Rabobank: Markets Have Already Decided That All Inflation Is “Transitory”, So Why Worry

By Michael Every of Rabobank

Off to Sing Sing

Obviously, today will be all about US CPI. Yes, it is going to be high – again: expectations are for a 0.5% m/m print and 0.4% core, translating into 5.3% and 4.3% y/y, respectively. Yes, those y/y prints are actually slightly lower than the previous month. Yes, markets have already decided that all inflation is “transitory”, so why worry about one more month of very negative real yields? Yes, Fed Chair Powell, who would presumably like to keep his job, stresses unemployment is the key part of his mandate for now. Yes, gold is hardly worrying about inflation already: it has lots else to worry about, it seems.

But then again, we just had a (somewhat questionable?) strong payrolls print – at last; the Fed is warbling about potential tapering on and off, despite being the ones pushing the “transitory” message markets are so happy to imbibe; and the Senate just passed the bipartisan infrastructure stimulus bill – which now heads to the House to likely be parked until 20 September, and perhaps indefinitely, if Speaker Pelosi is serious about her threat to hold it back until the partisan $3.5 trillion stimulus is passed too.

More importantly though, US Treasury yields are going through one of their mini rising cycles, 10s sitting at 1.35% at time of writing when we were below 1.14% a week ago, and so pushing the Dollar up to a 5-month high broadly. Against that background alone, if none of the others above, if we were to get another upside surprise in CPI (again) today, it would suggest further such market momentum near term. That does not mean anything more significant about the underlying outlook, or where yields and the Dollar ultimately go: but it is easy to sing when you are winning, as they say in the UK.

On the topic of singing, of no financial importance for markets, but surely still another discordant note, China has announced a further target for a crackdown: karaoke. “China will form expert legal teams to decide on the list of illegal karaoke songs, aiming to encourage the venues to have a more positive and healthy environment, after China’s culture and tourism ministry issued a notice on Tuesday”, reports the Global Times. This is only likely to impact Chinese-language songs, and follows on from a list of 120 tunes which were banned back in 2015. However, were it to extend to English-language songs, it could make life harder for Westerners in China, who already struggle to find something they can sing without looking ridiculous. Presumably the hotel lobby anthem of “Hotel California” will remain on the list, like the “You can check out any time you like, but you can never leave” capital controls it speaks to.

Any songs in Lithuanian in Chinese karaoke parlors (such as this custardy 2021 Eurovision entry), may now be at risk following China removing its ambassador from Lithuania and asking Vilnius to return its representative in Beijing. The Global Times also has a warning for Germany too: “Post-Merkel China-Germany economic ties in focus, 5G to be key testing ground”, lays down the red line on a “My Way or the Huawei” tech decision – and against reports in Handelsblatt that the most likely successor to Chancellor Merkel, Armin Laschet, plans to pivot to warn of China’s growing influence on the global economy and call for a strategic alliance with the US. The Global Times concludes Germany will have no choice but to side with China, and only the rhetoric will change. Should that analysis prove wrong, one wonders what the bilateral mood music will be? This all comes weeks ahead of a European Commission review of the EU’s position towards China – which is all a bridge to the recent report on EU-China relations we just published.

Meanwhile, the diplomatic equivalent of what Slipknot are to music, Pyongyang, this morning belted out that South Korea –with which it had been singing Kumbayah recently– is risking a “huge security crisis” by going ahead with a joint military drill with the US. “We will have them realize what a dangerous choice they made and how close they are to a huge security crisis by making the wrong choice,” the North Koreans bellow.

At the UN, US Secretary of State Blinken sung about maritime security, which markets don’t think about, but which is joined at the hip with global shipping, which markets just started to think about: “Some may assert that resolving the dispute in the South China Sea is not the business of the US or any other country that is not a claimant to the islands and waters. But it is the business and, even more, the responsibility of every member-state to defend the rules that we’ve all agreed to follow and peacefully resolve maritime disputes. Conflict in the South China Sea or in any ocean would have serious global consequences for security and for commerce. What’s more, when a state faces no consequences for ignoring these rules, it fuels greater impunity and instability everywhere.”

And Blinken again pointed the finger at Iran for the recent drone attack on international shipping – though what the US can/will do about it remains to be seen: no action presents the risk of further threats to shipping; too much action also presents further threats to shipping.

The lyrics of a tense geopolitical backdrop with pressure building on shifting tectonic plates may be as repetitive here as “Baby Shark”, and just as annoying for some, but that does not mean it doesn’t have the potential to be just as big a hit – to markets.

But c’mon, let’s shrug these worries off and get ready to sing with the winners on that key metric of US CPI! (And I am off to sing along to the Manic Street Preachers’ “If You Tolerate This Then Your Children Will Be Next”.)