Rabo: Comfortably Numb and Number

By Michael Every of Rabobank

Comfortably Numb and Number

Bond yields plummeted Friday (US 10s down 11bp to 1.40%). This followed the Biden administration’s airstrikes in the Middle East: yes, world, America is back…to bombing Syria. However, Friday’s strong market swing arguably reflected end-of-the-month short-covering rather than end-of-the-world duck-and-covering. Indeed, markets remain comfortably numb (or comfortably bomb) about such things. Even so, bond yields are likely to face a testing week from different directions.

First, there is still geopolitics. With yields tracking energy prices, how will markets square what some analysts see as a “surgical” US bombing (22 dead) with attempts to get the Iran nuclear deal back on track? Did US bombs show Tehran and the region it will use sticks as well as carrots? Or will Tehran shrug –it just rejected an EU-brokered offer of informal talks with the US, insisting on the removal of all sanctions first? And/or, will Israel respond to what it claims was an Iranian attack on one of its vessels? Markets also need to square the US’s new policy vis-à-vis Saudi Arabia to be launched today, which will further snub 35-year old de facto ‘wild-card’/economic-reformer leader Prince Mohammad Bin Salman (MBS) –while not sanctioning him for allegedly having ordered the murder of Khashoggi– in favour of 85-year old, conservative King Salman. Will Iran use such US distancing as an opportunity to press the Saudis physically?

The MBS snub is part of the White House’s new human rights foreign policy focus. On that front, Sunday saw 47 Hong Kong politicians and activists charged with subversion under its national security law. The Guardian notes: “Nearly every main voice of dissent in Hong Kong is now in jail or exile…All face life in prison if convicted….at the time of the arrests, the Hong Kong security secretary, John Lee, told local media those arrested had aimed to “paralyse” the city’s government with their plan to win the election and block legislation.” The White House has already stated it will “speak out” over Chinese actions in Hong Kong: for markets the question is if it will do more than that, prompting risk-off. Most of the Trump architecture on China remains intact, from tariffs to tech restrictions to supply-chain-shift plans, and the ‘Quad’, and even an insistence on China meeting the terms of the Phase One trade deal. Yet have we reached the limit of what the US is willing to do “because markets”? (Sunday also saw pro-democracy protests in both Thailand and Myanmar. As The Economist tweeted, Southeast Asia is pivotal in any US-China Cold War, but doesn’t want to choose sides – piercing analysis there, guys: so what will/can the US do?)

Second is politics. Former President Trump gave a speech at the CPAC convention Sunday titled “America Uncancelled”, in which he suggested he will run for the White House again in 2024 “and win a third time”(!) It remains to be seen how long markets can be comfortably numb about US populism, which history suggests is likely to become more, not less populist. Recall we are just over 18 months away from Congressional elections which could flip the House, the Senate, or both: and higher energy –and food– prices resulting from both extraordinary monetary policy and the promise of massive fiscal stimulus near term may potentially play as large a role there as they do in the bond market. US political gridlock would mean the end of the fiscal-monetary fusion narrative yields have been spiking on the back of (not noting that the UK is again talking about tax hikes). Of course, markets might prefer that outcome if it leaves central banks to mop things up – or rather mop financial assets up. But reflation it isn’t.

Third is the economy, where some data aren’t sticking to the Great Reflation script (in the same way that the Smartest People in the World at the WEF got the script wrong with their tweet stating global lockdowns were “quietly improving cities around the world” – with heavy emphasis on the “quietly”): China’s services PMI dipped from 52.4 to 51.4 over the weekend, and manufacturing from 51.3 to 50.6; that as a former finance minister warned fiscal risks remain “extremely severe with risks and challenges”, with low revenue for five years ahead and no prospect of any spending cuts ahead, suggesting policy may need to be tightened at some point.

The other key area for yields this week is of course central banks. We can expect all the usual suspects to have to put their mouths where their money is: that is verbally (for sure) and financially (quite likely?) show the longer end of the curve that they are still in control. First into this unwelcome spotlight is the RBA, which meets tomorrow. Just saying CoreLogic house prices were up 2.0% m/m in February isn’t going to cut much mustard – just credibility. Yes, if you had to pick a central bank to be at the vanguard of potential paradigm-shifting institutional change, it would not be the stolid one at Martin Place: yet the RBA are going to have to show markets something – unless the rising yield wave is receding like a distant ship, or smoke on the horizon, King Canute-like, by itself. (Which just to reiterate we *do* think will happen –see here and here— but not for a while….and certainly not if the Middle East has a series of unfortunate events.) After the RBA, everyone else will get their turn, with the ECB already giving us hints, right up until the Fed mid-month. The key question is at what point do we hear this classic tune play?

Hello? Hello? Hello? Is there anybody in there? Just nod if you can hear me; Is there anyone not long?

Come on now; I hear your yields ain’t goin’ down; Well I can ease your pain; Get bonds on their feet again

Relax; I’ll need some information first; Just the basic facts; Can you show which part of the curve hurts?

There are no yields, they are receding; A distant ship, smoke on the horizon; They are only popping up in waves; Your bonds move but I can’t hear what they’re saying

When I was young I had true fever; Yields could rise just like two balloons; Now we’ll never get that feeling once again; I can’t explain ‘cos you’d all understand; Let’s pretend this is not how I am

Curves must become comfortably numb

OK; Just a little more QE and YCC, quick; There’ll be no more, aaa-aaa-aaah! But the poor may feel a little sick

Can stocks stand up? I do believe it’s working, good; That’ll keep assets booming even though; They are all toilet, don’t you know?

There are no yields, they are receding; A distant ship, smoke on the horizon; I am only making one-way trades; Your bonds move but I can’t hear what they’re saying

When I was wrong; We got more than a fleeting glimpse; Of what this meant for CPI; I turned to look but it was gone; So let’s give that all the finger now; That theory’s flown; That dream is gone; and

Cuuuuuuur-uur-uur-uur-rves must become comfortably numb