“So It Goes”… Just Not Towards Low CPI Or Neutral Rates

By Michael Every of Rabobank

Yesterday’s Global Daily underlined we shouldn’t look to central banks or markets for clear answers on where long-run inflation and neutral rates will sit. Meanwhile, politics and geopolitics echo Kurt Vonnegut’s “So it goes” – just not towards low CPI and neutral rates (R*).

Americas:

The Mexican president gave an interview to ‘60 Minutes’ in which he suggested the US could solve its migrant crisis by changing its immigration and foreign policy: granting green cards to all Mexicans in America illegally (only Mexicans?); sending $20bn annual economic aid to poor Latin American countries; ending the embargo of communist Cuba; and removing sanctions on Russia-, Iran- and China-ally Venezuela. Central banks and markets grudgingly admit immigration can impact on wage inflation, which links economics to politics: they may now have to admit that economics and geopolitics are also linked.

Brazil’s President Lula is getting more involved in state enterprises such as Petrobas and Vale, alarming markets – especially in calling them, “a voracious dinosaur.” This is hardly a new pattern of behaviour in Latin America: it’s just that others do it elsewhere now too.

A New York appeals court slashed the size of the bond former President Trump has to place to appeal the ruling finding him liable for a near-half billion dollar fine for having inflated the value of his properties. Together with Trump’s sudden $3.5bn increase in paper wealth alongside the launch of his tech-linked SPAC, that smaller bond should be payable by the deadline in April, and as some legal observers suggest the ruling points to the case being overturned on appeal. That keeps a Trump 2 presidency, and Trump tariffs 2.0, pencilled in for 2025 – which our Fed-watcher Philip Marey sees as inflationary.

The US just passed another $1.2 trillion pork-barrel spending bill, keeping the fiscal-dominance Treasury ‘roll-up, roll-up!’ economic circus rolling towards November; and the congressional Republican circus started a new round of circular firing squad as a result.

Russia/Ukraine:

Russia linked the ISIS-K terror attack on Moscow to Ukraine (as the web says it was the CIA, Mossad, or the FSB). That awful loss of life has seen terror alerts across the West but might also trigger full Russian military mobilization vs. Ukraine. Shadow-boxer French President Macron would then have to stand up as the ‘Raging Bull’ he is presenting as or be shown as a Bull sitter. The stakes and fat tail risks should be clear.

The US told Ukraine not to attack Russian energy infrastructure for fear of “escalation,” meaning ‘high US oil prices in an election year’. Yet Ukraine’s drone attacks aim at stopping inputs into Russian missiles, not US autos, and Russia attacks Ukraine’s energy. Indeed, the US is now not arming an out-gunned Ukraine sufficiently to win, telling it not to match grey-zone tactics either, while saying a Ukraine defeat would have appalling consequences. Unsurprisingly, Kyiv has denied US pressure and carried out more attacks on Russian refineries; and the US has laid itself open to “arms or less oil” pressure going forwards – both are inflationary.

Baltic leaders are telling NATO members to bring back conscription. With unemployment where it is now, that would certainly be inflationary, unless we echo the Romans/Starship Troopers in saying “service guarantees citizenship” – would you like to know more?

Middle East:

The US abstained on a UN Security Council ceasefire resolution on the Israel-Hamas war, which passed, a slap to Israel’s hardline government. PM Netanyahu had threatened not to send a delegation to the White House unless it vetoed, and cancelled their departure afterwards, but only showed his impotence, as he also struggles over the domestic issue of which citizens serve. That said, the US insists its position on the conflict is unchanged; Netanyahu says he will still go into Rafah; and Hamas just rejected another ceasefire involving an exchange of 800 prisoners for 40 Israeli hostages because they insist the war must end completely (because they are losing). In short, further fighting looks likely regardless of the UN.

China and Russia agreed a deal with the Houthis to not attack their ships near Suez(!); both vetoed an earlier Gaza ceasefire UN resolution, to no outrage from Ivy League Maoists; and Hamas sent condolences to Russia for the ISIS-K attack on Moscow. Yet a Chinese tanker was then attacked multiple times by the Houthis: are they just poor shots, or poor allies?

The US also just attacked Iranian targets in Syria once again – slaps to ally and enemy alike?

Asia:

China is today alleged to have hacked business and political data in the US, and in the UK, and in NZ. Either China did it, not good for relations, or three Anglo economies all fabricated similar charges at the same time, not good for relations either. China also fired water cannon at Filipino coast guard ships in a dangerous manner in internationally recognised Philippines’ territory which Beijing claims as its own.

The Economy/Markets:

‘Food prices will climb everywhere as temperatures rise due to climate change’, with food price inflation seen increasing by 0.9 – 3.2ppts per year by 2035, and the same warming causing overall inflation to be 0.3 – 1.2ppts higher. That’s as Nikkei Asia says Greenflation causes Indonesia and Vietnam to retreat on their use of renewables.

Legoland UK is to introduce surge pricing, with higher ticket prices at peak times such as summer weekends. Economists will average this with lower ticket prices in the middle of the night on a wet Tuesday in January and say the effective price for consumers remains the same; and then not be able to take their kids to Legoland.

Noah Smith underlines the looming scale of the next China Shock, as it looks to dominate global manufacturing further, as Bloomberg argues it’s realistic for it to see a huge shift from property investment to high-tech output. That would be deflationary – if the rest of the world buys it. Which it won’t. The G7, if not G20, are likely to push back with tariffs and industrial policies rather than be hollowed out by Chinese over-production. Then we get an inflation shock.

China is to block the use of US made chips from Intel and AMD, as it moves to create its own separate tech supply chain. This is called decoupling, not derisking.

Bloomberg’s John Authors notes we are “trundling toward a polarized investment world where clients can choose between left- and right-wing money managers. It’s a horrible prospect.” Wait for the truly polarized geopolitical investment environment!

FX markets are trying to decide why the PBOC let CNY slide, then backed it with stronger fixing and state-bank dollar sales. At 7.2464 now, and after strong comments from Japan too, we aren’t in the JPY – CNY race to the bottom some feared – yet.

The EU is targeting US Big Tech in an antitrust probe, just as the US does the same. Coincidence or coordination?

The Boeing CEO is stepping down as the firm’s reputation nose-dives and its main union is pushing to get a Boeing board seat, which is something one usually sees in Europe, not the US. Does the departing CEO get a golden parachute?