Rabo: “The Fed Needs To Get Markets Off Heroin… Have You Seen Junkies Without Heroin?”

By Michael Every of Rabobank

Today will be all about US payrolls, and how much they rise. Consensus is 720K, up from 559K last month, with the unemployment rate to dip from 5.8% to 5.6%. Let’s see what the messaging will be on this if we get another disappointing report (but, hey, more stimulus!) or a stronger-than-expected report (Hey, jobs! But, oops, perhaps less stimulus?).

What it won’t be about is the IMF predicting the Fed will need to hike rates in late 2022 or early 2023, and probably to start to taper in H1 2022; and that “managing this transition — from providing reassurance that monetary policy will continue to deliver powerful support to the economy to preparing for an eventual scaling back of asset purchases and a withdrawal of monetary accommodation — will require deft communications under a potentially tight timeline.”

Allow me to communicate that better: “The Fed needs to get markets off heroin.”

The markets will respond with appropriate adroitness to this deft communication as part of a possibly constrictive chronological progression – just as they always do.

Allow me to communicate that better: “Have you seen junkies without heroin?”

Meanwhile consumer perceptions of inflation will continue to rise as oil prices move over $75 into summer, with more output from OPEC+ maybe now not arriving as a new deal stalls, and with the Iran nuclear / oil deal still not ready to go either, apparently. Let’s add US drought potentially pushing food prices even higher to that mix, eh?

In short, rising “transitory” inflation now, and then tapering in H1 2022, and then rate hikes by end-2022,…and then tanking assets(?) That backdrop will make the US mid-term elections in November 2022 interesting: no need to translate what politicians might think about it.

But for now, the junk is still there for the junkies – and hence the price of financial junk is still as high as the junkies are. That obviously helps them deal with what would otherwise be worries about lots of other issues.

Higher taxation might be one, for example, as the world now looks set to embrace the minimum 15% corporate tax rate suggested by the White House. Except financial services, obviously. We clearly don’t need a war on that drug!

Geopolitics is another. On yesterday’s 100th anniversary of the CCP, Xi Jinping’s key national speech stressed: “We will not accept preaching from those who feel they have the right to lecture us” – as the West does exactly that; underlined the “unshakeable commitment” to the “historic mission” to reunite with Taiwan; and, officially translated, that: “The Chinese people will not allow any external forces to bully, oppress or enslave us; anyone who deludes themselves into doing so will suffer a crushing and bloody head-on collision with the great wall of steel made of the flesh and blood of the 1.4bn Chinese people.” The original Chinese added “heads will break and blood will flow”.

Foreign policy circle interpretation is that this is yet another strong warning to the US to stay in its own lane – just as the US instead draws up plans to build a Belt and Road rival, and for democracies to all rally against autocracies. Either somebody blinks –who?– or underlying fat tail risks will continue to grow.

Regardless, Wall Street went up to a new high again yesterday, having either not noticed the speech, or having translated it as “Buy stocks!” Indeed, The Street –the sophisticated, ‘global’ players who are uncomfortable with those Americans who don’t hold a passport– is adamantly refusing to recognise any possible geopolitical tail-risks. And yet why not, indeed?

First of all, there is that Fed safety blanket: the Greenspan Put; Bernanke Put; Yellen Put; Powell Put, etc.

Second, even the US Commerce Secretary stated in response to the CCP anniversary speech: “That’s obviously, you know, a lot of bluster and rhetoric. I think US companies need to focus on doing their business,” and “We’ll do everything we can to make sure that our US companies are treated fairly and are able to have access to the Chinese market,” while also stressing the US would not stop talking about human rights.

Yes, Commerce does commerce and Defence does defence, etc. – though a key point is some countries do this in a joined-up manner. But how exactly is the emerging Biden Doctrine’s global struggle of ideological systems –or even just a realpolitik struggle of Great Power hegemony– compatible with neoliberal business norms of trying to build market share everywhere? I replay past Cold War quotes updated for Mr Market’s current thinking as a logical stress test:

“Ich Bin Ein Shareholder”

“Mr. Gorbachev, tear down these non-tariff barriers”

“Here’s my strategy on the Cold War – we win, they lose…and buy my cereal/sneakers/smartphone!”

See what I mean?

But back to those all-important payrolls, as I end up saying once a month.

Happy Friday!