By Michael Every of Rabobank

Nobody actually directly reads anything

More US opinion polls are out: a mixed bunch but including a Wall Street Journal Trump +2, which is not just an electoral college, but a large popular vote win. More US early voting data is in: again, the story from Nevada and Georgia in particular looks good for Trump so far. While markets are taking a breather from the ‘Trump trade’ for the moment, yesterday saw the US 10-year yield hit 4.25% and USD/JPY push past 153, with that kind of action finally catching up with stocks for once, which dipped. It really needs to be underlined how out-of-the-ordinary it is to see yields soar and the dollar rip, alongside gold, after the Fed starts cutting with a 50bp move. These are far from ordinary times.

That is underlined by the current ‘ludicrous speed’ phase of the US election, where today’s headlines allege more Trump sex scandal from 30 years ago and a link to Jeffrey Epstein, while VP Harris compared him to Hitler and fascism: Trump has long called Harris a Marxist. All of this leaves the parts of the world wanting proper policy analysis and debate, and especially those with painfully vivid memories of Nazism and Marxism, despairing of Godwin’s Law and US electoral hyperbole that confuses an already historically illiterate generation into thinking “Arbeit macht fries.” For once the market’s stoic lack of interest in politics around it pays dividends.

What was worth paying attention to was a US Beige Book that noted “On balance, economic activity was little changed in nearly all Districts since early September… Despite elevated uncertainty, contacts were somewhat more optimistic about the longer-term outlook.” Which hardly screams “50 BASIS POINTS!” Neither does the labor market, where the view was, “On balance, employment increased slightly during this reporting period…Wages generally continued to rise at a modest to moderate pace. With the improvement in worker availability, contacts in multiple Districts pointed to a slowdown in the pace of wage increases. Still, larger than usual pay increases were reported for some workers.” Indeed, Boeing workers just turned down a 35% proposed pay hike by a 2-1 vote, and a logistics expert says there is an 80% chance that the globally disruptive ILA US east coast port strike will restart on 15 January.

That might flow through to views on inflation, where the Beige Book said things “continued to moderate with selling prices reportedly increasing at a slight or modest pace in most Districts. Still, the prices of some food products, such as eggs and dairy, were reported to have increased more sharply… Contacts across several industries noted more acute pressures from rising insurance and healthcare costs. Multiple Districts reported that input prices generally rose faster than selling prices, compressing firms’ profit margins.”

Let’s put that against what we saw/heard in other places:

The BOC met expectations by slashing rates 50bps, the most since March 2020, to 3.75%, declaring high inflation over. Except for house prices(?), where lower rates will help generate a recovery: exactly what an unaffordable market needs when wage growth will likely track inflation lower. CAD dipped and the 2-year Canadian yield briefly slipped below 3%.

South Korea’s finance minister commented, and retracted, that 1,400 in USD/KRW was a “new normal”, not a crisis (and, reportedly, that the BOK couldn’t raise rates to protect the currency).

The BOJ’s Ueda hinted at more rate hikes and risks from being overly cautious; but getting this right “Keeps me awake 24/7.” Not only him. The election result this weekend is also a wild card.

ECB speaker dovishness is evident too, with traders starting to speculate we might even see a 50bp Eurozooka for Christmas – which our expert Eurozone team are sceptical of.

The UK Chancellor is to reinterpret the fiscal rules so an extra £50bn in capex is possible by measuring government net liabilities vs. assets like student loans people may default on. Looser fiscal policy could imply less need for looser BOE monetary policy, but BOE Governor Bailey just underlined inflation is cooling faster than expected, suggesting more Carry On Cutting.

RBNZ Governor Orr bewailed, “I haven’t really talked to anyone who’s ever actually directly read the Monetary Policy Statement or the record of the meeting. Most people get it second-hand, filtered through a journalist’s mindset or a financial analyst’s position talking.” Here’s an open secret: journalists and analysts often don’t read the originals either! “Mindsets” are often pre-set.

That mindset, until recently, was that the Fed would lead the monetary policy charge, and everyone else would follow in synchronised fashion, but less aggressively. Are we now finally pricing for the Fed *not* being the most dovish major central bank, as it’s constrained to the downside looking at US yields, while most others are more constrained to the upside? The ‘Trump trade’ is dollar positive and shouts higher US yields; that drags everyone else’s yields up to some extent even if their economies can’t take it, unless they cut rates by more. Trump potentially using the Fed like the Reichsbank (I’ve been saying MEFO for years) has one hypothetical implication of a much steeper US curve; and of a much weaker US dollar; yet combined with a trade war that dries up global exporters’ dollar earnings, another is abundant dollar liquidity inside the US, but scarce greenbacks outside it, so a kind of USD-Y/USD-H à la Chinoise.

That would likely trigger major geopolitical issues few in markets are focusing on, but which the BRICS were all just discussing.

On which note, Israel’s Defense Minister Gallant just stated that planned airstrikes on BRICS member Iran -whom China has just pledged to develop “friendly cooperation” with- “will make the world understand its military might”, which doesn’t sound like a bluff from a man who understands deterrence. In terms of timing, there’s a logical case this could fall after the US election to minimize political fallout. On the other hand, in the Jewish calendar today is the anniversary of the October 7 attack on Israel: if there’s political symbolism in that, it might point to action within the next 24 hours.

At the same time, the US is now saying it also believes North Korea may send troops to fight in Ukraine, which has seen South Korea threaten to send arms to Kyiv. While this is unconfirmed, it underlines how the wars in Europe and the Middle East risk conflating, as would any geopolitical tensions in East Asia. Like financial crises, what starts in one locale rarely stays there if other parties have interests, and in Ukraine, the Middle East, and East Asia everyone has a stake of sorts. This time, of course, central banks are not going to be able to do much about it – except listen to what politicians tell them they have to do to help.

We’ve flagged these fat tail risks – and that’s still all they are for now- repeatedly for years in various thought pieces and dailies. Of course, nobody actually reads reports, do they?