Peace In Our Time? Don’t Count On It

By Benjamin Picton, Senior Market Strategist at Rabobank

US equities closed mixed on Thursday, despite solid leads from European markets where all of the major indices closed higher. Bond yields were mostly higher with US 10s pushing up 3.5bps to 4.09% and the 2-year yield lifting by almost 4bps to 3.52%. There was notable price action in the Aussie market where 2-year yields rose by 7.5bps to 3.98% after the Wall Street Journal reported that a number of local banks are considering updating their forecasts to project an RBA rate hike as early as February. 

The rate hike chatter down under has been egged-on by a run of higher-than-expected inflation, strong household consumption figures and a lift in activity in Australia’s invincible housing market since the RBA began cutting interest rates back in February. A weaker-than-expected Q3 GDP result that showed growth of 0.4% in the quarter – compared to estimates of 0.7% – wasn’t enough to derail the push higher in yields as commentators pointed out that domestic final demand was strong and that the growth miss was largely attributable to a drawdown in inventories by mining companies. 

We’re a little more circumspect on the prospect for hikes early next year in Aussie. The latest GDP figures confirmed that year-on-year productivity growth (as measured by GDP per hour worked) rose from 0.2% in Q2 to 0.8% in Q3, which raises the prospect that productivity growth might exceed the RBA’s 0.9% year-end forecast and thereby imply a higher potential growth rate for the economy. Similarly, the household savings ratio was upgraded substantially to levels that now exceed those observed in pre-Covid times and substantially exceed the RBA’s projections issued last month. That suggests that the intertemporal rate of substitution was more skewed towards saving (rather than spending) than the RBA thought, and implies that monetary policy may have been more restrictive than thought. That’s as growth gross national expenditure remains in-line with the RBA forecasts, the labour market continues to soften, Aussie equities underperform global peers and growth in rents continues to moderate.

If all of that isn’t reason enough to be skeptical of a February rate hike, the trade-weighted AUD already exceeds RBA forecasts even as the US Fed looks poised to cut rates next week, the JPY remains in a weakening trend and the PBOC begins fixing the CNY weaker than estimates. A February rate hike course reversal from one of the most notoriously staid central banks while all of that is going on? The 2-year yield might say yes, but don’t count on it.

While Australia navel-gazes over local issues, the economic picture elsewhere seems to be deteriorating. As noted yesterday, the US ADP employment survey for November was a miss, recording a loss of 32,000 jobs. Similarly, the Challenger job cuts figures released overnight show that in the year to November this year has seen more job losses than any non-recession year except 2002. The UK construction PMI printed at an abysmal 39.4 to follow Canada’s dreadful services PMI of 44.3 and a decent drop in US capacity utilization reported the day before that makes today’s PCE inflation release all the more interesting.

One bright spot seems to be US weekly jobless claims, where the number of new claimants fell to just 191,000 and the four-week average fell by approximately 10,000 to 215,000 – the lowest level since January. So, more job cuts but less claimants. Can we chalk that dynamic up to the activities of ICE? Axios today reports that daily arrests are surging, and the Wall Street Journal reports that the Trump administration is preparing to further tighten controls over the work rights of legal immigrants. Fewer jobless claims despite fewer jobs does seem to suggest a shrinking labor pool.

In geopolitical news the FT reports that French President Macron has warned of a risk of the “disintegration of the international order” following a meeting with Xi Jinping. Such revelations will not be news to regular readers of this missive – we have been warning of this since 2016 at least, but European politicians have been a little slow to catch on. President Xi, who has repeatedly criticized the international order as a US-led order that is too Western-centric and marginalizes the global South, encouraged Macron to “hold high the banner of multilateralism” as the two sides made all the right noises on mutual investment.

The kind of multilateralism that Xi has in mind is an important point to consider. Is Xi talking about an idealistic evolution of the United Nations where more power is given to the developing world but disputes are resolved via dialogue? Or is he talking about ending US hegemony to carve the world up into spheres of influence for regional great powers to preside over? Xi’s reluctance to get involved in brokering a peace deal in Ukraine and recent naval deployments in the wake of a diplomatic spat with Japan will make many nervous that it is the latter.

A spheres of influence paradigm is certainly favorable in the eyes of Vladimir Putin. He has reportedly rejected the latest peace overtures from US special envoy Witkoff and told India Today that Ukrainian troops will either leave the Donbas region or Russia will “liberate these territories by force”. Kremlin officials have reportedly told journalists that a peace deal remains a long way off. The Wall Street Journal editorial today says “maybe it is time to conclude that Mr. Putin doesn’t want peace” while arguing that Putin has no incentive to negotiate in good faith while he feels that he is winning.

So, peace in our time? Don’t count on it.