A shocking necessity

Delivered on By Justin Pyvis

Good morning! You know a political leader is in dire straits when senior ministers are forced to provide their full confidence. That’s where ScoMo finds himself on the eve of an election, with Treasurer Josh Frydenberg reassuring everyone that:

“I’m hoping to see Scott Morrison continue as Prime Minister… [but] I’ve made no secret that [being PM] would be something I put my hand up for at the right time.”

We’re sure that will help ScoMo rest easy. πŸ™„

The question and hardly convincing answer came after the latest Newspoll “found the Coalition’s primary vote remains on a record low of 34% as Labor continues to peak on 41%”.

That’s the biggest gap between the major parties since Australia’s last Prime Minister, Malcolm Turnbull, was axed from the top job by his own party in August 2018…


Reading the tea leaves

Daily % change

AUD/USD

71.6

-0.1%

AUD/CNY

4.55

-0.2%

AU Bond

2.10

-4.8%

US Bond

1.96

-3.7%

ASX200

7,217

-1.0%

S&P500

4,419

-1.9%

Brent (bbl)

95.0

+0.6%

Gold (oz)

1,861

+1.1%

Iron ore (t)

149.5

-2.3%

Bitcoin

42,314

+0.2%

Ethereum

2,894

-0.8%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing theΒ US S&P500Β was down -0.36% but where it ends up is anyone’s guess. It has been a volatile session to say the least, fuelled by uncertainty about how hard the Fed plans to tackle inflation (see Food for thought below) and a possible Russian invasion of Ukraine.

Locally, theΒ ASX200 finished +0.37% higher led by energy (+3.4%) as oil prices crossed a seven-year high $US95 per barrel on rising tensions between Russia and Ukraine, which also helped support Aussie gold miners such as Regis Resources (+8.2%) and Evolution Mining (+7.9%).


Food for thought

The US almost needs another 'Volcker Moment' to regain its street cred.
The US almost needs another 'Volcker Moment' to regain its street cred. Source

Inflation in the United States is running hot. We’re talking 1970’s, “Great Inflation”-style hot and it has become a big problem for the Biden administration, which faces mid-term elections in November.

Ultimately inflation is the responsibility of the US Federal Reserve, which failed to sufficiently offset the government’s stimulus. But now that Team Transitory is dead and inflation is at risk of becoming entrenched in a wage-price spiral, what is the Fed going to do about it?

Writing on LinkedIn, former New York University professor of economics, Senior Economist with the President’s Council of Economic Advisors and member of the Economic Advisory Panel of the Federal Reserve William Silber thinks it needs to go early and hard:

“The 7.5% annual inflation data just released makes a 50-basis-point increase a shocking necessity. It also reminds me of September 16, 1992, a day after George Soros launched a speculative attack on the British pound. The Bank of England raised its interest rate by a shocking 5% to lure investors into buying pounds. Instead, the increase backfired and the pound collapsed because investors interpreted the jump as an act of desperation. The Federal Reserve needs more than a simple display of “shock and awe.” It needs substance and should follow former Treasury secretary Larry Summers' suggestion to “Have a special meeting, right now, to end QE.” Ending asset purchases is long overdue and a 50-basis-point increase by itself may simply confirm that the Fed is far behind the curve, like the Bank of England in 1992.”

The Fed is facing a credibility crisis. It isn’t scheduled to meet until March 15-16 but as Silber notes, it could call a special meeting earlier than that, cancel QE (quantitative easing, which essentially means buying government bonds with printed money) and pull itself a wee bit closer to the curve.

It’s not as unusual as it sounds – the Monetary Authority of Singapore did exactly that just over three weeks ago, sending a strong signal that it means business in terms of maintaining credibility as an inflation-buster.

The Fed certainly has the tools to bring inflation under control and restore some of its credibility. But is it willing to use them, given that doing so might slow the economy and set in motion a politically painful fiscal crisis, barring a commensurate cut in public spending (or higher taxes)?


Bits and bytes

πŸ₯΅ German chancellor Scholz flew to Kyiv yesterday and will travel to Moscow later tonight “in an effort to help defuse escalating tensions”.

πŸ™ UK foreign minister Liz Truss tweeted “Latest information suggests Russia could invade at any moment and we urge the Kremlin to deescalate.”

🏑 Westpac expects Australian property prices to fall 14% over 2023-24 “as strong inflation forces the Reserve Bank of Australia to start lifting interest rates from August this year”.

πŸ“ˆ Aussie electronics giant JB Hi-Fi warned that its suppliers are at “a point where they’re going to pass on” higher costs they’ve been absorbing up until now, which could cause the retailer to “broadly” increase prices for consumers by around 8%.

πŸ₯ Victoria’s government lifted its “Code Brown”, allowing elective surgeries to resume “as the number of COVID-19 cases continues to fall”.

πŸ•ŠοΈ Taiwan’s government will start to ease its pandemic restrictions, with the government committing to “also take into account livelihoods and economic development, gradually return to normal life, and step out to the world”.

πŸ’° According to the UK Chartered Institute of Personnel and Development, British companies are planning to “raise staff pay by the most in at least nine years”, to 3.0% from 2.0% three months earlier.

🦠 The Omicron outbreak in Hong Kong has gone from 100 cases a day to over 2,000 in just two weeks, which leader Carrie Lam said that had already “overwhelmed the city’s capacity of handling”.

πŸ¦• IBM is being sued after internal emails showed executives calling older employees “dinobabies” who should be “extinct”.

🏈 The Los Angeles Rams won Super Bowl LVI with a 23-20 victory over the Cincinnati Bengals, only the second time the 88-year old Rams franchise has ever claimed the Super Bowl.

🍁 The Ambassador Bridge connecting Michigan US with Ontario Canada officially reopened yesterday after police moved in and cleared anti-vaccine mandate protestors who had been blockading the bridge for nearly a week.

πŸ‘©β€βš–οΈ A judge threw out former NFL star Jarryd Hayne’s conviction for sexual assault. Hayne will apply for bail while prosecutors decide whether to offer him a deal or go to a third trial, which may not be possible until 2023.

🀫 The Australian Medical Association WA said people in the Hermit State aren’t getting tested for COVID-19 because “we just haven’t experienced a true outbreak yet”, and as “a protest against the McGowan government’s decision to delay the border opening”.

β˜ƒοΈ “Real snow fell in Beijing on Sunday for the first time since the Olympics began… [making] it tougher for ski racers to make it down the hill”.

πŸ”Œ Tesla is recalling another 500,000 vehicles in the US “due to its Boombox feature, a 2020 update that allows drivers to play sounds such a bleating goat or a fart noise outside the vehicle”. Musk blamed the recall on the “fun police”.