“Oooh! Rate Cuts!” vs. “Oh! Not Rate Cuts”

By Michael Every of Rabobank

“Oooh! Rate Cuts!” vs. “Oh! Not Rate Cuts”

Markets are their own happy story this morning as “Oooh! Rate cuts!” is again the meme du jour. But back in the real world it’s “Oh! Not rate cuts.”

Yemen’s Houthis say they can now hit the Eastern Mediterranean as well as the Indian Ocean and the Red Sea. If all three and Suez are out of bounds for Western shipping without naval escort, Operation ‘Prosperity Guardian’ is an expensive bad joke.

What isn’t, incredibly, is the Houthis telling US university anti-Israel protestors they can transfer to finish their studies in Yemen due to their ideological sympathies: “I was doing Marxist Critical Poetry, but now I want to switch to an PhD in Piracy.” That’s as Israel tells US Jewish students and professors to move there if the Western atmosphere stays as ugly as the latest report on global antisemitism underlines. So, global and local bifurcations happening in tandem; and even in the latest UK local elections, where many independent candidates won council seats purely on a ‘Gaza’ platform. Care to project the socio-political ‘dot plot’ from here like you do the Fed?

That’s as Hamas ‘accepts the latest ceasefire plan for Gaza’ but Israel rejects it, saying Hamas is talking about a different deal to the one agreed on the hostages. Israel may soon move on Rafah, with limited strikes already happening in response to Hamas rocket fire from there killing 4 Israeli soldiers overseeing aid flows into Gaza at the Kerem Shalom crossing. The Israeli press also reports Hamas may blow up the Egypt–Gaza border wall to precipitate a mass exodus into Egypt, creating chaos there. Fighting between Israel and Hezbollah also continues without yet reaching a tipping point. And the White House chose Israel’s Holocaust Memorial Day on Monday to block a shipment of already agreed ammunition to it, the symbolism of which may not have been obvious in D.C. but was very clear in Israel.

Rumours also flew this morning that Saudi Arabia’s Prince Mohammad Bin Salman was subject to an unsuccessful assassination attempt that left several dead and injured. What actually happened is unclear, and this may be fake news. Yet if true, who might want to destabilise Saudi Arabia, and the entire Middle East?  

China’s Xi asked France’s Macron to help avoid a global Cold War 2, which means not taking the kind of trade actions against Beijing that Von der Leyen and Draghi want. Even the Financial Times notes, “China’s charm offensive in Europe has threatening undertones and is likely to fail as a result.” Yet if we are to see EU-China trade war, echoing US-China trade war, Europe helpfully just told China where it is most vulnerable to counter pressure in saying, “we should treat agriculture as a sector strategic for security, which requires special protection.” Naturally, China is already starting a counter-probe into French brandy in response to EU probes on EVs and green goods.

China has reportedly just hacked the British Ministry of Defence, and allegedly dropped flares dangerously close to an Australian military helicopter in international waters in the Yellow Sea, where it is helping to enforce UN sanctions against North Korea.

Russia’s Putin has ordered exercises with strategic nuclear weapons in response to Macron’s “strategic ambiguity” over French boots on the ground in Ukraine.

Western intelligence chiefs warn Russia may expand sabotage operations across Europe (and the US?), taking out critical infrastructure or economic targets. That would disrupt the supply side of GDP, potentially a lot; and/or would mean a lot more on the fiscal side to protect soft targets. And what can the West do in response? Nothing similar: it’s a free option for Russia. Only Ukraine seems able to take out Russian factories and oil refineries – and the US is angry when it does the latter, as it points to higher energy prices eventually. And we can’t have that in an election year.

So, geopolitics remains inflationary. The only issue is how much, where, and for how long.

Shifting gears to socioeconomics, Bloomberg notes ‘Global Housing Shortages Are Crushing Immigration-Fueled Growth’, and “households go backwards in 13 developed economies as record immigration runs into a housing crisis.” Bloomberg just noticed Western immigration has soared? They couldn’t have predicted that Western economies which couldn’t build enough houses for their populations before Covid and saw a housing boom during Covid, would fail to add the required “affordable* housing for a population surge after Covid? They are surprised that while high immigration keeps a lid on still-high wage growth, it also pushes up house prices and rents further, which then mean higher inflation overall? And Bloomberg are shocked we are also seeing declining real GDP per capita across much of the West as a result?

Anyone looking at the bigger picture, or across disciplines, would have always said one should track real GDP per capita closely: what’s the point of higher GDP if people are worse off? Or, at least, they should do what I was doing 20 years ago when covering the US: looking at “real payrolls”, where you subtract out-of-normal-trend demographic changes from the monthly jobs data: some at the Fed just woke up to this – who next? Right now, that might mean weaker-than-it-looks labor data (“Oooh! Rate cuts!”). However, it doesn’t change anything about the supply-demand dynamic for must-have housing: it just creates a host of different, difficult problems that will ultimately flow back to markets one way or another. (“Oh! Not rate cuts.”)