A Tale Of Ten Cities

By Rabobank’s Benjamin Picton

A Tale of Ten Cities

The Daily is today, and on most Mondays from now on, coming to you from the Land Down Under, where it is currently the future (in a time-zone sense) – and that is appropriate given some of the themes in this particular missive.

Futures markets are pointing to a flat start to the week after the US 10-year yield closed back below the 4% level on Friday, ISM and PMI data came in strong, and stocks finished up. The Fed’s Daly won’t have helped sentiment much with further promises of rates being higher for longer and warnings of structurally higher inflation. Neither will the ECB’s Christine Lagarde talk of the need to deal with the “monster” of inflation. Nor will the weekend’s China’s National People’s Congress, which set a “modest” GDP growth target of 5% while further centralizing control in the hands of Xi Jinping. Outgoing Premier Li Keqiang said “struggle creates brilliance.” Helpfully then, China’s defense spending will rise 7.2%, and the US is close to instigating capital controls to prevent investment in Chinese tech.

Li also said “Hard work builds the future.” In his trademark style, so did former President and 2024 aspirant Trump, who unveiled his vision for ten new ‘Freedom Cities’ to be built on federal land, opening a new American frontier to offer low cost homes to millions – and replete with flying cars. Trump’s vision was of the Jetsons, plural, as he also spoke of a baby bonus aimed at lifting a sagging fertility rate, and support for Medicare and social security. There was also a new (old?) program of public works to ”get rid of bad and ugly buildings and return to the magnificent classical style of western civilization.” These new spending promises are to be funded, at least in part, by universal tariffs via “America first” mercantilism. China should be nervous; and so should US allies and trade partners thinking of 1930s-style US isolationism while other Great Powers are returning to 1930s-style belligerence. So should markets, perhaps, because Trump dominated the conservative CPAC convention despite mainstream and social media not covering what he says anymore. Indeed, his grip on the Republican party still seems strong enough that an alternative Daily title suggested by the regular author of this Daily was ‘Trumpy Python’s Flying Car-cass’. 

While the US dreamed of flying cars, Europe was split on plans to phase out those with internal combustion engines: Germany and Italy are delaying final approval of the new law. And while that horse-power trading was going on, German Chancellor Scholz was in D.C. to meet President Biden to discuss the war in Ukraine. More horse-trading?

If the West isn’t backing down there, neither are the Russians. Foreign Minister Sergei Lavrov confirmed “it is existential for us,” and accused the West of hypocrisy, pointing at its actions in Serbia, Iraq, and Afghanistan, and saying “nobody gave a damn about anything but finances and macroeconomic policies” during those episodes. Even a broken clock is right twice a day, and he is quite right that it used to be possible to ignore geopolitics and focus only on quarterly earnings and what the Fed and other central banks might do. Now one needs to look at a whole lot more a whole lot more.

But sticking with the week ahead, there are plenty of catalysts for ordinary market volatility as three central banks meet to set policy rates, some key data hits our screens, and US Fed Chairman Powell delivers his semi-annual testimony before the US House and Senate Committees.

Today is covered in more detail below in the Day Ahead.

Tuesday, the RBA delivers its March policy rate decision. A 25bp hike to 3.65% is seen as a near certainty in the market, with only one economist amongst those surveyed by Bloomberg expecting rates to stay put. The picture is becoming more complicated for the Reserve Bank, however, following poor jobs figures for December and January, weak Q4 GDP growth, and slower than expected wage growth. The temptation will be to ease off hiking early, especially following the release of diabolical January building approval figures last week (-27.6%) and the Melbourne Institute inflation gauge for February coming in at +0.4% vs +0.9% prior. However, the implicit price deflator in the Q4 GDP was still very high (9.1%), and the RBA will have one eye on strong data and the hawkish tone emanating from the US. Falling behind the inflation curve and having to catch up later is not a prospect it would relish, so we expect that it will indeed be a 25bp hike tomorrow.

Tuesday also sees Fed Chairman Jerome Powell begin a two day testimony where he will speak on the semi-annual Monetary Policy Report. Powell will follow a stream of hawkish Fed speak in recent days, notably from Waller, Daly, and Barkin, though risk assets took some encouragement from Bostic last week when he said that he favoured a 25bps hike in March. It seems likely that Powell will continue the more hawkish tone as recent US data has mostly surprised to the upside.

Wednesday, the BoC meets. Markets, and our Christian Lawrence, expect an end to the hiking cycle and rates on hold at 4.5%.

Thursday sees US ADP and initial claims data.

On Friday, the BOJ is widely expected to leave rates unchanged at -0.1% and maintain the yield curve control (YCC) policy targeting the 10-year JGB yield at 0.5%. This will be the last BOJ meeting chaired by Haruhiko Kuroda, with Ueda-San due to take over from next month. Speculation as to Ueda’s policy preferences have been rife in the market, and there has been some suggestions that the YCC target may be lifted soon as the Japanese economy has started to show signs of a pickup in inflation.

Rounding out the week, Friday also has US non-farm payrolls following the blockbuster 517,000 figure for January that effectively reset expectations of the likely path of Fed monetary policy to ‘higher for longer’. The consensus of survey is a gain of 215,000 with the unemployment rate remaining steady at 3.4%.