’t cooperate with China in BRICS under Modi, and has deepened defence relations with the US, UK, Australia, and Japan; that’s helped make it another beneficiary of Western FDI switching from China. Yet would that last if the economic policy wheels came off, or if India built bridges to Beijing? For now, Modi will press ahead, reportedly set to offer subsidies for domestic production modelled on recent packages for semiconductors and EVs. However, that also reflects the new non-neoliberal world we are in.
Turkey, a NATO member, applied to join the BRICS, a geopolitical mirroring of its continent-bridging geography. Its constitutional court also ruled President Erdogan can no longer dismiss central bank governors, good news for the incumbent given inflation is 75%. Yet the president can still note that Wall Street banks now echo his view that high rates cause high inflation, and the White House and Congress that fiscal stimulus is the best way to grow the economy.
The first UK election debate last night saw Labour leader Starmer claim PM Sunak knows inflation and energy prices are going to go back up, while accusing him of being “the most liberal PM we’ve ever had on immigration,” and that only he would reduce migration. Sunak claimed he would take the harder line, and suggested he is prepared to leave the European Court of Human Rights to do so. Both men said they would work with Trump if he wins. Neither mentioned the EU much. Meanwhile, Reform UK’s Farage got a milkshake thrown in his face.
We are a day from the start of the EU elections and the poignant 80th anniversary of D-day; days from the EU’s announcement of what tariff level it will set on Chinese EVs and green goods; and a few more days from the release of the EU strategy document explaining how it proposes to implement “radical change” towards strategic autonomy.
Against all this, the Financial Times main op-ed today warns ‘Nationalism threatens the world order’, and “if America retreats from its security guarantee of Europe, the consequences for global stability will be dire.” That’s true. Yet in blaming Trump, EU populists, and protectionism, the FT fails to admit that ‘Internationalism threatens the world order’ too, if done wrong. And it must have been done wrong: why else are so many powerful authoritarian states and anti-neoliberal democratic populists appearing, as pre-1914 and 1939 – coincidence, and/or the devil at work? The op-ed quotes WH Auden on the 1930’s as a “low, dishonest decade” and asks what we will say of the 2020s: nothing good, probably. However, I don’t see any high, honest discussion of how we got here, again, from the FT. That implies things can still get worse vs. market expectations, which will jolt them even more ahead.
As a case in point, the op-ed talks about a 2% of GDP NATO defence spending target needing to be met in the EU to placate the US when 3.5% of GDP for decades, and entire new military-industrial supply chains, are required – and only from geopolitical allies. Yet voters won’t accept lower social spending to pay for it. This also needs to happen quickly, not at a German pace which, to quote Blackadder, is that of “an asthmatic ant carrying heavy shopping,” or in the “longer term”, as analysts dismiss something they don’t want to include in their forecasts.
(Relatedly, as EU nations allow donated F-16s to attack inside Russia alongside US artillery, France may soon lead a small coalition of EU countries sending military trainers to Ukraine: and Moscow has said it is ready to strike them. The escalation risks should be clear.)
So, rapid pan-Western nationalism, protectionism, and anti-neoliberal populism is the recipe to prevent the FT’s fear of nationalism, protectionism, and populism! Please see our latest monthly outlook, ‘Dial π for Protectionism and Inflation’, focused on this precise issue.
Meanwhile, in terms of the US umbrella the FT clings to but doesn’t want to pay for, Foreign Policy excoriates the threat Trump poses to the international system, but equally stresses ‘Biden’s Foreign-Policy Problem Is Incompetence’: it lists a litany of woes to argue, “Unfortunately, there is ample reason to question whether America’s foreign-policy institutions can fulfil the lofty global role that US leaders have taken on.”
Without a US hegemon, geopolitics was always going to get bloodier, which markets hate. Yet the FT doesn’t address the neoliberal economic errors that undermined relative US and EU military-industrial power vis-à-vis challengers, which markets love.
That backdrop is going to matter more to markets structurally than US jobs data does cyclically. Bond bulls may just have been jolted awake again but bears of many kinds may not be hibernating for long.
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