Rabobank: The Surge In Commodity Prices Is Not Led By Bullishness, But By Panic

By Michael Every of Rabobank

Blessed are the cheese-makers?

Bloomberg markets informs me this morning that “inflation, not stagflation” is back. As they put it: stocks went up again yesterday to match bond yields; both energy and broader commodities are spiking; and the US ISM services PMI was firm at 61.9, with prices paid at 77.5. To be honest, that view is similar to the one you get from the back of a large crowd when you can’t actually see or hear the speaker properly: (“Speak up!”)

Market were likewise optimistic because Senator “Stonewall” Manchin –who is not the one to focus on, Senator “Bathroom” Sinema is– allegedly said: “I’m not going to rule things out” vis-à-vis the $3.5trn reconciliation package, suggesting the fiscal logjam can be broken and the debt ceiling dealt with. Except, as @lindsaywise tweets, the Hill journalist pool consensus is that he actually said “I’m not going to say anything about it.” Our hi-tech 24/7 global markets are the “Blessed are the cheese-makers” Python skit. Also note the content of the $3.5trn bill (green, Hyde amendment) is as divisive as the price-tag. Moreover, Republicans are united in blocking a debt-ceiling increase with a Senate filibuster because this forces the Democrats to use reconciliation to pass it, using up ammunition that cannot then be steered to Progressive-favoured spending. So, will the Greek inherit the earth? (“Oh, it’s the meek! Blessed are the meek! Oh, that’s nice, isn’t it? I’m glad they’re getting something, ’cause they have a hell of a time.”)

More broadly, the surge in commodity prices we are seeing is not led by bullishness, but by panic as energy prices spike and supply chains threaten to collapse. In China –despite a national holiday– the China Banking and Insurance Regulatory Commission has asked relevant lenders to safeguard the “reasonable financing needs” of coal mining, power, iron, and steel, and to “do everything possible” to increase support for securing supply, stabilizing commodity prices, safeguarding people’s basic livelihoods, and a “smooth operation of the economy”. This includes loan extensions with “controllable risks”, increasing regulatory tolerance for non-performing loans, prohibiting loan withdrawal and cutting-off of credit, and preventing “campaign-styled” carbon reductions – with the exception of firms with overcapacity. Now combine this kitchen sink credit policy with “at any cost” energy imports.

Global firms are also responding to the energy surge and shipping-price spike by hoarding. What happens when stocks have been built up enough? Deflation. (And note the Atlanta Fed GDPNow tracker is already down to 1.3% q/q annualized while some expectations for China are flat GDP q/q). Let’s be clear, the structural change in shipping costs and physical unavailability of goods means supply-side inflation will stay high for a long time ahead, and stockpiling will be very difficult to do. But where we do see surges in purchases, it is this dynamic at play, not “inflation”.

The only way it is inflationary is if wages rise. This is happening in pockets as the labor market is restructured post-Covid. Yet even where the trend is most evident, in the post-Brexit UK, the government is presiding over what we dubbed last year as “central planning with no plan”. And there, as elsewhere, if central banks and governments stimulate again without new supply chains or energy sources we are just back to stagflation.

Talking of central bank stimulus, Senator Warren attacked the Fed again yesterday, saying FOMC Chair Powell has “failed as a leader” and that there are “legitimate questions about conflicts of interest and insider trading,” as a further Fed member was suggested to be involved. Regardless, President Biden has said that he has “confidence” in Powell. In British politics, that is usually a precursor to a ministerial resignation in order to spend more time with their family.

Meanwhile, market bullishness was also triggered by the SEC’s Gensler saying he won’t ban crypto, like China. (“Well, obviously, this is not meant to be taken literally. It refers to any manufacturers of dairy products.”) No, the SEC won’t ban it: they will just regulate and tax it, so the market serves state power. That’s how you deal with what billionaire Ken Griffin calls a “jihadist call” against the US dollar.

The RBNZ, as expected, today took the decision to hike rates 25bp to 0.50% despite a large slice of the economy being in lockdown, and its largest trading partner being in energy meltdown (and a Common Prosperity crackdown and a property break-down). It noted: “Headline CPI inflation is expected to increase above 4% in the near term before returning towards the 2% midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk leading to more generalised price rises. At this time, measures of core inflation and medium-term inflation expectations remain close to 2%. The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment.” The Bank also added that the “level of house prices is unsustainable” – implying more tightening or macro-prudential measures to deal with it, or just a warning of a crash? Let’s now watch how raising rates against a massive supply-shock works out for a trade-and-housing dependent economy with low unemployment and a backdrop of fiscal stimulus. Blessed are the manufacturers of dairy products, or not?

Geopolitically, today sees the first of what are likely to be fruitless rounds of US-China security pow-wows, this one in Switzerland. That is as: the US bans the export of some nuclear materials to China; the Biden administration reveals how many nukes it has –less than thought– removing strategic ambiguity (why not their locations too?); John Kerry suggests President Biden was unaware of either the AUKUS deal or the fall-out with France; the CIA admits dozens of its operatives around the world have been killed of late; and Taiwan’s president writes a pleading letter to the world in Foreign Affairs. You know, a normal day in modern markets.

Moreover, Poland has agreed to buy US F-35 jets, suggesting integration into the US (and UK) defense umbrella, as well as its separate move towards US LNG networks over Russian – autonomia strategiczna. That leaves any potential EU army in “the year of defense” that is 2022 looking very French, when all the financial muscle is German. If national-security muscle is going to mean more realpolitik control over purse strings ahead, and “they shall beat their ploughshares into swords, and their pruning hooks into spears”, will the EU’s top cheese-makers be blessed and inherit the earth?