Firetrucks with sirens blaring

Delivered on By Justin Pyvis

Good morning! Peter Dutton will be Australia’s next opposition leader as the “most experienced parliamentarian” left standing, with ScoMo likely relegated to the backbench and former number one contender Josh Frydenberg turfed out by the electorate.

But whether he makes it through to the next election as leader is another question altogether. Former Liberal member for the NSW seat of Wentworth, Dave Sharma, wouldn’t give anything away, only saying that “his first job and his main job is to hold the government to account”.

Interesting times. How the Liberals rebuild themselves following the election bloodbath – it secured the lowest proportion of seats since the party was formed in 1946 – will go a long way to determining whether or not it even has a shot at reclaiming government three years from now.


Reading the tea leaves

Daily % change

AUD/USD

70.9

-0.3%

AUD/CNY

4.74

+0.4%

AU Bond

3.22

-0.7%

US Bond

2.75

-0.4%

ASX200

7,155

+0.4%

S&P500

3,979

+1.0%

Brent (bbl)

114.3

+0.6%

Gold (oz)

1,852

-0.7%

Iron ore (t)

130.8

+1.5%

Bitcoin

29,703

+0.2%

Ethereum

1,957

-1.1%

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

The US S&P500 added +0.95% following the release of US Fed’s 3-4 May meeting minutes, which confirmed that officials were expecting to hike rates by 50 basis points for at least the next couple meetings.

The Fed added that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and risks to the outlook”, indicating that it’s still uncertain how markets will respond to its policy tightening and will be watching the data closely.

One such data release was last night’s US durable goods orders, which rose a below-expectations 0.4% in April “as manufacturers confronted a worsening supply-chain crisis that continued to weigh on business investment”.

Locally, the ASX200 gained 0.37% despite mining giant BHP (-9.4%) going ex-dividend, with most sectors ending slightly higher outside of tech, which fell -3.0% following a similarly poor performance from the sector in the US the night before.


Food for thought

Some members of the US Fed are already getting cold feet about further monetary policy tightening.
Some members of the US Fed are already getting cold feet about further monetary policy tightening. Source

How serious is the US Federal Reserve about taming inflation? If you listened to Raphael Bostic, President of the Atlanta branch, not very:

“So as we expeditiously return monetary policy to a more neutral stance to get inflation closer to our 2 percent target, I plan to proceed with intention and without recklessness. We have seen throughout the pandemic that events and market shifts can happen quickly and in ways that dramatically alter the prevailing economic dynamic, in both good ways (the rapid rebound in employment right after the initial lockdown) and bad (the rapid rise of the delta and omicron variants). We all must be ready for the unexpected to occur, assess how risks have changed when it does, and stay aware of shifts in the strength of the economy.

Given the very high level of inflation, some might be surprised by my injecting some caution here. But remember this: even firetrucks with sirens blaring slow down at intersections lest they cause further preventable trouble.”

Bostic is clearly worried that the balance of risks might have already swung from bringing inflation down to preventing a hard landing, i.e. a recession. But where was that concern when the tide was moving in the other direction; when the Fed sat on its hands as inflation ratcheted up close to 10% annually?

Billionaire investor Bill Ackman wasn’t thrilled at the “various current and former Fed members have waffled and made dovish remarks proposing a modest increase in rates and a pause in the fall”:

“The Fed has already lost credibility for its misread and late pivot on inflation.

There is no economic precedent for 200 to 300 bps of fed funds addressing 8% inflation with employment at 3.6%. Current Fed policy and guidance are setting us up for double-digit sustained inflation that can only be forestalled by a market collapse or a massive increase in rates.

That is why I believe there are no buyers for stocks. How does this downward market spiral end? It ends when the Fed puts a line in the sand on inflation and says it will do ‘whatever it takes.’ And then demonstrates it is serious by immediately raising rates to neutral and committing to continue to raise rates until the inflation genie is back in the bottle. Stocks (of real businesses) are cheap once again.

Markets will soar once investors can be confident that the days of runaway inflation are over. Let’s hope the Fed gets it right.”

Global central bankers have a credibility problem after they were almost unanimously surprised by the re-emergence of persistent inflation, a phenomenon they thought was extinct. Statements such as the above from Bostic, just a couple of months into a tightening cycle, do not instil confidence that they’ve learnt from their mistakes.


Chewing the fat


Bits and bytes

📈 The Reserve Bank of New Zealand hiked its cash rate by another 50 basis points, bringing it to 2.0%, as it moves to “a level [3.25% this year] that will confidently bring consumer price inflation to within the target range”.

🏗️ Australian housing (-0.9%), non-residential (-1.8%) and engineering construction (-0.4%) all unexpectedly declined in the March quarter, likely due to supply constraints and labour issues.

👷‍♀️ The RBA claimed that housing construction delays are common, with a 50% increase in completion time from 6 months pre-pandemic to around 9 months today.

🏝️ Racking up the miles! Japan and now Fiji: Australia’s new foreign minister, Penny Wong, will travel to Fiji today on a trip that coincides an eight-country visit to the region by China’s foreign minister.

🤝 “China will seek a region-wide deal with almost a dozen Pacific islands covering policing, security and data communications cooperation when Foreign Minister Wang Yi hosts a meeting in Fiji next week.”

💸 Inflation and bracket creep will only make this worse: The latest OECD report shows that Australia’s average income tax rate is the fourth highest in the world, behind only Denmark, Iceland and Belgium.

💉 ATAGI now recommends that anyone aged 16 to 64 with significant health needs, conditions or a disability get a fourth COVID-19 vaccine dose ahead of winter.

🦠 Japan’s monthly economic report dropped its reference to the pandemic for the first time in over two years, reflecting that “social and economic activities have kept going even amid a resurgence of Covid-19”.

🚀 South Korean officials claimed that “North Korea tested a presumed intercontinental ballistic missile (ICBM) in one of three missile tests on Wednesday”.

🔬 No long COVID? A new study found “a large burden of symptoms & worse mental health post-COVID but no difference in objective neurocognition, & no evidence of ‘ongoing systemic inflammation or immune activation’ or any organ damage”.

🔫 The US experienced its worst primary school shooting since Sandy Hook in 2012, with an 18-year-old gunman killing at least 19 children and two teachers.

👴 Russia’s government scrapped its upper age limit for military service, previously capped at 40, “amid heavy casualties in Ukraine”.