Central Bankers Sound More And More Like Ron Burgundy
The world watched live last night Asia time as the news declared “The Nancy has landed”. Tweets flew about the Chinese closure of civilian airspace near Taiwan; of PLAN ships leaving port; of PLA jets in the air; and got footage of confused Chinese beachgoers looking a long line of PLA tanks trundling along in the sand. However, there was not an immediate military response - just China banning imports of Taiwanese biscuits. This saw a knee-jerk market relief response, meaning stocks and bond yields were both up.
However, it is still too early to presume the US has successfully carried out an ‘Im-Pelosi-ble Mission’ to restamp its security signature on the region. Indeed, alongside bristling Chinese social media and expected diplomatic protests, Beijing has announced its military will carry out exercises to “encircle” Taiwan from 4-7 August. It remains to be seen what happens after that.
Moreover, The Global Times declares ‘China's countermeasures against Pelosi's Taiwan visit won't be one-off’; shouts that “US House Speaker Nancy Pelosi sneakily landed in China's Taiwan island like a thief, detonating the mine she has thrown over the situation in the Taiwan Straits and China-US ties”; adds that “Pelosi's stupid, reckless, dangerous provocative actions welded the entire responsibility for undermining peace and stability across the Taiwan Straits to the US and the DPP authorities”; and that the response will be:
The article concludes that “Like a "political god of plague," Pelosi didn't do any good to the region except bringing risks and tensions to Taiwan.” Even the far more conservative English version of The People’s Daily adds that the US “should stop distorting, obscuring and hollowing out the one-China principle… and not go further down the wrong and dangerous path.”
In short, as I wrote yesterday, this issue will linger far longer than market’s attention spans will allow. Yet geostrategists are largely united in the view that we are still worryingly close to a potential Fourth Taiwan Strait Crisis.
Relatedly, and given the past three crises were ultimately resolved by a US show of force, including two with a nuclear threat, it is surprising that more attention was not paid to US Secretary of State Blinken, albeit on a different front, underlining that if the “vital interests” of the US or its “allies” were in danger, then Washington would (“only”) consider the use of nuclear weapons (“in extreme circumstances”).
Despite the fact that the Fed just said it will drop its forward guidance (as well as saying that 25bps, 50bps, 75bps, and even 100bps hikes are all possible in September), yesterday saw Fed speakers give clear forward guidance that they are far from making a dovish pivot.
San Francisco Fed President Daly said the Fed was “nowhere near” being done in fighting hot inflation. St. Louis Fed President Bullard said a recession isn’t going to happen, so that fear is not going to see him hold back. That was another reason for a move higher in bond yields, with US 2s up around 18bps to over 3.05% and 10s also up 18bps to 2.74%.
Then again, Bullard also said that modern central banks “have more credibility than their counterparts in the 1970s.” That remains to be seen when a series of Fed cuts in 2023 are now expected, and US 10s, even after the recent rise, are much lower than they were just a few weeks ago, which has helped take global yields lower with them.
While the economy *is* clearly weakening, that does not necessarily mean this pivot is coming. Such calls look like an extension of the totally-wrong 2021 “transitory” inflation call when headline CPI is near 10% y-o-y; the US core PCE deflator is nearly 5% y-o-y and over 7% m-o-m annualised; German year-ahead electricity prices just hit a fresh peak of over EUR400 per MwH; and structural/geopolitical issues from ports (where backlogs are rising), to supply chains (where the cost of shipping via the Rhine has risen to an all-time high as water levels sink); to labor markets (where unemployment may rise, but right now skilled labor is very hard to find); to Ukraine, are nowhere near being resolved - and will get far worse if the Taiwan issue does.
Ease off on rate hikes now --“because markets”-- and let’s see if rates can fall in 2023 as expected or, as a further shock to ‘transitorians’, if they have to actually rise because the structural environment is more inflationary now even if/when GDP growth is lower, as is the case in emerging markets. That isn’t a forecast – but it’s something to chew on.
For example, New Zealand, where rates are rising and housing slowing, just saw average hourly earnings up 2.3% q-o-q, so nearly 10% annualised. Then again, presumed next UK PM Truss is talking about public-sector pay cuts, which means levelling down, not up. More neoliberalism would do the heavy lifting for central banks, yet again. However, levelling down will go down as well as a No. 10 office party during lockdown when voters get a say. In which case, nobody is there to do the heavy lifting but central banks.
In short, a dovish pivot may happen, but we shouldn’t try to dress it up as anything but laughable if so. It would be as “modern” and “credible” as the flares and kipper ties in Anchorman. At least that would match recent central bank statements, where I hear echoes of:
Michael Every is the Head of Financial Markets Research Asia-Pacific. Based in Hong Kong, he analyses the major developments in the Asia-Pacific region and contributes to the bank’s various economic research publications for internal and external customers and to the media.
Michael has nearly two decades of experience working as an Economist and Strategist. Before Rabobank, he was a Director at Silk Road Associates, a strategy consultancy based in Bangkok. Prior to this, he was Senior Economist and Fixed Income Strategist at the Royal Bank of Canada based in both London and Sydney. Michael was formerly also an Economist for Dun & Bradstreet in London, covering ASEAN.
Michael holds a Masters degree in Economics (with distinction) from University College London and speaks Thai.
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