Rabo: Markets Are Wishing For A Negative Payrolls Number To Stop The Fed Wipe-Out

By Michael Every of Rabobank

“Fun” and Games

The US says Russia is making a detailed fake news video showing a digital mock attack against ethnic Russians in east Ukraine, with explosions and mass casualties, to act as a casus belli. We already had allegations of a Kyiv coup. Now Russia is apparently going to “вилять собакой“ – wag the dog. No evidence of this was produced, itself producing a reference to ‘Alex Jones’-style news from the Associated Press at a White House Q&A.

Oil prices jumped – and so they should. Either the US allegation is true, and Russia wants a war via fake news; or it isn’t, and the US wants a war (**cough** Gulf of Tonkin** cough **Iraqi WMD** cough) via fake news about fake news; or, the US is so incompetent it is likely to get a war anyway. As another 1,700 US paratroopers fly from Fort Bragg to Europe, Russia says it is justified in responding in kind. (Which it has been doing on massive scale well in advance.)

The irony is this narrative takes place on the same day a social media giant’s shares collapsed due to it placing its bets on everybody wanting to walk around in a fake digital reality. When I saw the latest video trying to sell this head-scratching headsettery, I genuinely thought it was a brilliant parody. Yet, as I have noted before, real life is now parodying itself better than anyone can. It’s all darkly amusing – until the shooting starts. On which, the financial press and mega corporate sponsors will now try to refocus our attention on starting pistols: welcome to a glorious celebration of sport and the Olympic spirit that has nothing to do with politics.

The US Olympic Committee president argues “politics has no place in sport”, supporting the games being held where they are, despite initial doubts. Sorry, that was Avery Brundage in 1936. The 2022 games will see lots of political questions; Covid lockdowns; IOC Chair Bach meet Peng Shuai; European athletes not taking their own electronics amid questions over the official app; several Western nations sticking with a diplomatic boycott; Nancy Pelosi –finding time in-between a busy day of stock-trading– warning, “I would say to our athletes, you are there to compete. Do not risk incurring the anger of the Chinese government because they are ruthless.”; and China picking a solider who survived fatal clashes with the Indian Army as a torch bearer. So, no, no politics at all.

Western media point out if Beijing 2008 was a case of “Here I am” to the world, Beijing 2022 is “Here I am, like it or not”. Even Bloomberg can see a huge slice of the leaders joining Xi Jinping today are from undemocratic countries, and the Guardian that: “When the leaders of China and Russia meet in Beijing this Friday shortly before the opening ceremony of the Winter Olympics, observers of the bilateral relationship will be looking for insights into how this 21st century quasi-alliance is reshaping the post-war world order.” The two are already working to create sanctions-resistant financial infrastructure. Of course, the New York Times and Amazon Post are more balanced about this all, because “anti-US imperialism”; and The Economist has a ‘Chaguan’ column urging the US to push Taiwan to negotiate a settlement with Beijing, even if it means rolling back its democracy.

While the Great Games play out in the background –e.g., Israel and Bahrain signing a defence agreement(!)– central banks are trying to maintain ‘Cool Runnings’. Yet all their bobsleighs are likely to end up like this one.

The Bank of England raised rates 25bp, the first back-to-back hike since 2004, and some members flirted with 50bp(!), while it also started to wind down QE. On the same day fuel bills jumped; just ahead of a leap in National Insurance payments; with food prices set to soar as well; and while warning of the largest fall in living standards for 30 years. (AND before the British public note the new crisis unfolding over Northern Ireland border again.) Faisal Islam of the BBC reports the following exchange with the BOE Governor:

Islam: “Are you trying to get into people’s heads and ask them not to ask for too high a pay rise?”

Bailey: “Broadly, yes.”

Islam: “Really?”

Bailey: ”We do need to see a moderation of wage rises…that’s painful.”   

What happened to Build Back Better and Levelling Up? What happened to all the new central bank thinking about political economy that Covid was supposed to prompt? As football fans sing at referees from the terraces: “You don’t know what you’re doing!” And clearly the BOE doesn’t: full year GDP growth for 2022 is now seen at 3.75% vs. 6% prior to their November meeting. Is this down to Omicron, as restrictions are lifted? Or a fake (fake) Russian video? Stefan Koopman’s follow-up here notes if tight monetary policy is used to weaken the current upward pressure on wages, it may be enough to tip the economy back into a recession. He forecasts another 25bp hike rate as soon as the next meeting, before the MPC perhaps then decides it’s best to re-assess. And meanwhile PM BYO is bleeding key staff as the fans also chant “Who ate all the cake?”

The ECB left rates on hold but President Lagarde, with all the verbal dexterity of an elephant on ice, managed to generate a market response almost equivalent to a rate hike regardless. As Elwin de Groot and Bas van Geffen note in their ECB coverage, Lagarde asked “Can we not remove this?” at the start of the press conference, referring to a small barrier that separated the stage from the photographers. For some, this referred to monetary accommodation too; and for others to the “Do I not like that?” of one of the most infamous football managers to ever have “You don’t know what you’re doing!” shouted at them. In short, the January inflation data appears to have struck a nerve; Lagarde did not repeat that a 2022 hike is “unlikely”, marking a hawkish tilt; the ECB has kept all options open for March, but a more formal pivot seems likely; and this again raises the odds of a policy error

Markets now find themselves in the strange position of waiting for US payrolls today and wishing for a negative number, following the ADP, to try to at least stop the Fed from its own ‘Cool Runnings’ wipe-out. Even if that number is fake news, they will take it. Even if that means D.C. will start pushing for further stimulus cheques in a US economy seeing worse logistics/supply-chain problems than a few months ago. (Despite the central banks who didn’t see inflation coming last year saying this would resolve itself as things magically do.)

But skate back and see that this isn’t about near-term rate policy. Hike, and face supply-side inflation and recession. Don’t hike, and face supply-side inflation, then demand-side inflation, and then more hikes, then recession. By some miracle, if that doesn’t happen, you end up with greater socioeconomic polarisation and accelerated collapse of trust in all (economic?) institutions. That’s the consequence of decades of failed thinking and architecture. I once called it ‘Thin Ice’ we could fall through. Now I see it like thick layers of snow that risk tumbling down on us in an avalanche – and that’s before we get to the risk of very loud bangs in Ukraine triggering this process faster than assumed.

Happy Friday.