Harder and faster

Delivered on By Justin Pyvis

Good morning! It’s finally over: Djokovic has left Australia after all three Federal Court judges dismissed his application to appeal the Immigration Minister’s decision to deport him.

The court didn’t even bother hearing why “Novax” thought he should stay, because “It is no part of the function of the court to decide upon the merits or wisdom of the decision.”

Essentially the Immigration Minister has the power to kick a foreign national out and that’s exactly what happened, end of story. Djokovic will now be banned from entering Australia for three years, meaning no more Aussie Open and no more Grand Slam attempts for the Serb.

To think, all of this drama could have been avoided with one little needle… (Johnson & Johnson, two for all the others).

Moving on, Health Minister Greg Hunt said “there are signs that NSW in particular and the ACT may be peaking”, and that “all of these jurisdictions have so far significantly undershot the hospitalisation, ICU and ventilation predictions that were made at the outset”.

Great news, which also happens to correlate neatly with how we expected the Omicron outbreak to go.


Reading the tea leaves

Daily % change

AUD/USD

72.8

-0.1%

AUD/CNY

4.62

-0.2%

AU Bond

1.87

+3.4%

US Bond

1.77

+3.6%

ASX200

7,394

-1.1%

S&P500

4,663

-0.3%

Brent (bbl)

86.3

+2.9%

Gold (oz)

1,817

-0.2%

Iron ore (t)

126.7

-1.1%

Bitcoin

43,024

-0.4%

Ethereum

3,331

0.0%

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.

The US S&P500 inched up 0.08% on Friday to finish lower for the second straight week, the first time it has done so since the WHO declared the Omicron variant a concern last year.

Several events likely took a toll on company valuations, including the biggest drop in nominal retail sales for 10 months (-1.9%) in December, an unexpected -0.1% fall in industrial production in the same month, a decline in consumer sentiment in January to the second lowest level in a decade, and a warning from JP Morgan – which fell -6.2% on Friday – that it expected “headwinds” of higher expenses and moderating revenue.

Locally the ASX200 closed down 1.08%, its biggest fall in over a week. Only utilities (+0.4%) finished in positive territory, with tech (-3.9%) smashed again. Afterpay – which is now a proxy for US parent Block – led the losses at -9.2% after US tech stocks crumbled the night before in the face of rising interest rates.


Food for thought

The RBA chart pack visualises how crazy it went on stimmy in 2020-21.
The RBA chart pack visualises how crazy it went on stimmy in 2020-21. Source

When will US interest rates rise? Writing in the AFR, Christopher Joye warned that it will happen “harder and faster” than many expect:

“Investors will have to resolve the cognitive dissonance of buying equities at record valuations on the Ponzi-like presumption of the low-rates-for-long meme juxtaposed against a US economy racked by the strongest inflation and wage pressures in decades, which scream out for higher interest rates."

Joyce laments the inaction at the US Federal Reserve (Fed), arguing that given how those very same central bankers responded to similar economic conditions only 3-4 years ago, “the Fed should be hiking in January and move in 50 basis point increments”.

By waiting until March, the Fed “will only entrench the budding wage/price spiral”.

We tend to agree, and would argue that the Reserve Bank of Australia (RBA) is being equally foolhardy by publicly claiming it would not hike rates until 2024, then 2023, then transitioning to the conclusion that “the condition for an increase in the cash rate will not be met next year [2022]”.

But just because the official data are only showing a 3.0% (September quarter 2021) increase in consumer prices doesn’t mean they aren’t already rising well above that – the RBA is making bold policy statements based on data that are currently 4-7 months out of date!

Given what is happening elsewhere in the world (and anecdotally in Australia), surely the balance of risk has well and truly shifted to limiting consumer and asset price inflation, the latter of which in particular has exploded?

That’s certainly the stance that the more sensible central banks appear to be taking, for example in New Zealand or more recently Korea, where the Bank of Korea (BoK) on Friday increased its benchmark rate by 25 basis points for the second straight month, bringing it back to the pre-pandemic level of 1.25%.

But would the BoK have hiked rates if it was using the same outdated data as Australia? Inflation in South Korea averaged 2.5% in the September quarter 2021, compared to a higher 3.0% in Australia.

It was only in October – the Korean government publishes inflation data on a monthly, not quarterly, basis – that BoK was able to observe a rapid increase in consumer prices, which shot up to an average of 3.6% in the December quarter.

The same spike in prices may well have happened in Australia and we just don’t know it yet. If it has and the RBA is forced to withdraw monetary stimulus sooner than it predicted (but still too late, mind you), it will, as Joyce notes, “put more downward pressure on long duration asset valuations, including listed equities, private equity, venture capital, crypto, property and fixed-rate bonds”.


Bits and bytes

🏡 No rate hikes until 2023-24? Suuure. The value of new loan commitments for housing in Australia increased by 6.3% from the prior month in November 2021, driven by a 7.6% rise in owner-occupier loans, the average size of which hit an all-time high $A596,000.

🍛 A Chinese woman went on a blind dinner date only for the government to lock down the entire city, leaving her trapped there “for days”.

⚡ Next Elon Musk will ask for Teslas to be fitted with flamethrowers. FedEx is asking federal regulators for permission to install a “laser-based missile-defence system” in its cargo jets.

🤡 Speaking of Tesla, it delayed initial production of its controversial Cybertruck until early 2023.

🏴‍☠️ The US government accused Russia of “fabricating a pretext” to invade its neighbour Ukraine, with 100,000 Russian troops now stationed on its borders with Ukraine.

🚢 What supply chain issues? China’s annual trade surplus reached an all-time high of $US676.4bn in 2021, 29.9% higher than in 2020.

👘 Japanflation incoming? Clothing retailer Uniqlo will raise prices in Japan “due to higher costs for raw materials and shipping”.

⚱️ Australia won the fifth and final Ashes test to take the series 4-0 after an English batting collapse for the ages, with the poms crumbling from 1-82 to all out for 124.

🦗 Virat Kohli quit as captain of the Indian cricket team following a series-defeat against a second-string South Africa.

🌋 A massive underwater volcano erupted off Tonga, causing a devastating tsunami to hit the island and warnings issued across the Pacific, including on the east coast of Australia. Satellites captured the epic eruption on film.

💃 The top-earning TikTok star made $US17.5 million last year for “posting videos of herself dancing”, making money from adverts, a clothing line and promoting products in videos.

💉 Health Minister Greg Hunt said a decision on the Novavax vaccine – aka “Nevervax” given the lack of approval – is expected by the TGA “in the coming 10 days”.

🍎 Apple now requires all store and corporate employees to get a COVID-19 booster shot within four weeks of becoming eligible, or be subject to regular rapid antigen tests before entering the workplace.