A year too late

Delivered on By Justin Pyvis

Good morning! Infectious diseases expert Paul Griffin said Queensland had performed better than expected through the Omicron wave, maintaining “reasonable hospital capacity and we’ve had relatively good outcomes, despite high numbers of cases”, and that:

“Things perhaps escalated a little quicker than a lot of people predicted, but in the end, we had to open up then and if we had delayed that opening up, we’d still be facing a similar challenge just at a later point in time.”

That’s a pretty consistent story around the world by now – Omicron is much milder than its predecessors. Denmark’s Prime Minister went as far as saying the COVID-19 pandemic was no longer “socially critical” for his country, with all restrictions to be lifted on Tuesday.

But try telling that to WA Premier Mark McGowan, who appears prepared to keep the state locked up until coronaviruses stop killing people. Zero, zilch, nada, nil. It’s almost as if nothing else matters. πŸ™„


Reading the tea leaves

Daily % change

AUD/USD

70.3

-1.1%

AUD/CNY

4.47

-0.4%

AU Bond

1.97

-2.5%

US Bond

1.81

-2.2%

ASX200

6,838

-1.8%

S&P500

4,328

-0.5%

Brent (bbl)

89.3

-0.8%

Gold (oz)

1,793

-2.0%

Iron ore (t)

138.4

+0.5%

Bitcoin

36,091

-2.1%

Ethereum

2,383

-3.4%

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 -0.51%, following its usual pattern of morning optimism (it was up nearly 2% in the morning session) ruined by disappointing news as the day goes on.

It started off well with US initial jobless claims falling for the first time in four weeks. The Census Bureau then published data that showed US GDP grew more than expected in the December quarter (+6.9% annualised), although the restocking of inventories was a huge part of that, contributing 4.9 percentage points to growth at the end of last year.

But then came durable goods orders, which disappointed by falling -0.9% from the month prior in December, the first decline in three months and worse than expectations for a -0.6% fall. All of that was going on with the backdrop of Tesla’s earnings report, which caused the electric carmaker to plunge more than -10% after warning that supply issues will last throughout 2022. Apple will report after the bell.

Locally, theΒ ASX200 dropped -1.77% in its first day back from the Australia Day break with declines across every sector except utilities (+1.2%) and energy (+2.1%), the latter of which rose on the back of Brent crude prices passing $US90/barrel for the first time since 2014 as tensions rose on the border of Russia and Ukraine.


Food for thought

The Fed is set to tighten policy a year too late and will probably be late to loosen as well.
The Fed is set to tighten policy a year too late and will probably be late to loosen as well. Source

Wednesday was a big day for markets. Having been up almost 2% before US Federal Reserve chair Jerome Powell started speaking, the S&P500 promptly plunged 2.8% before pairing some of the losses to finish down 2.1% from the day’s high.

Markets clearly weren’t happy about what was interpreted as a relatively hawkish tone set by Powell during the Q&A. But we were more puzzled by Powell’s blasΓ© attitude towards asset prices:

“Asset prices are somewhat elevated and they reflect a high risk appetite. I don’t really think asset prices themselves represent a significant threat to financial stability and that’s because households are in good shape financially. Businesses are in good shape financially. Defaults on business loans are low.”

Already-elevated asset prices have soared since the pandemic struck, fuelled by margin debt and speculative appetite for fringe assets such as cryptocurrencies, junk bonds and ‘SPACs’, along with the usual favourites such as property and stocks.

The time to tighten monetary policy was a year ago. Households and businesses are in “good shape” in part because of record-high asset prices, a temporary effect caused by easy monetary policy. But as 2000 and 2007 taught us, that can quickly reverse when the punchbowl is removed.

That’s the problem with central bankers that are “led by the incoming data”, as Powell claims he is, despite ignoring consumer price inflation rising well over 2% annually as early as March 2021 (the Fed targets a 2% average). They’re too slow to react to changing circumstances both on the way up and on the way down.

Yet the Fed remains confident in its models, even though they’ve been wrong for a long time. As the saying attributed to Mark Twain goes:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Just talk of raising rates has caused the tech-heavy Nasdaq to erase all of its 2021 gains and the ARK Innovation ETF, the posterchild for the zero-interest rate speculative era, to fall 50% in the past year. Bitcoin is down the same amount since November.

The Fed will almost certainly start tightening monetary policy in March – that’s what the “incoming data” are telling its models to do, albeit a year too late. But Powell may quickly find himself forced into yet another policy U-Turn, or a “Powell Put” as it’s known, when asset price deflation begins to expose the businesses and households that overextended themselves during the good times, thanks to years of ultra-easy monetary policy.


Bits and bytes

πŸ₯ Inflation in New Zealand hit 5.9% in the December quarter, its highest rate of growth since June 1990.

πŸ‰ The AFL is considering moving the West Coast Eagles and Fremantle Dockers to the east coast if WA’s hard border is still in place when the season begins on 16 March.

πŸ‘©β€πŸŽ“ WA Premier Mark McGowan did a last minute backflip on his new hard border rules, permitting international students to enter provided they’re vaccinated and self-isolate for 14 days on arrival.

πŸ“§ The US and NATO wrote to Russia’s President Vladimir Putin, telling him to “enter negotiations with Washington and its allies, including Ukraine, or proceed with an invasion and face what the administration says will be crushing economic sanctions”.

β›½ The Australian government offered to ship additional LNG to “friends and allies” in Europe if Russia cuts supply in response to escalating tensions with NATO over Ukraine.

πŸ₯ Only in (French) Canada: Quebec required the unvaxxed entering large stores to be accompanied by a “Health Warden”, to make sure “they do not purchase anything except for food and medicine”.

🎸 Spotify agreed to take down all of Neil Young’s music after he issued them an ultimatum: “They can have Rogan or Young. Not both.”

🎾 The grand final of the Australian Open men’s doubles will be an all-Australian affair, the first time that has happened since 1980.

πŸ’‰ Victoria’s Premier Daniel Andrews wants three jabs to be considered the new minimum for “fully vaccinated”, although ATAGI is “still considering whether to change its advice”.

πŸ” El Salvador’s President Nayib Bukele fired off a series of tweets encouraging people to “invest a piece of your McDonald’s paycheck in Bitcoin”, before unleashing on US President Joe Biden who he claims “wants to go to war to boost his approval ratings”.

πŸš€ An out of control SpaceX rocket launched in 2015 – a “four-tonne empty metal tank, with a rocket engine on the back” – is due to crash into the far side of the moon on 4 March, exploding on impact.

⛑️ Germany offered Ukraine “5,000 helmets as a clear signal: We are at your side”. Former champion boxer and Mayor of Kyiv Vitali Klitschko responded by saying he was left “speechless… What kind of support will Germany send next? Pillows?”

🏨 Hong Kong’s government will cut its mandatory hotel quarantine period for international arrivals from 21 days to 14 days, “after pressure from finance executives and foreign diplomats”.

🐟 The Australian government committed an additional $A1 billion “towards improving water quality, reef management and research” at the Great Barrier Reef.