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Wikipedia teaches us that ‘Moving the goalposts’ is a metaphor, derived from goal-based sports, that means to change the rule or criterion of a process or competition while it is still in progress, in such a way that the new goal offers one side an advantage or disadvantage.
The pandemic has caused multiple disturbances across what used to be a set of conditions that behaved fairly stably, predictably and comfortably for most. We reflect on the shifting goalposts within demand-supply equations, monetary and fiscal policy endgames.
Demand-supply disruption is high and persistent across goods and services. Commodity markets literally climb a wall of worry as geopolitical risk and supply chain disruptions stretch timelines towards a certain equilibrium state. The disruption is broad-based impacting the energy, base metals and soft sectors alike. A perfect storm that involves constantly moving goalposts. The variation of outcomes across sell-side participants is extreme. The price of oil 12 months out goes from USD 185 at the high towards USD 75 at the low point. The skew is pointing higher. Demand-supply in housing markets gets disrupted because of material commodity price and volume (delivery times) uncertainty. Beyond the factual inflation pressure in construction costs, the buy versus rent decision still tilts in favour of buying. High inflation accelerates the desire of families to become house-owners instead of seeing indexed rents impact their disposable income. Europe stands out in this respect as long interest rates still sit well below historical averages. However, in the US, mortgage rates have climbed beyond that point and housing affordability might drop faster than elsewhere. Expectations for a return to pre-pandemic mortgage funding rates for first home buyers has been squashed. The fear of losing out leads to a scramble to fix monthly interest expenses at a rate that moves higher at light speed…that in itself is pushing mortgage costs ever higher. A new set of Dutch CPB (Central Planning Bureau) Global Trade numbers will be released on April 25. The previous set of numbers pointed to stalling global trade…Will Chinese COVID shut down and the war in Ukraine have increased downward pressure?
Monetary authorities are facing a brutal awakening. The debate around the required level of terminal policy rate levels is raging. The long-standing 2.5% level is getting contested, even by certain FED governors. Based on an estimate of real equilibrium US policy rate between 0.00% and 0.50%, we arrive at 2.5% nominal terminal rate the moment inflation holds at 2.00%. That 2.00% inflation target is becoming a far-fetched dream, as we notice both 5Y5Y US inflation swap rates pulling further away closing at 2.80% or the 5Y5Y inflation expectations as priced through US inflation linked bonds settling at 2.60%. The US Federal Reserve Common Inflation Expectations (CIE) Michigan Alternative rose towards 2.85%. This measure of inflation expectations is constructed using 21 inflation expectation indicators. The index includes expectations derived from households, firms, professional forecasters, and financial market participants (Include both “short horizon” inflation expectations, which are typically forecasts for the year ahead, and “long horizon” inflation expectations, which are typically forecasts made for some period over the subsequent 5 to 10 years). With all three of the above inflation gauges running well above 2.5%, one might understand the requirement to lift the terminal rate towards 3.00% or even 3.50%. That is not priced by markets today. Again, goalposts might be on the move. If markets test such pricing further, USD strength and potential US equity market stress will be ahead of us. Both will amplify the tightening of financial conditions. The variation across outcomes is widening.
The ECB is less unencumbered. The complexity of the EU and EMU architecture warrants a less aggressive stance. Fragmentation risk splitting paths between core and non-core long rates within the monetary union might increase systemic risk once again. Such a sword of Damocles is paralysing the strategic options available to the ECB.
Enter fiscal policy to the above mix of variables where we notice movements on goalposts. In the US, the Congressional Budget Office plainly reports on annual budget deficits averaging 5% beyond 2030. No complex rules are required in order to allow fiscal policy to propel or stabilise US consumer spending and US government and corporate investment behaviour. Within the European Monetary Union, the complexity in optimising fiscal policy is tantalizing. The COVID-19 crisis led to a triggering of the Stability and Growth Pact general escape clause (GEC) that saw member states abandoning the Maastricht fiscal framework. Desperate situations require desperate solutions and fiscal boundaries were abandoned. Today, the European Commission is working on a less complex governance framework around the Stability and Growth Pact. It is built on a debt anchor linked to an expenditure rule as operational indicator to guide Member States‘ fiscal policies. The current 1/20th rule that calls on EMU member states to reduce debt to GDP readings by 5% a year towards the 60% reference value seems too severe. Loosening towards a 3% rule might be opted for. An expenditure (inflation adjusted) growth rule will be calculated that allows more fiscal space. However, this rule is linked to the 2% inflation target as set by the ECB. Yet again, countries with lower debt to GDP ratio might get more fiscal room than countries that start from a high level and have to incur higher interest rate expenses.
You get the picture. Moving the goalposts on fiscal policy within the Eurozone remains complex. The better options are detected within the realm of renewed EU wide fiscal programs as the EU Next Generation plan that was released over the summer of 2020.
We went across many moving parts in the setting of a new global economic framework. Time will tell us. Time will bring guidance and wisdom. However, patience has been lost to the world of today. In particular financial markets are short of patience. Markets behave like a spoiled child. They want action now, in order to quell inflation, and they long for a pre-COVID world. The former will take time to normalise, and the latter becomes a distant memory. Time to face reality and focus on the benefits that a proper long term investment horizon will bring to the table.