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Rabobank: The Dirty Secret In Markets Is That Nobody Pays Attention To Details

Courtesy of ZeroHedge View original post here.

By Michael Every of Rabobank

Just Details

Details matter. Or they should. In reality the dirty secret in markets is that nobody actually pays attention to them.

One example is when, in a former role, somebody asked me to proof-read an offer document to propose entering into Hungarian government bond sales aimed at potential ‘Mrs Wattanabe’ investors. I did, and told them I did not think the Hungarians were offering florin debt. (The Hungarian currency is the forint; the florin was a gold coin struck from 1252 to 1533 in Italy. I am sure Mrs Wattanabe would have loved getting an 8% yield on a gold coin.)

Another case in point is US CPI, which you would have to be getting an 8% yield on a gold coin to keep up with. US headline inflation hit 8.5% y/y yesterday, a tick higher than expected, but the market focus was on the 0.3% m/m core print, which was 2 ticks lower than consensus. Along with the recent dip in oil prices, the sudden view was again that we have seen ‘peak inflation’. Happy days! US shorter-dated bond yields tumbled as a result, the 2-year falling 18bp intraday at one point, while longer yields fell less (10s down 10bp intraday). The US dollar also dipped.

What the market didn’t notice in the CPI release was the detail that ‘peak inflation’ was driven by a large dip in used car prices (-3.8% m/m) when almost everything else went up: food 1.0%; food away from home 1.5%; energy 11.0%; and even services 0.6%. And, yes, those are all month on month, not year on year. Try annualizing them for size.

That market move was only partially reversed when former dove Brainard flew in and said that the Fed will move “expeditiously” to raise rates, and will tighten “methodically”, alongside QT, to ensure inflation gets back to 2%. She didn’t seem to be too focused on the details either when she added, “the health of the US economy bodes well for bringing inflation down without causing a recession.”

US Senator Manchin was typically blunt in his own take:

“It is a disservice to the American people to act as if inflation is a new phenomenon. The Federal Reserve and the Administration failed to act fast enough, and today’s data is a snapshot in time of the consequences being felt across the country. Instead of acting boldly, our elected leaders and the Federal Reserve continue to respond with half-measures and rhetorical failures searching for where to lay the blame… Here is the truth, we cannot spend our way to a balanced, healthy economy and continue adding to our $30 trillion national debt.”

So, that’s a no to Build Back Better then?

Meanwhile, we got more piecemeal inflation-fighting from the White House with the announcement of an emergency waiver on summer ethanol ban to try to lower gasoline prices. It will have a marginal impact at best: but it is far from marginally bad policy to be burning food for fuel at a time when we see soaring global food prices.

The linked press event also took a segue in that Biden declared, “Your family budget, your ability to fill up your tank, none of it should on hinge on whether a dictator declares war and commits genocide a half a world away." So, genocide now – at least until that gets walked back too by the press office, which it hasn’t so far.

Those who are into details will note that the ability to fill up the tank does not hinge on a Russian dictator or genocide: it is a combination of many dictators, and elected officials, and people talking about ecocide.

Some people are finally noticing some details, however. For example, here’s Paul Krugman in the New York Times this week:

“There has been a longstanding belief among Western elites that commerce is good for peace, and vice versa. America’s long push for trade liberalization, which began even before WW2, was always in part a political project: Cordell Hull, Franklin Roosevelt’s secretary of state, firmly believed that lower tariffs and increased international trade would help lay the foundations for peace.

The EU, too, was both an economic and a political project. Its origins lie in the European Coal and Steel Community, established in 1952 with the explicit goal of making French and German industry so interdependent that there could never be another European war…

So does trade promote peace and freedom? Surely it does in some cases. In other cases, however, authoritarian rulers more concerned with power than with prosperity may see economic integration with other nations as a license for bad behaviour, assuming that democracies with a strong financial stake in their regimes will turn a blind eye to their abuses of power.

I’m not talking just about Russia. The EU has stood by for years while Viktor Orban of Hungary has systematically dismantled liberal democracy. How much of this weakness can be explained by the large Hungarian investments that European, and especially German, companies have made while pursuing cost-cutting outsourcing?

And then there’s the really big question: China. Does Xi Jinping see China’s close integration with the world economy as a reason to avoid adventurous policies — such as invading Taiwan — or as a reason to expect a weak-kneed Western response? Nobody knows.

Now, I’m not suggesting a return to protectionism. I am suggesting that national-security concerns about trade — real concerns, not farcical versions like Trump’s invocation of national security to impose tariffs on Canadian aluminum — need to be taken more seriously than I, among others, used to believe.”

Notably, there are also arguments among national security types that once you decouple the other side is free to act with impunity geopolitically; and that threatening decoupling can lead to rapid escalation. Regardless, when you’ve lost Paul ‘free trade now!’ Krugman…

Linking this together, don’t focus on US core CPI, focus on the argument used last year that used cars meant inflation was “transitory”. It wasn’t then and it isn’t now. It’s becoming entrenched. US headline PPI today is seen up 1.1% m/m / 10.6% y/y, and 0.5% m/m / 6.6% y/y core.

Moreover, as even ‘Krugmans’ start to realise economic national security matters --on which, see some great work on supply chain problems from my colleagues Maartje Wijffelaars and Erik-Jan van Harn-- we will soon grasp that freedom isn’t free. It’s expensive, because if we don’t want to be economically reliant on the likes of China then we need to be onshoring an awful lot of production. I am sure patriotic Western businesses and Wall Street will get right on it…

Yet it can’t come too soon for Dani Rodrik, of ‘global trilemma’ fame, as he argues, “When economists talk about global convergence, what they usually have in mind is that developing economies grow more rapidly than advanced economies, and the incomes of the world’s poor rise to levels in richer economies. The irony nowadays is that we are experiencing downward rather than upward convergence.”

Ironically, back in 2002 that was something I was telling ‘Krugmans’ would be inevitable due to globalization if they looked into it in detail rather than making utopian assumptions: nobody listened, but the resulting ‘go long long bonds’ trade paid off nicely.

In short, today we have entrenched inflation, a Fed prepared to “meticulously” ensure it becomes unentrenched, and a geopolitical backdrop that favors decoupling, which cannot be anything other than inflationary.

Timing-wise, that suggests higher long yields, then much lower, and then higher again – presuming the Fed doesn’t do what the BOJ have been doing and keep them low ‘for national security’. At which point it’s the dollar one wants to worry about. But that’s a story for another day.

Meanwhile, on that geopolitical backdrop, Putin says talks with Ukraine have hit a “dead end” and vowed to not stop “military operations" in Ukraine until Moscow succeeds; Japan is apparently close to joining AUKUS, making is JAUKUS(?); and we hear the ‘g’ word – but that “never again” allegation doesn’t seem to move markets, patriotic Western business, or Wall Street based on the recent trend. It’s apparently now just ‘detail’.


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