Michael Every from Rabobank
OPEC+/RBNZ Reversals on BOE/RBA Reversals
Markets have already begun a bear market rally, fueled by the shifting sands of UK politics, where more policy reversals may occur; the chancellor tried to suggest that the queen’s death may have played a role in the messy launch of the mini-budget; and one journalist notes: “This Tory conference is so messed up I still can’t believe it’s real. Ministers are getting completely out of place, MPs are barely present but still throwing shade left, right and centre, Tory members are drinking champagne, half laughing and half crying “we’re all sh****”. It’s WILD.” This Keystone Cops dynamic has already led to a desperate “no QE or MMT!” actions of the BOE.
Then the RBA only hiked 25bp, not 50bp, given the 80% price., outpacing even his pigeon rod. “The Council is committed to returning inflation to the 2–3% range over time. Today’s hike in interest rates will help achieve this goal, and further hikes are likely to be needed in the coming period” the governor said, knowing full well that his actions would be received dovishly and reduce expectations for peak rates to about 3% — against expected inflation this year of about 8%; inflation above 2% by 2025; a red-hot labor market; and the government this time will be more in favor of labor than of capital.
During the turn, he noted, “inflation in Australia is too high. Global factors account for much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role… national income is boosted by record terms of trade. The labor market is very tight and many firms are struggling to recruit workers…Wage growth continues to pick up from the low pace of recent years…Given the tight labor market and early price pressures, the Board will continue to pay close attention to both the evolution the cost of labor, and on the behavior of firms when setting prices in the future period.”
So why the twist? “The expected softening of inflation next year reflects the ongoing resolution of global supply-side issues, the recent decline in prices for some commodities and the impact of rising interest rates.” In other words, the RBA still considers inflation to be transitory (!); and the focus, out of character, is on the rest of the world – “The Great Economy did it and got away with it.”
However, it was really all about housing: “Higher inflation and higher interest rates are putting pressure on household budgets, with the full impact of rising interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen, and house prices are falling after earlier strong gains. By working in a different direction, people find work, work more hours and earn higher wages.” In short, everyone has a job; wages are rising; but after another crazy upward movement, house prices are finally falling… so it’s time to turn around. The bank also released the “No Panic!” program. trick to explain why housing would be fine: “many households have large financial buffers.” Yes, the ones *without* big mortgages! Everyone in the markets can see that this is the Austrian Reserve Bank.
However, despite the initial drop, the AUD did not suffer too much, just as the GBP rose in recent sessions. There is a key message in this.
While the U.K. and Australia have been pushed back from their hawkish ways by asset prices, the focus is on the U.S.. In both cases, the market’s initial reaction was to lower *US* yields and lower the *US dollar*, leading to a Fed pivot. if not then we will see the UK and Australia punished for not keeping pace, with higher yields and/or much lower currencies for both.
On that front, we got some important US data in the form of JOLTS jobs, which showed the biggest drop since 2020. This will be registered with the Fed. However, this cannot be seen in isolation, as some have suggested: it must be seen alongside the incredible surge in job offers ahead that 2020 did not see. Even after this reduction, there are still 1.67 vacancies. for each worker. Even assuming the labor market lags, does that mark a turnaround now that the Fed has made it clear it expects unemployment to rise rather than the jobless rate to fall to lower inflation? Hardly!
However, we did get a speech from non-voting Fed Daley in San Fran, who, while denouncing inflation as a “corroding disease,” also added: “We need to recognize and understand the impact that an interest rate hike or a dollar appreciation against other currencies has on global growth and global financial conditions, because ultimately these things come back to the U.S..”
However, as I keep stressing, the real world is not a ball game. Indeed, along with lower yields and the US dollar, we have seen higher commodity prices in recent sessions. Moreover, apart from that simple dynamic, we have a geopolitical one.
OPEC+ meets today and Russia and Saudi Arabia are reportedly teaming up to cut production by as much as 2 million barrels per day. In other words, the destruction of supply corresponds to the destruction of demand; so the energy of inflation even in a recession. And higher energy already leads to the destruction of the supply of fertilizers; behind schedule, which will mean the destruction of food supplies; and then the workers will demand higher wages so they can still eat.
This is reported by CNN The White House is “who feels spasm and panic» as the most senior U.S. energy, economic and foreign policy officials lobby against production cuts, seen in some draft threads as “a total disaster“which can be taken as”hostile act.” Indeed, the U.S. is reportedly “removing the gloves”, and the language used also includes the phrase that: “There is a great political risk to your reputation and your relationship with the US and the West if you move forward.” What is the US going to do? Break in? Encourage the Saudis to engage more with Russia and China, further reducing supplies to the West? It’s time (again) for the geopolitics and geoeconomics lover!
On that note, the EU has agreed on a cap on oil prices in Russia, the “details” of which will be published today. One part is clear: no more EU technology to help Russian energy production, which will reduce production over time – and thus push prices higher. The rest is so obscure it looks like a reverse South Park Underpants Gnomes strategy: “Step one: limit the price of Russian oil – Step two: ? “The third step: no Russian profit.” Apparently, Greece has already agreed to exclude its tankers.
Accordingly, Russia is said to be moving towards either accepting all forms of crypto for payment or a digital RUB. How do you think the US will respond? A lighter touch on crypto regulation on Wall Street and Fed tapering to allow anyone thinking of getting back into the labor market to stay home and trade NFT monkeys in sunglasses again? Even Kim Kardashian just got hit with a $1.2 million fine from the SEC for plugging a crypto asset.
There was also a 50 bp RBNZ hike today. to 3.50%, and note that they discussed a 75bp move like the major central banks, not 25bp like the Reserve Bank of Austria. The New Zealand dollar rose 0.9% on the news and related comments that the RBNZ is concerned about inflation driven by a weaker currency – something Australia should take note of. (And by the way, New Zealand has a housing market that they really like too.)
Even in Tuesday’s daily reverse auction aimed at stabilizing markets, all £2.22bn worth of gilts were rejected. FinTwit gossip adds: “I know an institutional Gilt broker, on why the Bank of England isn’t buying Gilts… “BOE insists on QT start on Oct 31st (which I think is ridiculous, although it’s tightening up on the front). The Bank of England does not want to buy these longs in the middle. It’s all just a defense to contain systemic risk.”
Sorry for the structural incoherence in your BOE/RBA cut, Mr Market.
Finally, Elon Musk took to Twitter to veer from his “artificial intelligence robot” that looks like a geriatric Terminator in a nursing home that needs other robots to look after him, to a peace deal between Russia and Ukraine, before returning to Twitter, which –surprise surprise, by signing a tough legally binding agreement with him– he will eventually buy. Let’s take a look at what’s going on with Western political and market debates: it honestly couldn’t be worse.