Both Biden And The West Are Now Winging It

By Benjamin Picton, Senior Macro Strategist at Rabobank

Bond yields are pumping higher again following the release of US retail sales figures yesterday. These printed 0.7% in September, up from 0.6% for August, and well above expectations of 0.3%, while the ex-autos and gas reading was also 0.6% vs expectations of 0.1%. Later in the session similarly strong industrial production and capacity utilization figures were released, further highlighting the trend of resilience in the US.

10-year US Treasury yields jumped almost 13bps to 4.83% as a result, the highest daily close of the cycle. The 2-year yield also closed at a new high of 5.21%, after having touched a new intra-day high of 5.237% earlier in the session, and as a follow through, the 10-year JGB yield this morning hit 0.83%, the highest since 2013. Consequently, equities were down a touch yesterday, and both gold and oil gained on renewed tensions in the Middle East (more on that below).

Elsewhere it was a different economic story. New Zealand Q3 CPI undershot estimates, while in Canada we saw CPI actually print negative m-o-m, taking the y-o-y figure down to 3.8%, two ticks below the survey estimate. In Germany, the ZEW survey saw expectations at -1.1, up from -11.4 in September and much better than the -9 reading expected, but the ‘current situation’ remains diabolical at -79.9, still within striking distance of the 2020 lows when the entire economy was locked down.

Yet in Australia, the RBA’s October meeting minutes were taken as hawkish, putting the November meeting back into play for a resumption of the hiking cycle. Key lines were: “The Board has a low tolerance for a slower return of inflation to target than currently expected” and “upside risks were a significant concern given how long inflation is likely to remain above target”. Perhaps the RBA’s patience with stickiness in services price inflation, soaring unit labour costs, and a sinking currency are beginning to wear thin? Or maybe new Governor Bullock is not as relaxed as her predecessor about taking substantially longer than peer central banks to return inflation to target?

However, geopolitics leads again so far today.

The deadly explosion at the Al-Ahli Arab Hospital in Gaza, where Al-Arabiya reports 800 people were killed, including many children, has inflamed the situation in the Middle-East to the extent that President Biden’s diplomatic mission to try to de-escalate tension now looks a pointless exercise. A planned summit between Biden, Egyptian President Al-Sisi, PA President Abbas and Jordanian King Abdullah has now been cancelled, leaving only the Israel leg.

The IDF blames a misfired rocket launched by terrorist group Islamic Jihad, while the Arab world claims the hospital was bombed by Israel. Through the fog of war, it’s hard to know the truth immediately, but most minds have already been made up – except, perhaps, for Biden’s, who is still in flight at time of writing. His view may impact on Israel’s room for the imminent ground war it is close to launching.

Even before that begins, protests have now broken out around Israeli and US embassies across the region, with some fearing for the stability of the Palestinian Authority in the West Bank. What’s more, the risk is now of further escalation from Iran and Hezbollah, the former vowing a “harsh response”, even including against the US, and the latter announcing a day of “unprecedented anger” today.

We can expect further pro-Palestinian demonstrations across the West this week. The depth of feeling will make it even harder for Biden to convince the left of his party to support Israel, particularly in the provision of lethal aid (which some reports suggest could immediately require up to $10bn). Yet that will be critical if Iran and Hezbollah make good on threats to open up a new front in the north: and recall that if Iran does get involved, that puts Rabo Energy Analyst Joe DeLaura’s predictions of $100/bbl oil before year end back into play, which in turn suggests further inflationary pressures from the supply side of the economy (and higher rates).

On the other side of the coin, Biden is already being pressured to do more. A bi-partisan group of 110 members of Congress have written to the President urging him to take a firmer stance against Iran by cutting off its oil trade (China won’t like that). The signatories have also asked for the Administration to put pressure on Qatar and Turkey, following signs of support for Hamas from those countries.

The Al-Ahli Hospital deaths may also make it more difficult for Biden to convince Western allies to show resolve in supporting Israel in its bid to root out terrorists in the Gaza strip. UK Labour leader, and presumed next prime minister, Keir Starmer has tweeted “international law must be upheld”, while European Council President Charles Michel commented that targeting civilian infrastructure contravenes international law.

Meanwhile, as the Middle East rages and the West recoils, Xi Jinping welcomes Russia’s Putin and a host of Global South leaders, ex-India, to his Beijing Belt and Road Forum to talk about what an alternative world order might look like. The ‘global’ Western press mostly failed to even cover it.

In short, both Biden and the broader west are now winging it.