FOMC member Bullard said that while it was too early to start taking about changing policy, and he would leave it up to Chair Powell to initiate the discussion on tapering, once 75% to 80% of the population is vaccinated, “it will be time to start assessing where we want to go next.” He also noted that It will be difficult to interpret CPI data due to base effects as well as supply chain bottlenecks, with better comparisons to be made in the second half of this year. He was encouraged by the price increases to date, and would like to see market and survey-based inflation expectations rise further. He has no concerns over systemic risks.
Event Outlook
Australia: The March NAB business survey should continue to reflect the economic reopening, with the February print showing conditions at their highest level since mid-2018. Weekly Payroll Jobs and Wages for the week ended Mar 27 will provide a snapshot of the labour market before the end of the JobKeeper subsidy.
New Zealand: March is likely to have seen a dip in the Quarterly Survey of Business Opinion as New Zealand briefly returned to higher alert levels and the Government announced major interventions in the housing market. These changes are likely to be a drag on house prices and confidence. The survey’s pricing gauges will be worth watching, with supply disruptions and shortages of some goods pushing costs of production and output prices higher. Meanwhile, we expect a modest 0.2% fall in retail card spending in March. Earlier in the month, the Covid Alert level was dialled up for around 12 days. That will limit any lift in spending after February’s fall.
China: Surging exports should continue to support the March trade surplus (market f/c: USD 52bn).
Euro Area: The ZEW survey of expectations has recovered to pre-COVID levels, but extended lockdowns present a risk for the April read.
US: March NFIB small business optimism will be supported by the stimulus and the rapid pace of vaccinations (market f/c: 98.0). The March CPI is expected to print at 0.5%mth (2.5%yr), with further temporary increases over coming months.
Interesting comments from Bullard. My view is that the Fed is going to be forced to tighten long before the RBA. There are three reasons.
First, US growth, inflation and yield exceptionalism is being driven by pro-cyclical fiscal policy. BofA:
Political Business Cycle (PBC) models were a hot topic in the 1980s. In the standard”opportunist” PBC model, incumbent politicians have an incentive to stimulate the economy going into elections because the benefits–low unemployment and strong growth–materialize quickly, and the costs–high inflation–occur with a lag. This stimulus can come directly from fiscal policy or indirectly by pressuring the central bank to accommodate that fiscal easing. Moreover, most models assume that voters have relatively short“memories” and vote based only on recent economic news. A number of studies have confirmed the importance of recent economic news to election outcomes. These studies point to the Great Inflation of the 1970s as a prime example of the political business cycle in action.
That’s a little obtuse. This time around, capitalism itself needs support from a pro-cyclical fiscal pulse. That’s how to deliver the wage gains needed to offset the inequality killing capitalism via the rise of populists like Donald Trump.
Moreover, despite the coming US fiscal cliff that is the result of a strong fiscal pulse last year, more fiscal will support domestic demand such that there is a rise in private investment. Also BofA:
We believe the failure to generate a capex recovery in the last cycle owes in large part to a persistently high level of uncertainty. Corporate America had to deal with a highly unpredictable global environment early in the cycle with debt sustainability issues in Europe which was followed by gridlock in DC under the Obama Administration and a trade war under the Trump Administration. Meanwhile household sector was deleveraging and the banking sector was undergoing a regulatory overhaul which threatened to limit the availability of credit. There are reasons for uncertainty today as well—potential changes to taxes, behavioral changes post COVID and evolution in global trade. But corporates can feel much more certain about the strength of the household balance sheet and the health of the banking sector. Our equity strategists are also growing bullish on the capex cycle: their capex guidance ratio has recently recovered from its lows, and the Business Roundtable CEO survey is signaling strong capex growth, which tends to lead S&P500 capex growth.
The key to a lacklustre capex cycle in the last cycle was weak domestic demand, in part owing to weak wages and fiscal policy. This time, there is no such roadblock.
So, these two drivers will amount to ongoing US growth exceptionalism for years to come and a strong DXY. I have been musing for a few weeks about whether or not the slowing US fiscal impulse later this year might coincide with a European opening to produce a counter-trend rally for a while. That remains possible given Europe will also fly out of lockdown when its vaccine program finally catches up.
But that danger is offset by the third force coming to bear on the RBA before long. China is hitting the brakes as it seeks to address its own structural problems while the global economy is so strong. Credit is slowing fast and growth will following the H2 this year, with even more slowing in 2022.
That means this, via Goldman:
A range of measures show that China’s short-term real rates are elevated by historical standards. Current levels of short-term real rates appear to be in line with or above China’s neutral rate, although there is significant uncertainty associated with the neutral rate estimates. With policy rates likely on hold and inflation poised to increase in the coming quarters, we think there is room for short-term real rates to fall in China.
As China slows its interest rates will come off and CNY is going to fall. This tends to weigh more heavily on the export-dependent Eurozone and EUR than it does the more domestically-focussed US.
The question posed in the post title – is the Australian dollar a proxy for America, Europe or China – is answered by the observation that it is all three. But the weight of each varies heavily from cycle to cycle. The last two cycles have been characterised by weak US and European demand and a strong Chinese economy both through its external and domestic investment sectors.
The coming cycle is the reverse. US demand will be strong and investment high. Europe will be the same old laggard. And China will see fading demand growth as it restructures.
The sum of this is still decent growth for the global economy but the mix is much less favourable to the Australian dollar than previous cycles because commodities and EMs will suffer once past the reopening boom.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
