Daily Commentary

MarketMinder’s View: This piece is illustrative of a firestorm of overthinking and extrapolation afoot Down Under after the Reserve Bank of Australia (RBA) hiked interest rates by 0.25 percentage point overnight in response to the Consumer Price Index (CPI) ticking up to 3.8% y/y in December (or 3.6% y/y in Q4, if you prefer the more established quarterly CPI, data from FactSet). This article operates on the presumption that inflation stems from low unemployment and an economy that is running too hot, breaching potential GDP (the maximum rate economists estimate it can grow without throwing off inflation). This isn’t because the economy is really growing that fast, though. It argues this is because productivity is poor, hence the article focuses on the Labor government’s forthcoming May Budget and the Australian Productivity Commission, claiming austerity and government plans to boost productivity are required to forestall another round of rate hikes, which flow through pretty fast to households, given floating-rate mortgages’ prevalence in Australia. But slow down! Potential GDP and productivity are squishy and debatable econometrics, ones economists themselves fail to define, measure and track. Yes, inflation is running above the RBA’s 2% – 3% target range. So in a sense that would justify tightening policy, which the RBA cited (along with weak productivity and low unemployment). But that could easily reverse and prove a mere wobble. Beyond that, all those factors are backward looking. M3 money supply rose just 4% y/y in December, a historically tame rate (per the RBA). Inflation is always and everywhere a monetary phenomenon, so this suggests the forward-looking tinder for an inflation fire is lacking, regardless of what the government does with the Budget, which really doesn’t matter all that much to inflation. So we need to cool on extrapolating rates’ path from here based on such grandiose speculation. Obviously, we have no idea where rates will head. But neither does the RBA, Australian Treasurer Jim Chalmers or any pundits cited here. You can’t forecast central bankers’ actions, which are subject to human bias and whim. You must judge decisions after they are taken. While the logic behind this hike seems a little off to us, it doesn’t seem like a major mistake at this point.

MarketMinder’s View: We award this article one point for its discussion of the economy’s decentralized, complex nature—and the fact assessing and forecasting it isn’t an if-then exercise. And yes, a couple of often useful gauges of oncoming or ongoing recession—the yield curve and Sahm Rule—did deliver false reads over the past few years. (Note: Neither of those are firing today.) That doesn’t mean they are broken. The yield curve is the best of these, and it really only predicts because of how it influences banks, which borrow short term to lend long. When it is steep, interest revenue exceeds costs nicely, encouraging lending. When inverted, the reverse. But when the curve inverted in 2022 and 2023 tied partly to fed-funds rate hikes, banks were awash in deposits from COVID stimulus, so their funding costs remained below fed funds. As for the other indicators? Consumer confidence gauges show little history of predicting behavior of any kind, and consumer spending isn’t a huge swing factor for the economy. Big as it is, most spending is on essentials and services, which don’t fluctuate much. Furthermore, we would note the discussion of business investment here is a little off considering it cooled pretty markedly in Q3’s GDP report (and has sequentially the last two quarters, per Bureau of Economic Analysis data). Now, we agree to an extent that uncertainty has been high, and that slowdown could reflect that. But for stocks, you have to consider all of this differently. You have to compare them to expectations. Hence, you don’t need to pin stocks’ rise on irrational exuberance over AI, as this does. You can just see reality for what it is: Tariffs didn’t bite nearly as hard as feared last year, a positive surprise. Economic data turned out to show growth, another positive surprise. Worldwide, nations struck deals freeing trade with each other and cutting the impact of US tariffs. Positive surprise. We think that is what matters for stocks.

MarketMinder’s View: This article features one sensible stretch detailing trade deals struck between the EU and India, and a brief discussion of a similar deal between the EU and South America’s Mercosur nations, which notes that countries have largely responded to US tariffs by freeing trade more—a trend that extends far beyond these two deals. But surrounding it is a discussion of politics (so a reminder: We favor no politician nor any political party) that largely presumes things like the dollar’s decline indicate foreign central banks are “dumping dollars and buying gold,” largely because of tariffs, which has pushed “… down the value of the dollar, long the currency of choice for global commerce, to its lowest level since 2022 last week versus several competing currencies.” While we agree tariffs are an economic negative—mostly for the US—and that uncertainty over the state of deals President Donald Trump has struck is unhelpful, the “sell America” theory this advances has some holes. Take the dollar’s level. Yes, it is roughly where it was at points in 2022 against a trade-weighted currency basket. Thing is, that isn’t a weak level—it’s roughly the average over the past 40 years. On interest rates, which this claims will rise as foreigners flee, consider: Benchmark US 10-year Treasury yields are presently 4.27%, down from one year ago—before most tariff announcements and only days into Trump’s second term. Shorter-term notes are all down, too. Longer term? 20-year yields are flat. 30-year rates are up, but from 4.76% to 4.90%, which isn’t significant. (Data from FactSet.) “Sell America” is a fun narrative, but it runs aground when you even consult a few basic facts.