In So Many Ways It Feels Like The Barbarians Are At The Gates

By Benjamin Picton, Senior Macro Strategist at Rabobank

How Often Do You Think About The Empire?

There is big news today that ex-Australian media titan Rupert Murdoch is stepping down as Chairman of News Corp. He is to be succeeded by son Lachlan who, having served the longest apprenticeship since Prince Charles, will take over as sole Chair of News Corp and continue on as Executive Chair and CEO of Fox Corporation. The Murdoch family’s grip on the legacy media landscape lives rent-free in the heads of many, and speculation over the eventual passing of the baton has even spawned an Emmy award-winning TV series. So, how often do you think about the Empire?

The question has become a light-hearted social media sensation, but in a world of geopolitical fragmentation, empires matter. Wannabe Tsar (a derivative of ‘Caesar’) Vladimir Putin raised eyebrows in June last year by comparing himself to Peter the Great. “It seems it has fallen to us, too, to reclaim and strengthen” he said. The process of “reclamation” continues as the war in Ukraine grinds on, and Putin fired a new shot at the West overnight by imposing a ban on exports of diesel and petrol. This saw front month European gasoil futures surge by 4.5% yesterday, but they have fallen back again by around 2.7% in early trade today. The Russian ban compounds the problem of an already tight market for refined products that has been driven by hot weather, reduced refining capacity and Western embargoes on Russian crude supplies.

The timing of the ban coincides with the decision by erstwhile Imperial institution the Bank of England yesterday to leave the official bank rate unchanged yesterday for the first time since November 2021. A majority of analysts surveyed by Bloomberg had expected the Bank to lift rates by 25bps to 5.50% but the Monetary Policy committee ultimately voted 5-4 against a hike. The decision probably swung on the softer than expected CPI inflation figures for August that were released earlier this week. Those numbers saw core inflation fall to 6.2% YoY and the headline number decelerate to 6.7% after a merciful fall in food price inflation. Motor fuels were the largest upward pressure on the headline number though, and Russia clearly isn’t helping on that score.

The BOE hold followed a decision earlier in the week from the US Federal Reserve to leave the upper bound of the Fed Funds rate unchanged at 5.50%, a move widely expected by surveyed analysts (including us). Despite holding at this meeting, the Fed upgraded its dot plot forecasts on the trajectory of interest rates and has maintained its bias towards another hike in 2023. The median of the FOMC dot plot is now well north of the OIS curve for 2024 and 2025, and the prospect of higher rates has been received poorly by equity markets. The S&P500 has lost 115 points so far this week as the higher for longer narrative gets priced in and increased geopolitical tensions threaten to roll back the frontiers of the empire of American capital.

There was a point of difference in the world of central banking this week from the Rijksbank and Norges Bank. Both central banks hiked rates by 25bps, following a similar decision by the ECB last week. Rijksbank projections suggest that Swedish rates may have now peaked at 4%, but there is a slight tightening bias implied by the projected peak in the rate path of 4.10%. The Norges Bank was more explicit, raising the outlook for the peak in its policy rate from the current policy level of 4.25% to 4.5% through 2024. Here again the “higher for longer” narrative applies.

Higher for longer is undoubtedly an unpopular meme, and financial markets remain slow to accept it if rates curves are any guide. Even so, we are now seeing 10-year treasury yields at the highest levels this side of Western capitalism’s near death experience 15 years ago, leaving the “rate cuts soon!” brigade of equity managers and real estate spruikers asking “Quo Vadis?” while overleveraged governments and households say “et tu, Brute?”

How sustainable is this with the immense debt loads that we are currently carrying? What will happen once US student loan repayments resume next month for the first time in 3 years? Can equity and real estate valuations continue to defy the most rapid rate tightening cycle in living memory? In so many ways it feels like the barbarians are at the gates.

Undoubtedly, the unpopularity of higher rates is the main reason why they are the exclusive domain of an unelected technocracy. Central bankers are a modern breed of Optimates, while Tribunes of the Plebeians like former President Trump burnish their Populares credentials by promising to force rates lower. In this respect, as with all things, life boils down to the basic question: are you for Caesar? Or the Senate?

Think about that.