By Michael Every of Rabobank

POP! Go more narrative balloons left and right than I had space to cover yesterday:

Russiagate (says Matt Taibbi); vaccines (says Scott Adams); a Ukraine peace deal (says former Israeli PM Bennett, claiming an April 2022 ceasefire was shot down by Boris Johnson); a Ukraine peace deal (says Newsweek: the US reportedly offered Russia 20% of Ukraine for peace in January - and Russia and Ukraine both shot it down); gold (Russia sold 3 tonnes to pay bills, though the FT says there is ‘colossal’ central bank buying); de-dollarisation (India says it’s switching oil payments from dollars to dirhams, which are pegged to the dollar!); literal balloons (President Biden says the recent incident has not harmed relations between China and the US, and Secretary of State Blinken says he will try to reschedule his visit – but China aren’t getting the bits of their balloon back); trade (the EU and UK are closer to a compromise over Northern Ireland trade); laws (the EU and UK will drift apart if the UK withdraws from the EU Convention on Human Rights); sport (English football giants Manchester City are accused of 100 breaches of financial fair play rules, potentially seeing them fined, docked points, banned from the transfer market, and perhaps even relegated and/or stripped of past title wins); and politics (Biden is to push for a billionaire tax in his State of the Union address: to a Republican House. Nothing doing, obviously.)

Of course, some balloons still have a lot higher to float. Japan is going to subsidise domestic electronics production more; the US may impose a 200% tariff on Russian aluminium, which is seen as relief for a market expecting a total ban; and the UK Labour Party has pledged to rapidly rebuild the armed forces if it wins the next election, on top of all the Higher social spending it supports. If you are holding on to the ‘protectionism’ and ‘military spending’ strings you are not going to get stung as you reach for honey. However, it’s better to remain open to letting go of most others than to be lifted higher and higher above the ground.

Indeed, the Fed’s Bostic warns the “blow-out” payrolls report backs Fed Funds going higher than the terminal rate of 5.09% priced in yesterday. Bostic backed two hikes, and suggested a step back up to a 50bp move might be needed. Independently, according to Bloomberg, a chunky market position is being taken against emerging markets. Moreover, as early rumours of a dovish new BOJ governor are rebutted, Japanese cash earnings leaped 4.8% y-o-y, and even rose 0.1% y-o-y in real terms. That isn’t a complete surprise in that we had earlier seen retailer Uniqlo flag it would raise the salaries of all employees by 40% before March 2023. However, it is a problem if you think the BOJ are going to continue to remain dovish forever, when turbulence in the JGB market could flow through to USD/JPY and US Treasuries. In short, it’s only a week into the second month of the year and already the key 2023 market memes are blowing up again.

The main focus today is on two key central bank actions. First, we get the RBA. The market consensus is a 25bp hike to take rates up to an awkward 3.35%. Until relatively recently, the Aussie market consensus was that this might be the peak – if for no other reason than because anything more will hurt the housing market, and you aren’t allowed to do that in Australia. (They deport you to the cold, rainy UK if you do.) My helicopter view was that the RBA and Australia are not special cases, and that they would have to tighten far more than that: 3.75% to 4.0% seemed sensible to me from afar.

Then we got the strong CPI print for December; then the awful retail sales print for the same month; then the strong US payrolls print, and the Fed making clear they are still not done; yet we didn’t get the lift from China reopening Aussies were hoping for. (Indeed, there really doesn’t seem to be the usual massive Beijing stimulus flowing into commodities some had expected, though we need to wait for the March National People’s Congress to get a clearer picture on how artificially high the GDP target for 2023 will be set, and if we get there via bridges to nowhere or e-CNY consumption vouchers that can only be spent on things Beijing permits.) On balance, the Aussie market is now more open to the RBA rate moving higher than 3.35%. Though few think a 50bp move today is likely given housing, housing, and housing is on its mind, might we get a 40bp hike to 3.50%? At least it’s a round number and makes them look like they are doing something.

Indeed, we already see new narrative balloons being floated in the Aussie press. Apparently, the housing market is moving against would-be home buyers, not for them, in terms of the number of properties being withdrawn from the market. You see? Higher rates are also bullish for property prices in Australia! Of course, this is also a bursting balloon. Buyers are hurt by higher mortgage rates, and so are homeowners with mortgage-rate resets looming: that must lower home prices, or see market transactions freeze. You can say your house is worth whatever you want, but the proof of the pudding is in the selling, not the spruiking.

Second, we get Fed Chair Powell, who gets a second bite at the cherry in explaining to markets that he is not happy that US financial conditions are easier now than at any time last summer, when the market was saying “Fed pivot!” If he’s hawkish today we can expect risk off and a stronger dollar; and if he again fluffs his lines yet again, we can expect the opposite. One wonders what balloon string he is holding on to if he yet again can’t make it clear to markets that rates are going up more, and STAYING UP – like better quality balloons.

Meanwhile, grasping onto my own balloon string for a final paragraph, one can argue the Fed is wrong on the payrolls front longer term because it doesn’t grasp the enormity of what is about to hit in terms of AI. Neither does the financial industry. As ChatGPT is rolled out as part of the Microsoft Office suite, a Bloomberg markets’ survey about the impact of AI yesterday saw two thirds of respondents say it would not replace their job. I would posit that the correlation between the people who said that and the people who are easily replaced by an AI is positive and high. Indeed, the impact will be felt across the entire services economy: and we don’t even need humans for their political biases anymore from what ChatGPT will and won’t write so far. Then again, as Twitter perhaps shows, only a core of white-collar workers are needed to actually run firms, and the rest can go help rebuild the UK or US army, or such-like. What an irony that would be: the people who patronisingly told blue-collar workers to ‘learn to code’ being told to become blue-collar workers, because that’s just progress.

Again, how narratives can burst in your face!