Rabobank: No Cucumbers

By Stefan Koopman, senior macro strategist at Rabobank

Schools in much of the Northern Hemisphere are gradually closing for the summer holidays and it won’t be long before it’s komkommertijd. This Dutch idiom, which translates literally into cucumber time, is used to express that very few important things happen during the period between mid-July and late August. These weeks used to be a particularly busy time for cucumber growers, while there wasn’t much work to do in many other fields, so cucumber time became associated with the lack of news, activities or events. Most media have jumped on this, tending to give it even a little more substance by publishing reports that would hardly have any news value outside of cucumber time.

The word also regularly shows up in the financial press or in analyst reports, indicating little action is happening in the markets. Don’t expect to see much of it this year, though, with equity, rates and FX volatility remaining at elevated levels. In particular in Europe, there literally and figuratively is no energy left for a silly season. In fact, French Finance minister Le Maire suggested on Sunday that a full stop of Russian gas inflows is now the most likely scenario. Consequentially, the French government is currently drawing up lists of regions, sectors and companies in order to determine which industries may be forced to reduce consumption and which are of enough vital importance to be prioritized. It may not take too long before tough decisions need to be made: the 10-day annual maintenance on the crucial Nord Stream 1 pipeline has just started and the fear is Moscow may find a couple of screws that can be tightened just a little bit further.

With input costs at sky-high levels, inventories of unsold stock rising, production levels falling and new orders plummeting, an additional dose of energy rationing will hollow out European manufacturing to levels only seen during the Covid lockdowns. Please tell me how exactly the ECB is going to achieve a ‘gradual but sustained path’ of further increases when large parts of the economy are either in a significant slowdown or in a deep recession? We expect to see more repricing of ECB policy expectations, in particular for 2023.

It’s not entirely surprising that selling the euro has been a popular macro trade as of late, but much of the move lower in EUR/USD is also reflective of dollar strength. The greenback remains caught between two competing narratives, but still looks well positioned in both: there is uncertainty about the significant slowdown in the global industrial production cycle, with demand for services being simultaneously under pressure by high inflation, a sharp tightening of global financial conditions, and renewed covid lockdowns in China. This spurs demand for safe assets, such as the dollar. On the other hand, Friday’s US employment report showed that some parts of the economy, and the labour market in particular, remains remarkably resilient whilst facing these recession risks. Non-farm payroll growth was a very solid 372k, which is the fourth consecutive time we’re seeing a number in the 300k’s, whilst the unemployment rate remained steady at 3.6% and average hourly earnings only slowly decelerated to a rate of 0.3% m/m and 5.1% y/y. 

Even as this month’s decline in commodity prices indicate inflation may have seen its peak (again…), these numbers should provide the Fed more than enough leeway to continue aggressively raising interest rates and to stamp out the tarry parts of inflation. We expect a 75 bps hike to 2.25-2.50% at the July 27 meeting; and following the strong payroll numbers, the market is now fully positioned for such a move. Even though Q2 GDP data, scheduled for July 28, may indicate only a day later that the US economy has been in a ‘fake recession’ in the first half of 2022, we expect the Fed’s aggressiveness could eventually tip the US economy into a ‘real recession’ in the second half of 2023.

Another victim of dollar strength and higher US yields is the yen, which currently flirts with the 137 level. This is its weakest since 1998. This morning the pair got an extra lift higher from Bank of Japan Governor Kuroda, even has he didn’t say more than what he always says: the Bank of Japan will not hesitate to add more monetary easing if that is necessary. On the political front, Japan’s ruling coalition has expanded its majority in the Upper House elections in the wake of the assassination of former PM Abe. This not only strengthens the mandate of PM Kishida, but also implies the Japanese people may not be as concerned about rising prices as feared. This could be taken as an endorsement of the Bank of Japan’s easy policy settings.