The fall in oil and gold prices combined seems to point to a drop in risk aversion

Outlook: The rise in yields in most places and the fall in oil and gold prices combined seems to point to a drop in risk aversion. The ruble is up and the yuan is down. We can’t find a single reason for risk sentiment to be reduced. The price of war is high and should be getting priced in.

This week is full of economic data goodies, including China’s IPI, retail sales and real fixed investment overnight. Tomorrow it’s the UK labor market and Germany’s ZEW. Wednesday it’s US retail sales and the Fed. Thursday brings eurozone inflation and the Bank of England. Friday is Canadian retail sales.

Chatter and rumbles about the Fed has cooled down. Everyone seems to accept that it will be a 25 bp hike and plenty of rhetoric about keeping options open. Tomorrow’s PPI may well be the proverbial monkey wrench in that presentation. Also on Wednesday we get the new quarterly economic projections and dot plot of expected rate hikes, with some talking about front-loading hikes because a slowdown later on this year seems inevitable–better to get it in fast. There might become talk about a new “neutral” rate. Obviously 2% is not it anymore.

What about contracting the balance sheet? Bonds start maturing and rolling off in May/June, and will not be replaced, but some analysts expect the Fed to engage in outright sales of mortgage-backeds.

In a quiet morning, Bloomberg says we need to consider whether the Ukraine crisis will prod the US president to invoke the Defense Production Act to increase domestic crude production as the prices for consumers surge. The price of gasoline now averages $4.30 nationwide, with those fruitcakes in California going to $8-9. See the chart from the St. Louis Fed. This is pretty bad, but not unprecedented. The problem is politicians blaming it all on Russia when it’s a far bigger and more complicated story.

And in addition to drops in the price of oil today, just about everything else in the commodity world is lower, too. See the table from TradingEconomics. This is almost certainly temporary. Gird your loins.

Demographic Insight: The WSJ ran a story last week on the views of economist Charles Goodhart, author of The Great Demographic Reversal (Sept 2020). Goodhart was a member of the Monetary Policy Committee of the Bank of England and the hand behind Thatcher’s monetarist policies. But now monetarism is giving way to demographics. Instead of too much money supply driving inflation, from now on it will be labor shortages and all that implies.

Here is the nut: “He argued that the low inflation since the 1990s wasn’t so much the result of astute central-bank policies, but rather the addition of hundreds of millions of inexpensive Chinese and Eastern European workers to the globalized economy, a demographic dividend that pushed down wages and the prices of products they exported to rich countries. Together with new female workers and the large baby-boomer generation, the labor force supplying advanced economies more than doubled between 1991 and 2018.

“Now, he said, the working-age population has started shrinking across advanced economies for the first time since World War II, and birthrates have declined as well. China’s working-age population is expected to shrink by almost one-fifth over the next 30 years.

“As labor becomes more scarce, he maintained, workers will push for higher wages, in turn driving up prices. At the same time, businesses will manufacture and invest more locally to help offset both labor shortages and the nationalist and geopolitical pressures curbing globalized supply chains. That will increase production costs and local workers’ bargaining power. Global savings will fall as older people consume more than they produce, spending particularly on healthcare. All that will push up interest rates, he predicted.”

But while governments and even some central bankers are listening, we seem not to be able to match up rates and inflation.

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