BofA’s Ajay Kapur is “delighted”, thanks for asking.
Specifically, he’s “delighted that the consensus opinion has shifted our way”, where that means the world has finally come around to the reality that rate hikes and quantitative tightening simply aren’t tenable in the current environment.
Back in December, Kapur penned an urgent message, imploring central banks to “please reflate”.
Suffice to say it didn’t take long for policymakers to come around. Starting with Jerome Powell’s January 4 comments in Atlanta, central banks the world over embarked on a coordinated dovish pivot designed to head off a downturn, help offset the drag from ongoing trade frictions and rescue markets – not necessarily in that order.
Since then, we’ve seen cuts from the RBNZ, the RBA, the RBI and enhancements to forward guidance (plus additional promises of accommodation) from the ECB and the BoJ. Now, the Fed is on the verge of embarking on an easing cycle – or at least that’s the way the market is pricing things.
“For many quarters now, we have argued that expectations of rate hikes and QT were inexplicable, and the rate CUTs were needed, given almost ALL our indicators signaled weakness”, Kapur wrote, in a June 5 note.
But if the question is whether he thinks it’s enough that everyone now seemingly understands the risks and the purported necessity of more easing, the answer is no. He believes the read-through of the Huawei escalation and the antirust investigations of big tech in America are evidence to support several of the key themes found in recent editions of his “Inquirer” series. Those themes, atop the trade tensions and already gloomy macro outlook, are a noxious brew.
“The rubber-band of the global economy is very stretched”, he wrote in March. “We see a possibility of peak plutonomy, peak polarization, and potentially peak oligopoly leading to more unorthodox potential solutions being offered in addition to anti-Buybacks, anti-oligopoly and anti-big Tech sentiment”, he added, fleshing things out.
Since then, the US has opened antitrust probes into Amazon, Google and Facebook, while inequality and polarization continue to define the contours of the political discussion.
Kapur takes note of recent developments, but before he does, he warns that “the current combination of an inverted yield curve (10yr less 3m, and the six quarter forward 3m rates less current 3m rates) AND the 4% YoY contraction in the global real monetary base is a toxic combination for growth and risk assets.” He calls that “simultaneous combustion”.
As you can see from the chart header, Kapur believes the morphing of the trade war into a “tech war” and the renewed antitrust push stateside, will make an already bad situation worse.
“This cyclically vulnerable zone is now contending with a double blow – a broad trade/technology war AND an anti-trust thrust in the US”, he warns, adding that “global oligopolies have been a key part of lifting ROEs, and financing buybacks [but] those bull market pillars are now suspect.”
On Monday, Donald Trump underscored tech’s antitrust jitters – sort of. Although he stopped short of casting monopoly aspersions, he suggested the US might look at fining big tech, if only because purported “discrimination” has left the president with a bruised ego.
BofA’s Kapur goes on to point out that the percentage of countries with PMIs in expansion territory has fallen to the lowest since 2015.
The upshot of all this is that central banks (and, likely, fiscal policy, to the extent monetary policy ends up running out of ammo) will look up a year from now and find themselves much looser than they anticipated.
“We think policymakers will be a lot easier globally than they currently think, or the consensus projects”, Kapur writes. He then chides policymakers anew. “The quicker they understand the deflationary risks, the quicker the recovery in risk assets.”