Rabo: The Fed Is Getting Flattened, Whatever Happens Now

By Michael Every of Rabobank

“How much worse could I make it?”

The Atlantic, in an article titled: ‘Populism Always Sounds Great in the Abstract’, bewails “A New Jersey truck driver defeated the state Senate president, but politics needs people who know what they’re doing,” adding the witty line: “I love the David and Goliath stories of politics, but only if David isn’t also a Philistine.” Ed Durr, who’s $153 home-made social-media-free campaign strategy just beat a political warhorse responded: “How much worse could I make it?”

Without being partisan, it’s a question worth asking. Which of the brilliant minds at the Fed, White House, or in Wall Street had a 6.2% y/y US inflation print penciled in for October, the highest since December 1990, and, given base effects into end-year, the possibility we close 2021 close to 7%, the highest since June 1982: that’s so far back it was five years before even Biden first ran for president. “Bueller? Bueller?” That’s right – nobody. This is not just about lumber, or used cars, or energy, or food. Inflation is evident across a broad spectrum of goods; yes, with energy prices high, it will spread; into food, for sure; with supply-chains still strained, it will spread if demand does not fall; and in so-far-restrained services, the next big shock will be from rising rents, where demand is inelastic.

This hurts – like the deleted MSNBC tweet telling us ‘inflation is good’.

Did you get a 7% pay rise this year? Atlanta Fed wage growth data says those who stick with their jobs are seeing pay rises of 3.5% y/y; those who switch are getting 5.4%. Churn, baby, churn: and who fills the lower-paid positions left behind? Post-Virginia and New jersey, the White House realizes just saying “transitory” does not play well with voters, and President Biden has pledged that “Inflation hurts Americans (sic) pocketbooks, and reversing this trend is a top priority for me.” How, though?

There is the infrastructure bill, but it will take years to kick in. Given the White House just rejected an appeal by US solar panel producers to impose tariffs on imports, it would also appear less Building Back will be done in the US, and more strain placed on ports. The bill also doesn’t address warehouse space, underpaid truckers, absent chassis, or structural monopolies in logistics that ensure high profitability and low resilience. As Matt Stoller underlines, “The consolidation of power over supply chains in the hands of Wall Street, and the thinning out of how we make and produce things over forty years in the name of efficiency, has made our economy much less resilient to shocks.” Moreover, Freightwaves notes just 16 companies – all outside the US – control 80% of global liner shipping, container production, and box-leasing capacity. Their economic power is growing, and they have no incentive to bring prices down. July’s White House executive order to tackle cartels only applies domestically.

Perhaps oil will be released from the strategic reserve given President Biden’s view that this is the core problem – which will not add to US refining capacity or help supply chains or lower rents. And the planned $1.75 trillion Build Back Better bill puts more money in Americans’ pockets – which even Citadel is now saying would cement inflation by increasing demand when supply is constrained. Childcare is a ‘good thing’: but it is not transportation infrastructure.

The message for the Fed from the yield curve, pre-CPI, was that merely jawboning was a policy error prompting bull curve flattening. An inflation print that suggests the Fed may be behind the curve saw US yields surge –2s up 10bp, 10s up 10bp, 30s up 12bp at their intraday peak, and TIPS 10-year break-evens topping 2.70%– and bear curve flattening. In short, the Fed is getting flattened whatever happens now – and the US dollar is getting pumped. What are the FOMC going to do – hike? Jawbone? Write articles in The Atlantic?

Indeed, the outlook continues to confound those in charge who failed to notice that pre-Covid the global economy was already heading for a recession – our 2020 outlook back in late 2019 was titled “Titanic”. There still appears to be painfully little dot-joining going on, just spurious dot-plotting.

Meanwhile, in China Evergrande walked right up to the edge of default before making an interest payment. Word now seems to be the PBOC will help “good” developers sell bonds to Chinese banks to refinance their CNY debts (at lower interest rates, despite soaring credit risk). At the same time, the PBOC took the rare step of announcing mortgage lending picked up in October to CNY348bn (USD54bn) vs. CNY247bn (USD38bn) in September despite the controls in place. That’s the tactical picture. The strategic one is a Wall Street Journal article claims Beijing aims for a “controlled implosion of the real-estate giant, selling off some assets while limiting damage to home buyers and businesses.” Less attention is allegedly being paid to foreign investors – but just enough not to let faith collapse completely. The meta picture is what China’s growth model looks like once property speculation is excised, not just in 2022, but from here on out. For that, we will need to pay attention to the CCP’s Sixth Plenum that wraps up today.

The US and China have announced a joint declaration to cooperate on climate change. Which is nice. They signed the same document back on 12 November, 2014. When US CPI was just 1.6% y/y. Which year is the following from? “The United States of America and the People’s Republic of China have a critical role to play in combating global climate change, one of the greatest threats facing humanity. The seriousness of the challenge calls upon the two sides to work constructively together for the common good.”

Aussie jobs data were their usual random walk at -46.3K vs. an expected rise of 50K despite a decline in the participation rate. Full-time employment sank -40.4k and part-time -5.9K, and unemployment rose from 4.8% to 5.2%. Further volatility for a bond market expecting the RBA to be wrong on saying it won’t hike in 2022, backed up by the US CPI print overnight.

And in geopolitics, Russia is flying nuclear bombers over Belarus as the border row with Poland blazes on. Donald Tusk has penned a letter stating: “I am addressing you, the leaders of EU Member States with an earnest appeal for full solidarity with Poland and Lithuania in the face of the growing crisis on the border with Belarus. Irrespective of your views regarding migration and your evaluation of the internal situation in Poland, we must, I underline, we must, as a political community, use all available means of pressure in order to contain the escalation of tension on the Eastern border of the Union…There is no more time nor space for hesitation.” He calls for “tough decisions vis-à-vis Minsk,” and warns, “Lack of reaction or postponing will only embolden the provocateurs and their protectors and may lead to dramatic, difficult to predict consequences.”

But numerous lines in the sand have been crossed already, with no slings proffered in response. “How much worse could I make it?” We shall soon find out.

Not just in the US, but globally, aren’t we lucky the ‘Goliaths’ are in charge rather than the philistine “Davids”? By the way, evidence suggests the Philistines were related to bronze-age Greek civilisation, so the linguistic insult hardly fits; and it’s not the Davids whose dignity is now being covered by the smallest of fig leaves.