This Unhappy Global Dynamic Will Lead Markets And Market Analysis For Years To Come

By Michael Every of Rabobank

Non Ducor, Duco

Who/what leads and who/what is led? That’s the question you should be asking yourself again today – even as most in markets think what they are paid to look at leads all rather than accept that life has (changeable) hierarchies.  

Yesterday saw a surprise leap in US retail sales: 0.7% m-o-m vs. 0.4% expected; ex-autos 1.1% vs. 0.5%; ex-gas and autos 1.0% vs. 0.3%; and the control group 1.1% vs. 0.4%. That followed Friday’s rise in the Michigan survey consumer inflation expectations from 2.9% to 3.1% (1-year) and 2.8% to 3.0% (5-year) and eclipsed the big dip in the Empire PMI. What leads/is led?

The New York Fed’s SCE labour market survey shows people want $81,800 to change jobs, up around $10,000 since March 2021. While those saying they were now unemployed vs. four months ago rose, so did the percentage who plan to retire early. What leads/is led?

The retail report pushed US bond yields much higher intra-day before partially reversing: there was almost a test of 5% in 2-years, while 10-years hit 4.66% and are still over 4.60%, a 2024 high, and +70bp since the start of a year which promised a rate-cuts frenzy. Indeed, Bloomberg reports one investment bank which had started 2024 flagging 275bps of Fed cuts and had trimmed that to 50bps, is sticking to that call while now making the case for the Fed to HIKE by 50bps – it’s not just Larry Summers anymore. Is that leading or being led?

In Asia, JPY is 154.3 (-9.4% year-to-date) with muttering of worse; KRW 1,391 (-7.8%) following the JPY lead; CNY 7.23 (-2.0%) with questions over how long it can continue to hold up if JPY and KRW fall down; IDR 15,848 (-2.9%), close to a record low; INR 83.45 (-0.3%), also close to a record low; THB 36.81 (-7.4%); PHP 56.89 (-2.7%); and MYR 4.79 (-4.2%). In EM space only MXN –its own entity, as Christian Lawrence regularly points out– is at 16.72 (+1.5%). In other crosses, EUR/USD is just holding on to 1.06 (-3.8%), GBP to 1.24 (-2.3%), CAD testing 1.38 (-4.2%), AUD 0.64 (-5.7%), and NZD is already under 0.59 (-6.7%). Clearly, the dollar will keep leading others.       

However, Politico claims: ‘Trump trade advisers plot dollar devaluation’, “which could juice US exports but also fuel inflation.” Reportedly, this policy could shift, but for now they may “weaken the dollar unilaterally or through negotiations… using the threat of tariffs”. Yet Trump’s Wall Street faction is opposed to a weak dollar because it would hurt asset values, and his national security camp fear it would undermine global sanctions and the US dollar’s reserve status. So, who leads after the US election, and within a hypothetical Trump White House?

A Treasury Secretary can’t just lead the dollar lower in markets. They can jaw-bone, but if the Fed has higher rates than others, they are pushing a balloon underwater (and if inflation picked up further, how would the Fed not hike more?) The US can threaten tariffs, but they would push the dollar up. The US can’t lead a new global Plaza Accord because while some of the BRICS+ might like a weaker dollar (and higher commodity prices), Russia wants NO global dollar; and China will never allow a repeat of Japan 1985 – it won’t allow CNY higher to pivot to consumer-led growth. The article also notes everyone may run their own counter-policies anyway. Logically, Lighthizer might have to impose inbound capital controls, which Wall Street would hate, but the article is wrong in that moneymen love a weaker dollar, as all assets rise on it. And on the national security side, you have to enforce sanctions first (**cough** Iran **cough**). But if you can’t see our current dynamic leads towards the breakdown of the global system, you are misled.

Chinese data underline they won’t shift to consumer led growth, and CNY may be led lower. New home prices were -0.3% m-o-m, used home prices -0.5%, property investment -9.5% y-o-y and residential sales -30.7%. Industrial production was 4.5% y-o-y vs. 6.0% consensus; retail sales just 3.1% vs. 4.8%; and fixed investment 4.5% vs. 4.0%. Yet Q1 GDP was 1.6% q-o-q and 5.3% y-o-y, far higher than 4.8% expected, probably partly due to negative deflators pushing up real growth rates. 

From China to geopolitics, which continues to lead the headlines. Markets did what markets do best yesterday, shrugging off complex matters which they don’t understand in the hope that all will end well. Yet today, as I stressed would be the case in yesterday’s Global Daily, we are again at a moment of high geopolitical tension.

Israel will respond to Iran’s unprecedented attack on it with “clear and decisive” retaliation. We just don’t know when or how. The US has reportedly not opposed this but won’t join in, and the Israeli move may not be fully coordinated with it. Positively, Israel says it doesn’t aim to escalate to a regional war, and reports suggest it will minimize casualties while exacting significant damage: that implies a blow in the economic sphere, from a major cyberattack to a physical one on industrial (drones), nuclear, port (or energy) facilities(?) While energy remains a fat tail risk, it’s exactly the tactic Ukraine is using, despite White House anger. An Iranian official stated: “We do not want war, but we are ready for it if it is imposed on us, and our options are wide. We have the full will to respond militarily to Israel again, but in a stronger way and with weapons that have not been used previously.” In short, regional escalation risks remain. Oil is moving slightly higher again today; and were it to spike due to geopolitics, central banks would likely be led by it.

Ultimately, this crisis won’t be resolved until either Israel or Iran leads the other to accept their opposing redlines: either Israel can attack Iran whenever Iran’s proxies attack it, so the latter don’t; or Israel can never respond to Iran directly, so Iran’s proxies will attack it more freely. It’s hard to see how that gets settled without more violence, or the biting sanctions on Iran/the IRGC that nobody talking about de-escalation has yet offered as alternative. As the US leads on physical defence, it remains paralyzed on any offense despite the two being linked in any successful geostrategy.

As I continue to stress, that unhappy global dynamic will increasingly lead markets, and market analysis, in the years to come. Non ducor, duco.