{"id":1451265,"date":"2024-01-17T15:20:00","date_gmt":"2024-01-17T20:20:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1451265"},"modified":"2024-01-17T15:20:00","modified_gmt":"2024-01-17T20:20:00","slug":"markets-are-overlooking-how-much-worse-this-can-get-how-inflationary-it-could-prove","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/markets-are-overlooking-how-much-worse-this-can-get-how-inflationary-it-could-prove\/1451265\/","title":{"rendered":"“Markets Are Overlooking How Much Worse This Can Get, How Inflationary It Could Prove”"},"content":{"rendered":"

“Markets Are Overlooking How Much Worse This Can Get, How Inflationary It Could Prove”<\/span><\/p>\n

\n

By Michael Every of Rabobank<\/em><\/p>\n

Waller Way to Behave<\/strong><\/p>\n

Points of order today. First, we need to underline the major disconnect between market pricing for aggressive 2024 Fed rate cuts — including new hedges that the Fed cuts by 50bp in March<\/em>— and how the actual economy is still performing. Second, we have to ponder what drove the Fed to make the dovish statements in late 2023 that drove, and still drive, that kind of wild pricing. Third, we have to deal with the Fed, and others, walking it all back just weeks later.<\/p>\n

That\u2019s what Waller became the latest central banker to do yesterday. He started off saying, \u201cFor a macroeconomist, this is almost as good as it gets. But will it last?\u201d, then argued only far more time than between now and the March meeting will tell. As a result, bonds, stocks, and just about everything except the US dollar sold off.<\/strong><\/p>\n

For the few who read Waller\u2019s speech in full — and people who price for six or seven Fed cuts, and 50bp cuts in March, when core inflation is well above target likely don\u2019t read anything fully — he added he\u2019s more confident the economy can still move towards immaculate disinflation, that financial conditions remain restrictive (despite the Pavlovian response since Powell\u2019s dovish turn), and that we can still get three rate cuts later in 2024 if inflation behaves, including next month\u2019s revisions to CPI methodology. Indeed, what will be hedonically adjusted lower this time?<\/em><\/p>\n

Yet all around us we see misbehaviour. Maybe the White House and Congress just found another $70bn down the back of the sofa to throw at voters; maybe President Biden will cancel student loans less than $12,000, so more money to buy a sofa. It\u2019s an election year where, \u201cdemocracy is on the ballot,\u201d or \u2018the future of the country\u2019 is. You really think we are going to get tight fiscal policy? The key question is if the Fed will play ball or hardball.<\/strong><\/p>\n

It’s election year folks, do you really expect a negative payrolls print? https:\/\/t.co\/s7Y1XSxNEh<\/a><\/p>\n

\u2014 zerohedge (@zerohedge) January 4, 2024<\/a><\/p>\n

Waller also mentioned the Red Sea, where the behavior is truly worrying \u2013 but so was his take that there would only be a one-time price effect if the Suez Canal remains closed. He hasn\u2019t learned from the last shipping supply-shock crisis, it seems.<\/strong><\/p>\n

Meanwhile, more Houthi attacks on commercial shipping have occurred; Japan\u2019s NYK is avoiding Suez too; so are Shell\u2019s tankers, joining Qatari and Russian LNG carriers; and maritime insurance rates have soared from 0.1% to 1% of cargo, with some insurers reportedly avoiding coverage of US and UK (and Israeli) merchant ships <\/a>against war risks \u2013 and that includes their \u201cinterest\u201d in a ship, a far more blanket term than just the registration of beneficial ownership. Note that\u2019s because the US and UK carried out recent airstrikes on the Houthis to try to stop these shipping attacks, which the EU disassociated themselves from (in order to keep their insurance rates down<\/strong>).<\/p>\n

I published on this unfolding crisis yesterday (Same Deep Ship, Different Day<\/a>). It stresses that markets are overlooking how much worse this can get, how inflationary it could prove, how hard it will be to resolve<\/strong>, and how it will soon be everyone for himself in trying to protect their maritime trade.<\/p>\n

Making my points for me less than 24 hours later:<\/p>\n

As already shown, the crisis is getting worse<\/a>.
\n\tWe see the warning that a \u2018tipping point\u2019 Houthi attack that reduces all willingness to sail through Suez is not far away<\/a>.
\n\tInflation pressures already loom: (\u2018DP World sees Red Sea disruptions hurting European customers hardest: Cost of goods into Europe from Asia will be higher<\/a>\u2019).
\n\tChevron is warning of a very real risk to oil prices<\/a>: that would certainly be the case if the Houthis turn their fire on Saudi Arabia again.
\n\tMaersk says the crisis could last for months. That may actually be optimistic.
\n\tThe US is already winding back expectations that airstrikes will stop Houthi attacks, as it is about to officially redesignate them as terrorists. Indeed there is no realistic military solution to \u201cThe Houthis hijacking the world economy,\u201d in the words of US National Security Advisor Jake Sullivan, without massive ground forces, which nobody will provide given how often Yemen has given invaders a bloody nose in the past.
\n\tMoreover, there is no realistic political solution. Rather, there is agreement with our immediate post-10\/7 analysis that this is not just about Israel\/Hamas, problematic enough, but the geoeconomics\/geopolitics of the proposed India-Middle-East Economic Corridor which bypasses Iran<\/a>. (\u201cIf you don\u2019t work through us and our North South Corridor\u2026we will make sure that no shipping is safe between India-South Asia to the Red Sea and Europe<\/em>.\u201d) Indeed, note that the UN Security Council resolution condemning the Houthi attacks was not supported by either China or Russia.
\n\tEU Member States Back New Naval Mission in Red Sea <\/a>to try and keep their own cargo flowing. Yet how will they succeed where the US Navy has failed, and do you know how much it will cost Europe to do that at scale, long term \u2013 and as Germany is insistent on balancing its budget? (On which, see our recent note on the hunt for EU strategic autonomy<\/a>.)<\/p>\n

In my best Cilla Black impression (for the few who will get that reference) \u201cWaller way to behave!\u201d And Deep Ship for most of us? You bet!<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nWed, 01\/17\/2024 – 10:20<\/span><\/p>\n

\u200bRead More<\/a>\u00a0<\/p>\n

\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

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