A dirty French word

Delivered on By Justin Pyvis

Good morning! Hot on the heels of Tuesday’s explosive 50 basis point rate hike came comments from former RBA governor Ian Macfarlane (1996 - 2006), who offered up some forecasts of his own:

“I find it hard to think that it will just come back to 2%. I think there’s enough scarcity out there, particularly with such a tight labour market both in the US and here, and with the feeding through of all the supply shocks… I think 3-4-5% is more likely. It could go up to 7 or 8%.

[Interest rates] are obviously going to have to go up a lot more from where they are now. Everyone accepts that.

The market is expecting… the cash rate to be 3.05% by December… that’s a lot in a short period of time. It could happen. The other way of looking at it is that wherever inflation settles, you want the cash rate to be higher in real terms. If it were to settle at 4%, you’d want it to be higher than 4%.”

As to how the RBA got it so wrong, Macfarlane suggested that the central bank had probably become accustomed to several years of an “extraordinary, certainly unforeseen situation, of inflation being too low”, meaning when the pandemic struck it had “a huge reaction that was out of proportion to the size of the problem they were addressing”.

It then compounded that error by waiting until May this year to respond and is now having to resort to super-sized hikes to regain lost ground – some of which it may never get back.

Reading the tea leaves

Daily % change







AU Bond



US Bond









Brent (bbl)



Gold (oz)



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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 fell -1.08% overnight as US Treasury yields crept up over the psychologically important 3% level and oil prices continued to rise, reaching a 13-week high, fuelling concerns about persistent inflation.

Locally, the ASX200 added 0.36% despite heavily losses for the big banks (financials -2.9%) following Tuesday’s 50 basis point rate hike, the largest in 22 years. Energy (+4.2%) was the best performer of the day but there were also solid gains for utilities (3.2%), industrials (+2.0%), tech and materials (both +1.9%).

Food for thought

Even "one million is actually an absurdly low number of people — far too few to support a modern economy."
Even "one million is actually an absurdly low number of people — far too few to support a modern economy." Source

An unintended thought experiment: How likely is Elon Musk’s Mars colony to succeed? Not very according to Paul Krugman, who took his political blinders off for a moment to channel some the economics that won him a Nobel prize:

“Now, given access to world markets, even small countries can have full access to the benefits of modern technology; life in Luxembourg is pretty good. But unless we actually invent the Epstein Drive or something, the realities of transportation costs mean that Musk’s hypothetical Mars colony would have to be largely self-sufficient, cut off from the rest of the solar system economy. And it wouldn’t have enough people to pull that off with anything like a modern standard of living.

Yes, there are downsides to globalisation, especially to rapid change that can disrupt whole communities. But you really wouldn’t want to live in a world without extensive international trade. And you really, really wouldn’t want to live on another planet, cut off from the globalisation we’ve created on this one.”

A dirty French word: What do a “dirty French word”, Henry Kissinger, China, Taiwan, Vietnam, Ukraine, the US and inflation have in common? According to historian Niall Ferguson, quite a bit (paywall-free version here):

“Back in the 1970s, that little French duosyllable was almost synonymous with ‘Kissinger.’ Despite turning 99 last month, the former secretary of state has not lost his ability to infuriate people on both the right and the left — witness the reaction to his suggestion at the World Economic Forum that ‘the dividing line [between Russia and Ukraine] should return to the status quo ante’ because ‘pursuing the war beyond that point could turn it into a war not about the freedom of Ukraine … but into a war against Russia itself’.”

In a very long article by today’s standards (~3,600 words), a dovish Ferguson then went on to draw lessons from the past and apply them to the Biden administration’s apparent goals in Ukraine, which he worries “has become the arsenal of Ukraine’s democracy, not the broker of a peace that it is leaving to Ukraine to define”.

The war is also inflaming Biden’s “number one problem”, inflation, which for the US public is second only to “Depp v. Heard”:

“Currently, however, the administration’s foreign policy isn’t helping fight inflation — quite the reverse. Large-scale support for Ukraine is not only expensive (the total thus far is $53 billion, according to economist Larry Lindsey). It also restricts supply via sanctions on Russia, and further restricts supply by prolonging the war, cutting off Ukrainian exports of wheat and other goods. Continuing Trump’s trade war and ramping up the support for Taiwan add a further inflationary pressure by keeping Chinese imports more expensive than they otherwise would be, and also encourage the process of ‘decoupling’ China’s economy from ours.”

Do read the whole thing.

Where to for Ukraine: In line with Ferguson’s dovish views, Ukraine’s President Zelenskyy is worried that “Western politicians and the media are beginning to push Ukraine to end the war with a result that is not beneficial for Ukraine”:

“Everyone really wants to push us little by little towards some result that is definitely undesirable for us, because we have not been asked yet, but beneficial for other parties that have their own interests. Again, different: both financial and political.

Fatigue is growing, people want some kind of result for themselves, and you and I need a result - for us.”

Support for the war, particularly in the US, is rapidly fading ahead of the midterm elections as issues such as the cost of living crisis take centre stage. Opining in the NYT, US commentator Ross Douthat earlier this week wrote:

“If Kyiv and Moscow are headed for a multiyear or even multi-decade frozen conflict, we will need to push Ukraine toward its most realistic rather than its most ambitious military strategy. And just as urgently, we will need to shift some of the burden of supporting Kyiv from our own budget to our European allies.”

Ukraine is losing up to 100 soldiers a day, with another 500 injured. That’s clearly not sustainable, but neither are the billions of dollars in aid and weaponry being sent to Ukraine each month to fund the war effort. While Russia is also feeling the pain, “If something cannot go on forever, it will stop.”

Chewing the fat

Bits and bytes

👨‍💼 Many of Sydney’s public sector employees walked off the job yesterday to protest the government’s offer of a 3% wage increase, with the union demanding “at least” 5.2%.

📔 Federal Treasurer Jim Chalmers plans to hand down his first budget on 25 October, warning that rising interest rates “will put significant pressure on a budget that already has its share of difficulties”.

⚡ Energy Minister Chris Bowen said the Australian Energy Market Operator will be given the power to “procure some gas and keep it in reserve to be released for urgent and crisis situations”.

🚀 “NASA will launch a research rocket from remote northern Australia this month in the agency’s first blast off from a commercial space port outside the United States.”

🏉 Queensland defeated the Blues 16-10 in game one of the State of Origin “on the back of three tries two in an Origin series opener that has had absolutely everything, including a controversial finish”.

📈 The Reserve Bank of India raised its policy repo rate by 50 basis points to 4.9%.

😷 Yeh… Covid… “Chinese authorities urged residents of a city bordering North Korea to close their windows on days with southerly winds. Residents suspect authorities are considering the possibility that the Covid virus is being carried through the air from North Korea.”

🎮 “China has approved the release of dozens of new video games, boosting the shares of some of its biggest tech firms Wednesday on hopes that a long-running and painful crackdown on the sector is easing.”

🚢 US Treasury Secretary Janet Yellen told a House of Representatives Ways and Means Committee hearing that the Biden administration “was looking to ‘reconfigure’ tariffs on Chinese imports”.

☕ A new observational study (so determining causation is extremely problematic) found that drinking 1.5 to 3.5 cups of coffee per day reduced the likelihood of death by up to 30% compared to those who didn’t drink coffee.

📣 “Twitter will yield to Elon Musk’s demand for internal data central to a standoff over his troubled $44 billion bid to buy the social media platform… just days after the Tesla chief threatened to back out of his deal.”

💉 Moderna’s updated vaccine, which addresses both the original COVID-19 strain and Omicron, had “more durable protection against variants of concern”, with similar side effects to booster doses of the current vaccine.