Markets Are Very, Very Nervous Going Into The FOMC Decision

By Michael Every of Rabobank

Higher for Longer Anxiety

Markets are very, very nervous going into the FOMC decision. The Wall Street Journal’s Timiraos tells us the Fed’s message will be “higher for longer”, language that had been dumped in December.

It’s another wait-and-see meeting for the Fed, but this time, the questions are likely to be tilted in the direction of filling out the Fed’s reaction function for upside risks on inflation and wages rather than downside risks or benign inflation. https://t.co/lc3jPx7rUs

— Nick Timiraos (@NickTimiraos) April 30, 2024

Moreover, if the Fed sees more hot data –following a jump in the Employment Cost Index, US house price inflation rising again, and a New York Fed wage tracker showing pay hikes staying around 5% y-o-y– then while they may not raise rates again, they will certainly remove some of the implied cuts in the next dot plot; in his words, that would force yields higher along the curve in order to tighten financial conditions. So, higher yields anxiety.

Meanwhile, former President Trump give an interview to Time magazine that underlines how remarkably different, and radical, a ‘Trump 2’ would be. In particular, markets should note:  

Let’s shift to the economy, sir. You have floated a 10% tariff on all imports, and a more than 60% tariff on Chinese imports. Can I just ask you now: Is that your plan?

It may be more than that. It may be a derivative of that. A derivative of that. But it will be somebody – look when they come in and they steal our jobs, and they steal our wealth, they steal our country.

When you say more than that, though: You mean maybe more than 10% on all imports?

More than 10%, yeah. I call it a ring around the country. We have a ring around the country. A reciprocal tax also, in addition to what we said. And if we do that, the numbers are staggering. I don’t believe it will have much of an effect because they’re making so much money off of us. I also don’t believe that the costs will go up that much. And a lot of people say, “Oh, that’s gonna be a tax on us.” I don’t believe that. I think it’s a tax on the country that’s doing it…

Mr. President, most economists—and I know not all, there isn’t unanimity on this—but most economists say that tariffs increase prices.

Trump: Yeah.

Are you comfortable with additional inflation?

Trump: No, I’ve seen. I’ve seen – I don’t believe it’ll be inflation. I think it’ll be lack of loss for our country. Because what will happen and what other countries do very successfully, China being a leader of it. India is very difficult to deal with. India – I get along great with Modi, but they’re very difficult to deal with on trade. France is frankly very difficult on trade. Brazil is very difficult on trade. What they do is they charge you so much to go in. They say, we don’t want you to send cars into Brazil or we don’t want you to send cars into China or India. But if you want to build a plant inside of our country, that’s okay and employ our people. And that’s basically what I’m doing. And that’s – I was doing and I was doing it strongly, but it was ready to really start and then we got hit with COVID. We had to fix that problem.

So, higher tariffs and, for some, higher inflation anxiety. And it’s not just from Trump: following yesterday’s Global Daily title of ‘Beg, Borrow, or Steel’, Treasury Secretary Yellen flagged higher US tariffs are needed vs. Chinese steel dumping; and the White House wants ethanol aviation fuel subsidies which will boost corn prices – you can tell it’s a US election year.  

Meanwhile, Trump may want to end Fed independence (vs. telling the world rate cuts are coming by end year, and placing doves, not hawks, on the FOMC after a series of scandals). Would this imply “bigly” rate cuts, or open the door to the hybrid higher-rates-for-some/lower-for-others monetary/fiscal/industrial policy I have hypothesized as the only logical solution to the mess we are in? Either way, it would be “bigly” for all asset classes; more so when another headline suggests Trump wants to punish the BRICS who try to dedollarise with high tariffs.

Meanwhile other things are likely seeing central banks reach for their Valium:

• The West has K-shaped, unequal, unhappy, stagflationary, more emerging-market economies with too much debt and too few good options.
• Not only the yield curve, but an entire generation is lying flat or inverted in calling for violent revolution or communism in the US; and, at elite universities, to the approval of faculty, administrators, and authorities. As legitimate protest metastasizes into a ‘tentifada’ or, as Alan Dershowitz calls it, “Mein Kampus”, a Harvard-Harris poll shows 43% of US 18-24 year-olds support Hamas over Israel, and a majority want *Iran* to have a nuclear weapon.
• High geopolitical tensions mean protectionist, inflationary, Hamiltonian rearmament; yet the West currently can’t get the Suez Canal open to its maritime commerce again because of the Houthis; and Poland confirms it’s asked the US to let it host nuclear weapons, which could lead to an EU Cuban Missile Crisis.

In 2019, I suggested we were on the cusp of an ‘Age of Rage’ that risked injecting politics into central banks: within 2 years, the Fed was talking about social justice, which some think perhaps played a partial role in the FOMC’s delayed recognition that rate hikes were necessary. In 2024, a former ECB president is calling for “radical” change, a US presidential candidate may back the end of Fed independence, and the Wall Street elite’s kids want global revolution. Where will things sit in another five years? “25bps lower” is not an answer that captures the real tail risks. However, not many want to ‘go there’, which leads me to high anxiety.

In Mel Brooks’ High Anxiety, psychologist Richard Thorndyke and belle Victoria Brisbane must pass through San Francisco Airport, where the police are looking for them. To hide, they wear clothes from charity and do an impression of many grandparents, as Thorndyke urges Victoria: “Be loud and annoying. Psychologically, when you are loud and annoying, people don’t notice you.” Indeed, when the metal detector is triggered by a forgotten gun, Thorndyke avoids arrest thus:

Thorndyke: “What is this, a gameshow? What did I win, a Pinto?”

Security: “I’m sorry sir, we’re going to have to search you.”

Thorndyke: “Please Sir, what did I do? What did I do? What’s to my crime?”

Security: “You beeped.”

Thorndyke: “I beeped! I beeped! Take me away! Take me back to Russia! Put me in irons! I beeped! The mad beeper is loose! Take away the beeper! Take me away!”

Security: “It’s alright! It’s alright, please go! Please go!”

We are now living that movie. Tipping-points loom in our ecology, economy, society, theology, psychology, demography, national security – and, yes, markets. Yet many ignore those “loud and annoying” messages right up until the likes of Timiraos spell it out for them. As such, aren’t those focused solely on the next rate cut the real “mad (25) beepers”?

Our Australia/New Zealand strategist Ben Picton will make some very, very nervous: he’s revised his RBA policy rate forecast to include two further 25bps hikes (in August and November) to reach a terminal rate of 4.85%, and has removed future cuts in accordance with our house view that Trump will win the US election and enact tariffs. Those not prepared to make those kind of tough market calls may react as in the High Anxiety shower scene, where the attached clip misses the punchline: “That kid gets no tip.” But I think Ben just gave you a great tip.