Daily Commentary

MarketMinder’s View: Here is an interesting development: A supertanker owned by a Japanese oil wholesaler (and sailing under the Panamanian flag) successfully crossed the Strait of Hormuz with 2 million barrels onboard, and according to the Japanese government sources quoted here, it didn’t have to pay Tehran’s mooted toll. “According to the report, the tanker had been anchored off the coast of the United Arab Emirates for more than a week before it began sailing through the strait on Monday night. It had reportedly loaded crude oil in Saudi Arabia in early March.” This shows us a couple of things that are worthwhile from a supply standpoint even if the oil now in transit is merely one day’s worth of Japanese consumption. One, given the tanker loaded in March, after conflict broke out and when uncertainty was highest, it seems oil activity in the region hasn’t stopped. Two, the situation in the Strait appears to be more complex than simplistic headlines and soundbites imply. It may be hard for individual people to see through the fog of war, but markets are pretty good at sussing these things out.

MarketMinder’s View: This article bills the titular event as a “potent symbol of the fiscal stresses on the U.S.,” but we find it nothing of the sort. Why? Because Uncle Sam doesn’t service his debts using GDP. Scaling America’s debt load with its economic output—the debt-to-GDP ratio—compares apples to oranges or maybe even squirrels. Instead, assess creditworthiness like bond buyers do. Ask: How likely is a borrower to cover their debt payments? For that, it is best to consider whether their incoming cash flow covers interest costs. Per the Treasury, US federal receipts (mainly tax revenue) regularly exceed interest outlays by over five times. America can easily service its debt—which is why global investors (with the most to lose) routinely buy more and, per FactSet, 10-year Treasury yields at 4.4% today remain below their 5.9% average since 1970 (with inflation tame). Or look at it from another perspective: If debt-to-GDP mattered, would Japan be able to borrow at 2.5% for 10-year maturities—their current yield, per FactSet—with its government debt 2.4 times the size of its GDP (per the IMF)?

MarketMinder’s View: The Bank of England (BoE) voted 8-1 so stand pat today, with economist Huw Pill the lone dissenter preferring a quarter-point hike. This article is a good recap of policymakers’ reasoning and reports, which indicate to us they made a wise decision for some wrong reasons. We guess that doesn’t totally matter for now, but it indicates flaws in the Bank’s thinking that could lead to errors later. Positively, it seems policymakers weren’t tempted to hike rates in direct response to higher energy costs, conceding monetary policy is powerless to solve. Right-o! Energy prices are set globally, and rate hikes can’t increase supply or solve transit bottlenecks. That happens more gradually and, again, globally, as producers adapt. Where we think the BoE runs aground is in its analysis of the second-order effects, the risk of higher energy and petrochemical feedstock prices filtering through to broader consumer goods and services prices. It determines this risk is minimal for now, which we agree with, but it cites a weak economy where firms have no pricing power and workers don’t have the clout to secure the wage hikes it deems necessary to drive broader inflation. It also draws a contrast between now and 2022, when energy prices’ spike coincided with hot inflation: “‘Relative to the previous energy shock of 2022 [after the start of the Russian-Ukrainian war], currents events were occurring from a starting point of lower inflation, weaker demand, a looser labour market, and a restrictive monetary policy,’ the Bank said.” So what is the problem with all of this? One, we have decades of data showing wage growth follows inflation—it doesn’t lead it. Wages were slow to catch up after 2022, then slowed well after inflation rates eased. Two, you can’t logically compare economic growth rates now with early 2022, considering the UK was still rebounding from COVID lockdowns at that point, with a depressed base skewing growth rates higher. Three, while money supply is indeed growing more slowly now than it was before 2022, today’s monetary environment doesn’t look restrictive to us. UK money supply grows at healthy prepandemic rates, and the yield curve is nice and steep. All this points to the UK economy likely growing better than expected. But without surging inflation, because of the aforementioned tame money supply growth. Absent surging money supply, higher costs force households to make substitutions, curbing demand for other goods and services and counterbalancing the price pressures from higher input costs.