A negative feedback loop

Delivered on By Justin Pyvis

Good morning! According to the latest Roy Morgan Poll conducted last week (2-8 May), the Labor party slightly increased (+0.5) its two-party preferred lead to 9 points over the incumbent Liberal/Nationals.

In terms of primary votes a massive 35.5% of people said they’d either vote for a minor party, independent or refused to disclose altogether, posing problems for the pollsters:

“This large cohort of voters not voting for their major parties makes predicting the final two-party preferred result particularly difficult and increases the chances of a large number of cross-benchers being elected at next week’s Federal Election.”

However, Labor is still the red-hot favourite:

“Although many pundits refer to the ‘unexpected’ victory of the Scott Morrison-led L-NP at the 2019 Federal Election, in reality, the polls – including the Roy Morgan Poll – were a lot closer three years ago.

The L-NP made a late surge three years ago and increased their two-party preferred vote by 2.5% points over the last two weeks of the campaign. A similar swing for the L-NP now would not be enough for the L-NP to retain Government at next week’s Federal Election.”

The latest Roy Morgan two-party preferred poll, 2019-2022. Also, how not to format an X axis! Click image for a larger version.
The latest Roy Morgan two-party preferred poll, 2019-2022. Also, how not to format an X axis! Click image for a larger version. Source

Reading the tea leaves

Daily % change







AU Bond



US Bond









Brent (bbl)



Gold (oz)



Iron ore (t)









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

The US S&P500 ended its run of losses overnight by edging up 0.25%, with tech (+1.6%) the standout after bond yields fell ahead of tonight’s all-important US inflation data.

Locally, the ASX200 once again mirrored a very weak US lead from the night before to fall -0.98%, dragged down by materials (-2.4%) and energy (-2.1%) due to softer commodity and oil prices amid concerns of a global economic slowdown, particularly in China.

Shanghai is now in its sixth week of hard, ‘cannot leave the apartment’ lockdown, while Beijing has been placed in lockdown-lite (by Chinese standards), where “Schools, gyms, hairdressers, parks, restaurants and bars are shut, [and] millions have been told to work from home.”

The ongoing “dynamic zero-COVID” chaos is having a major impact on China’s economy, and not just consumption: according to a leaked internal memo, Tesla – which just last week announced plans “to increase output to pre-lockdown levels by next week” – “halted most of its production at its Shanghai plant due to problems securing parts for its electric vehicles”.

Food for thought

According to the Fed, market depth is very low which could contribute to elevated volatility and uncertainty in the near-term.
According to the Fed, market depth is very low which could contribute to elevated volatility and uncertainty in the near-term. Source

The Chicago Board Options Exchange’s (CBOE) Volatility Index, which measures the market’s expectations for volatility over the next 30 days, is close to its post-pandemic highs. So it was perhaps timely that the US Federal Reserve (Fed) released its bi-annual Financial Stability Report this week, its “framework for assessing the resilience of the U.S. financial system”.

Volatility was a key theme throughout:

“Further adverse surprises in inflation and interest rates, particularly if accompanied by a decline in economic activity, could negatively affect the financial system.

Additionally, a sharp rise in interest rates could lead to higher volatility, stresses to market liquidity, and a large correction in prices of risky assets, potentially causing losses at a range of financial intermediaries, reducing their ability to raise capital and retain the confidence of their counterparties.”

The Fed notes that market “depth has decreased since late 2021”, which initially “reflected rising uncertainty about the outlook for monetary policy”. However, more recently:

“This markedly low depth could indicate that liquidity providers are being particularly cautious, and liquidity may be more fragile than usual. Declining depth at times of rising uncertainty and volatility could result in a negative feedback loop, as lower liquidity in turn may cause prices to be more volatile.”

We assume the Fed meant a positive feedback loop, as a negative loop by definition would reduce fluctuations? Regardless, the section on near-term risks was well thought out and included:

  • Russia’s war in Ukraine and its negative effect on European economic activity, causing a crisis in which “European banks would be particularly affected”.
  • Elevated interest rates, inflation and the resulting impact on balance sheets, “leading to an increase in delinquencies, bankruptcies, and other forms of financial distress”.
  • An economic crisis in China triggered by an “intensification” in the heavily indebted real estate sector’s downturn, “amplified by lockdowns or other disruptions to the economy”.
  • Higher food and energy prices leading to “social and political stresses” in emerging markets, triggering a “downturn in investor risk sentiment and capital outflows”.

Essentially the Fed has no idea how this inflation crisis is going to play out but all of its possible recession triggers are plausible, including those caused by the Fed itself (second dot point).

The full report is 72 pages so do read it for yourself.

Chewing the fat

Bits and bytes

😑 According to ANZ-Roy Morgan, Australian consumer confidence was “virtually unchanged this week” after last week’s big plunge, leaving it “at its lowest since Victoria’s second wave of COVID-19 in August 2020”. Confidence was especially weak amongst those “paying off their home”, after the RBA’s recent rate hike.

📈 The latest NAB business survey showed that “conditions continued to strengthen in April, while confidence eased but remained above its long-run average… However, output price inflation eased with final product prices rising 1.7% and retail prices up 2.1%.”

👨‍👩‍👦‍👦 Northern Territory Chief Minister Michael Gunner will resign because “My head and my heart are no longer here, they are at home.”

👷‍♀️ We sure hope his “plan to lift wages” involves the word productivity! Labor leader Anthony Albanese “backed a rise in the minimum wage of 5.1%”.

👊 The WA government will use its majority in both houses to extend its “draconian” emergency pandemic powers until January 2023.

🌊 New data from Glassnode showed that “40% of [Bitcoin] holders are now underwater on their investments”.

💱 El Salvador’s President Nayib Bukele claimed to have “bought the dip”, loading up on another “500 [bit]coins at an average USD price of ~$30,744”.

💰 Nouriel Roubini, aka “Dr Doom”, who once called Bitcoin “the mother of all bubbles”, “is working to develop a suite of financial products including a tokenized asset intended to act as a ‘more resilient dollar’.”

📡 A threat to the great firewall: China’s government warned that SpaceX’s Starlink satellite internet programme “should put the international community on high alert”.

🛳️ $A62 each a day: “Couple live aboard cruise ships after calculating it makes more ‘financial sense’ than a mortgage.”

🗳️ Meet the Philippines' new President: Ferdinand “Bongbong” Marcos Jr, son of a former dictator who “was known for his brutal authoritarian rule” and “plundered an estimated $US10 billion from public funds”.

⚔️ The UK’s Ministry of Defence claimed that Russia’s “demonstrable operational failings… [prevented] President Putin from announcing significant military success in Ukraine at the 09 May Victory Day parade”.

⏰ Joachim Nagel, head of Germany’s Bundesbank, said the European Central Bank should take “a first step normalising ECB interest rates in July… The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike.”