We Will Now Find Out What Putin Does When It Is “Sovereign Russia” That Is Being Attacked

By Michael Every of Rabobank

Really Trussing Up

Yesterday saw stocks slump and key bond yields rise slightly, the US dollar remain on the back foot, and commodities –or at least oil– fail to go anywhere. We also got some market-moving events and statements: we just haven’t seen the matching moves happen yet.

Russia announced it will annex parts of Ukraine today. This will then introduce a global split between the likely small number of states that will recognise this decision, given the doors it opens to other contested borders being changed by force, and the entire western world, which will reject the move. Then we find out what Russia will do when it is “sovereign Russia” that is being attacked. Risk is unlikely to be on as a result, especially into a weekend.

Far from unrelated, the EU saw major developments in its energy crisis. Even if the Twitterfication of it might have been unfairly reductive, how about: “EU official: President of the EU Council Michel believes the EU needs to tackle high gas prices and electricity prices; it’s up to the experts to figure out the details.” Such royal hand-waving unlinked to how reality works is how we got into this mess in the first place. But things were figured out. Not, as former BOE Governor Carney said of the UK, a needed rush for nuclear power. Rather, Germany –where inflation hit 10.9%, and the government warned the energy crisis is becoming a broader social crisis– offered a EUR200bn “protective shield” to keep the price of electricity down.

That means massive state subsidies and debts; for years; with no energy rationing in place; as the country starts to run dreaded twin deficits; and as the ECB raises rates. Those Europeans talking about Schadenfreude looking at the UK should be aware that while Nos. 10 and 11 are acting like the Mad Hatter and March Hare at the Tea Party, Europe is also living in Wünderland.

In fact, it’s hard to make an argument that the EU is not risking becoming the UK with a lag. To hammer home the point, the ESRB regulators report the EU faces ‘severe risks’ to its financial system, with the Ukraine war possibly (only possibly?!) creating a combination of slow growth, falling prices, and market stress. I don’t think the dollar will be down, or the EUR up, for long.

Of course, the same is true for GBP. More so when Pill yesterday claimed the BOE did not intervene in the Gilts market to push yields lower (as 30-years collapsed 106bp!), and will not do QE or Yield Curve Control; and neither will it fund the government, or MMT. The only logical function left is a bailout: except that is supposed to be on Bagehot terms: “Lend without limit, to solvent firms, against good collateral, at high rates.” I didn’t see that – did you?

As if that was not enough UK “More Tea! More Tea!”, and as suggested earlier this week, PM Truss is now going to push for aggressive state spending cuts to show markets that she is serious about fiscal discipline. So, tax cuts for the rich remain and bankers’ bonuses are back, etc., but we will see huge real-terms declines in social spending across the board into a recession, and even on “geoliberalism” UK soft power like the BBC World Service. In the ultimate marketplace of ideas, democracy, Labour is now up between 17 and 33 points up in the polls, which would imply the Tories will be entirely wiped off the political map.

Following the lead of using Macron as a verb in Russian (“Macronit” meaning to talk a lot and then do nothing useful), yesterday saw market chatter of how “to Truss” or to “Truss up” might be used in idiomatic English. (“They really Trussed that up, didn’t they?”) All I would add is that it also works with a Germanic “Truß” – with a lag.  

Meanwhile, the Fed sent the message rates are going to keep rising regardless, even if we see a recession, that UK wobbles have as little to do with it as the UK claims its budget has to do with its wobbles, and whispers are that may include only a hairshirt “the discount window is available if you need it” Bagehot safety net ahead. This is revolutionary stuff for markets coddled with liquidity since Greenspan.

Are they Trussing up too? Larry Summers, who is being mentioned so often it surely cannot be a coincidence, is saying he sees the present backdrop looking like August 2007. Some think August 2008.

In either case, the PBOC is now leaning back towards bubbles again regardless, allowing nearly two dozen cities to lower mortgage rates for purchases of a primary property. The problem is that everyone can see that aside from a few hotspots, property is over-priced and over-supplied, and prices are going to fall anyway now the mania has faded – so why rush to buy? The other problem is that if the PBOC succeed, it means inflation for everyone else. The PMI reading of 50.1 today, up from 49.4, is neither here nor there, but the private Caixin PMI at 48.1 vs. 49.5 expected was there not here.

As Mexico just hiked rates 75bp to 9.25%, Bloomberg also notes the RBA faces an uphill battle to not be as hawkish as everyone else. (And does not note “because housing.”) It quotes there are “some lingering issues around credibility and communication,” which reminds me of the quip from Gandhi: “What do you think of Western civilisation?” “I think it would be a good idea.”

Of course, the BOJ is still doing its own sweet thing, boosting regular bond purchases this morning to try to cap upwards pressure on yields – which can only mean downwards pressure on JPY.

I would write more, but it’s been a hell of a week for me personally, and I am too Trussed up to do so. End of the month, end of the quarter, end of our tethers.