Rabobank: 50-50-50

By Michael Every of Rabobank

50-50-50

This week, which will be quiet in Asia due to the Lunar New Year ahead, starts like the last: lots of key reasons to be worrying. Indeed, despite the backdrop of US equities trying to deny all of them on Friday, it also starts with the Asian markets that are open largely in the red.

The situation vis-à-vis Ukraine is no better. This is despite confused messaging from Kyiv over whether an attack on it is “imminent” –translated as “inevitable” in Ukrainian– or not. One can see Kyiv’s point that the West saying so while doing nothing to help is not good for local business confidence, and that this kind of Russian destabilisation is something they just have to live with.

Parts of the West insist downplaying said risks does not stop them occurring: the UK is sending even more men and military equipment to the relevant borders and talking about targeting oligarchs in London, rebuilding bridges with parts of the EU despairing of a lack of leadership from Germany; the US is closer to agreeing on “the mother of all sanctions” against Russia; and France is sending troops to Romania. Yet other parts of the West are still not acting despite warnings that *EU* countries could be seeing Russian attempts at Finlandization in the near future.

Expect more shuttle diplomacy this week, but don’t expect a magical resolution despite the Council on Foreign Relations releasing a proposed off-ramp of Putin and the West retreating and everybody kicking the can down the road and reforming European security institutions, even as the US still wants to leave and the EU can’t and won’t step up. That is the kind of ‘hockey-stick’, not baseball bat, forecast one expects from central banks, not battle-hardened think-tank pen-pushers: it speaks to the bleed-through of neoliberal utopianism from one field to another.

So, if we can’t agree a Russian attack is “imminent” or “inevitable”, can we at least try to assign it a probability? Just 10% this week? 30% by the weekend as more forces arrive? And, as Russian state media allege Kyiv is planning an attack on Russian-held east Ukraine during the Olympics, over a 50% risk of war after the games end?

Meanwhile, the Fed’s Bostic is suggesting the Fed could go 50bp in March. No longer is this threat just in the realms of Wall St tin-foil hat conspiracy. Could the Fed really unleash such an attack on undefended markets? Given its favorite measure of inflation, the core personal consumption expenditure deflator, soared to 4.9% y/y in December, the highest in 38 years, there is an argument that it may. However, there is more than a 50% probability that they are just threatening this in the hope that they don’t have to: the market is currently pricing just a 1 in 4 risk of a 50bp March hike.

The Fed’s problem is that it mirrors much of what we see from the West over Ukraine: only belated understanding that underlying structures have changed from a presumed neoliberal paradigm; and the subsequent threat of acting aggressively but nobody believing it “because markets” – which then points to risks of having to do far more fighting further down the line as a result. Relatedly, I would wager if there *is* more than a 50% probability of Russia moving on Ukraine by the end of February then there is *far* less than a 50% chance of the Fed doing their own 50 in March.

I am not going to refer to Chinese diplomatic comments playing up the risk of war with the US over Taiwan: there is a far lower near-term probability of that happening, even if it supports our Ukraine metacrisis narrative. (As do Houthi attacks on the UAE, and North Korean missile launches –with US offers of talks without preconditions– and Australia joining the EU’s WTO case against China.) Yet Chinese PMI data were depressingly close to 50, with manufacturing 50.1, services 51.1, and Caixin manufacturing 49.1. “More stimulus!” cry the analysts who don’t notice no previous stimulus has had any discernible effect because the problems are structural not cyclical. Maybe Lunar New Year will give them time to reflect: but I doubt it.

One of the only things keeping the US dollar relatively tied down at the moment is that China’s CNY is taking a ‘none shall pass’ stance to monetary policy divergence, which is anchoring a lot of Asian EM FX. Is there more or less than a 50% of that holding long term though? The risks to EUR from Ukraine should also be clear.

The other thing is that so far US 10-year yields are not rising much despite Fed jawboning and dot-plotting, and that matters more for many FX crosses than the short end of the yield curve. If the US wants to shoot itself in the foot with monetary policy, as the flattening curve screams, then it is hardly US dollar positive. That said, there is more than a 50% chance that a US recession would end up making global waves, which suggests a different sub-phase of our metacrisis.

Lastly, Italy finally has a president, after 8 rounds of voting, but it has ended up where it started – with the same octogenarian as a symbol of national stability and progress. Oh for a leader of just 50, not just in Italy but in many other places!