Kouk panic: Rate hikes coming!

The Kouk windvane is back:

For the first time in many years, central bankers and global investors are witnessing a material pick-up in inflation.

Despite the evidence, which shows inflation lifting to levels well above target, the reaction of central bankers and investors has so far been muted.

…Bond markets, which inevitably move well before central bankers, have seen yields jump in anticipation of the inflation/interest rate hike dynamics. The moves are relatively contained at this stage, but clever investors are looking for a further sell-off in bond yields once the penny drops more widely that inflation is accelerating.

In Australia, the RBA has largely dismissed these pressures signalling that, on its assessment, inflation will remain low and it will not be required to hike interest rates until 2024, at the earliest.

Markets are ignoring this guidance, with the start of the interest rate hiking cycle starting to be priced in to the later part of 2022, just 12 months from now, and around two years before the RBA reckons it will need to move.

…The market is pricing in a 0.5 per cent cash rate by the middle of 2023, 1.0 per cent by the end of 2023 and with further increases through 2024.

I don’t think so. The current back-up in global yields is driven by:

  • US inflation pressures of which we have little.
  • A global energy shock that is very short-term.
  • A tiring reflation cycle.

Now, you could argue that these things will lead to stagflation, not a burst of deflation in which case rates will rise even as growth falls but that seems to me to be a longbow still.

The fact is, we are at the end not the start of COVID stimulus:

  • US growth is falling fast.
  • Inflation is nearly all supply-side based which central banks can’t address and is going to deflate by itself over time anyway.
  • China is in a virtual recession on the property and energy shocks.
  • There’s energy panic in coal and gas that will collapse in the months ahead, taking down much of the commodities complex with it.

Sure, we’ll get some more US and European public investment and there is a tail of high savings to spend. And I’m not arguing some global recession is imminent. But the fiscal and monetary impulse is already tanking and global goods output is next:

Followed by a commodities bust made spectacular by the bursting energy bubble:

And there goes your inflation and rate hikes, Kouk:

In Australia, we can add macroprudential tightening and the return of slave labour to the mix.

My view remains that the RBA will be printing MOAR before it ever hikes rates.

Houses and Holes
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      • Jumping jack flash

        Earth-directed CME last week, and an earth-facing coronal hole before that may or may not have triggered the Melbourne earthquake… It certainly seemed to be similar solar weather pattern to when Japan had the tidal wave that took out that reactor back in 2010.

        (There is a recent paper that claims a definitive link between solar activity and earthquakes.)

  1. You’re right, slave labour to the rescue. The punters will come around once their illusionary “house wealth” drops.

    • Jumping jack flash

      No no.. slave labour will not solve anything it will just exacerbate the problem. We desperately need inflation and lots of it. Slave labour suppresses it. It was the flawed strategy implemented since Howard dreamed up Workchoices to suppress inflation so banks wouldn’t raise interest rates.

      The spectre of banks raising interest rates has long been fixed, but inflation suppression remains strong.

      • Don’t call yourself a bludget DLS 🙂
        I happen to agree with you also – they will continue to look through inflation, its supply side mainly, fiscal stimulus has mostly subsided, throw in China and there ain’t lasting inflation ’round ere’…

  2. So what I am not understanding is, RBA has an inflation target and a mandate for the economic prosperity and wellbeing of Australians. What if a low inflation target suits the wellbeing of Australians through low rates being capitalised into homeowners equity? So in that case, is RBA targeting a higher inflation rate than now or a lower one?

    • Even StevenMEMBER

      Low inflation and low interest rates will tend to be most supportive of asset prices.

      The fundamental premise is that low interest rates makes the hurdle rate for new investments lower, thereby encouraging borrowing, economic activity, employment etc.

      In practice, it blows asset bubbles.

  3. Jumping jack flash

    Rate hikes depends on substantial wages growth occurring in the US and UK – the places where our banks get most of our debt from.

    If US and UK wages start to grow enough as a result of this global inflation wave coupled with their unprecedented [COVID] stimulus, then those banks will be able to safely raise their rates – which are embarrassingly low and banks would surely love to raise them off the floor, even just to a low 1.5 or 2%, and declare victory over the last decade of debt deflation.

    But if wages do not rise enough then it would make absolutely no sense for banks to raise rates, and they would instead need to continue with all those shenanigans where the governments essentially pay the banks a portion of their expected interest take so banks keep their rates below what they feel comfortable with.

    Who knows what will happen? It will be fascinating in any case.

    All I do know is that Australia surely missed the mark with our imbecilic leaders and their poor excuse for [COVID] stimulus. It was nowhere near the level of “unprecedented” and much of it was handed back, or just disappeared into the aether, certainly not spent on consumption and higher consumer prices as it should have been.

    • What’s the magic wage inflation number?

      It would make sense for the wage inflation being necessary given all the private debt being allowed and taken on but I don’t think that’s coming for most.

      Maybe the responses to crises made sense until recently but I do wonder how the next will be viewed. Agree were in for some interesting times especially where our leaders across the board are trying to take the path of least pain and resistance.

  4. Definitely wage rises in my industry. Mum said QA testers leaving in droves for double the pay. I know IT developers (at least 4 of them) in our company that have left for a near 80 – 100% pay rise in the last 3 months. I don’t understand why those wage rises arent showing up in the any number… Is this only a particular industry and thus, does not really show up in averages?

    • You’re in IT yeah, you do realise where most of the work has been moving to in the last 25 years and also the status on the international border closure for most part? Anyway that phenomenon will disappear soon if our leaders get their way. Actually it’ll happen

      • I agree, but some industries work on like 2 yr contracts, not your casual contract type… It aint quick to unwind those and 2 yrs is a while for price increases to subside. Which, the 4 devs anyway, they were 2yr contracts.
        Neverthless they ARE going up, as opposed to RBA’s “eyes closed but saying – where I cant see any increases..”

        • Wages are going up in my industry, and anecdotally in many others. I work internationally so immigration doesnt personally effect my wages. They will open the floodgates so Australian wages might not go up, however we will get hit by imported inflation. Fuel, food will go up as Australians compete with the export market. Dont worry wages wont be going up though!
          I think the real question is how much inflation the RBA will politically be able to look through, especially if the dollar starts turning on US rate rises.
          We all know the real estate complex comes first and theres no way we are gonna do an Ireland, Australian will be feeling real pain from inflation before the RBA tries to do anything about it
          Dave is likely gonna be right although i dont agree with his reasoning.

        • I’m assuming banking etc regarding 2 years. If people are coming out of a contract and can get a better rate, good on them. But that’s the nature of contracting As for the Devs, who knows how much they were originally on and where they’re from. 80% may seem like a lot but maybe is more in line with the upper going rate.

  5. 7 years of oil and gas development below replacement levels,
    Situation in coal is likely worse.
    Many were forecasting a shortfall in fossil fuel supplies around 23/24 well before covid.
    High energy prices = inflation

  6. Even StevenMEMBER

    I disagree with MB position on this one (although it’s not high conviction, more an ‘on balance’ view). I think inflation is on the way up. The cheap deflationary injection we’ve had from China industrialising is slowing. Money printing is here to stay until the inflation numbers are such they have to stop. Whilst asset values are the predominant recipient of money printing, it will also feed through to CPI inflation. Some sort of inflationary (CPI) overshoot seems likely over next few years.

  7. I agree.
    Loads of boomers will not be returning to work after seeing their super benefits and IP values skyrocketing.
    I noticed the commute home took an extra 15 minutes. Work? Who needs it?