Banananomics: Opportunities From Wounded Economic Conditions

Opportunities From Wounded Economic Conditions

If re-elected as President of the United States, Donald Trump will impose a tariff of at least ten percent on all goods entering the country.

Inputs that matter: The Bank of England kept its key interest rate unchanged at a 16-year high but indicated that it is on course to cut rates over the coming months alongside its European peers, and possibly as early as June.

• The Central Bank left its key rate at 5.25% but indicated it could lower it in the coming months.

• The Monetary Policy Committee (MPC) of the Bank has been right to point out that several factors have contributed to the U.K.'s recent high inflation, including Russia's invasion of Ukraine and disruption to supply chains caused by the pandemic.

The opportunity: Critics argue that if the Bank had been paying proper attention to the warning signs, it would have changed course months ago and started to cut interest rates, not causing so much damage to the economy.

• The MPC finally decided to act by increasing interest rates and undertaking Quantitative Tightening, which has worked.

• While this is good news, it has also contributed to the U.K. economy entering recession and exacerbated stagnant growth, which continues to hit living standards, make it harder for households and firms to borrow, and jeopardize people's jobs.

• On Thursday, Bank of England Governor Andrew Bailey played down any political pressure his institution received, confirming that a rate cut immediately before a General Election wouldn't be out of the question.

Zoom in: The Organization for Economic Cooperation and Development (OECD) updated its global outlook last week. 

• It increased its 2024 global growth forecast to 3.1% (up from 2.9% in its previous forecast back in February) and its 2025 forecast to 3.2% (up from its last forecast of 3%).

Between the lines: At its meeting on May 1, the U.S. Fed noted the lack of progress on the disinflation front in the last several months but indicated that it would be patient. It also pointed to the incredible progress made on the disinflationary front in the past year.

• When asked about the possibility of a rate hike, Fed Chair Powell dismissed it, describing it as unlikely. 

• And when asked if the U.S. is in a stagflationary environment, Powell was emphatic that it isn't. 

• Finally, the Fed also said it would slow down the level of its balance sheet reduction.

Follow the money: That was followed by a U.S. jobs report that offered an even more vital sign of a cooling labor market, strengthening the case for a rate cut. 

• Non-farm payrolls were far below expectations at 175,000 jobs added in April.

• The 2-year U.S. Treasury yield moved significantly over the week, falling from an early peak above 5% to finishing at 4.8%.

Saudi Arabia's Shameless Perspective On 2030

Saudi forces have forced as many as 6,000 people out of their homes to make way for the kingdom's planned city, shooting anyone who tried to resist eviction.

Inputs that matter: Crown Prince Mohammed bin Salman has described the area as a "blank canvas," perfect for realizing Saudi Arabia's vision of a planned high-tech city called The Line, but a BBC investigation found that the homes, schools, and hospitals of three villages were completely erased from the map in the last five years.

• Rabih Alenezi, a Saudi ex-intelligence officer, recalled the order to clear villagers advised that "whoever continues to resist [eviction] should be killed, so it licensed the use of lethal force against whoever stayed in their home."

• Neom, Saudi Arabia's $500bn (£399bn) eco-region, is part of its Saudi Vision 2030 strategy, which aims to diversify the kingdom's economy from oil.

• Neom claims to be a "blueprint for tomorrow in which humanity progresses without compromising the planet's health."

The opportunity: Covering a total area of over 26,500 sq km (10,230 sq miles)—larger than Kuwait or Israel—Neom will, developers claim, exist entirely outside the confines of the current Saudi judicial system, governed by an autonomous legal system that will be drafted up by investors.

• Much like Barcelona's traffic-free "superblocks," he explains that each square will be self-sufficient and contain amenities such as shops and schools, so anything people need will be a five-minute walk or cycle away.

• The "giga-project" is part of the crown prince's vision of a greener Saudi Arabia.

• A week before the COP26 climate change negotiations, he also launched the Saudi Green Initiative, announcing a target of achieving net zero emissions by 2060.

Zoom in: The energy minister, Prince Abdulaziz bin Salman, reportedly said the Saudis wouldn't stop pumping: "We are still going to be the last man standing, and every hydrocarbon molecule will come out."

• Oil prices have pulled back sharply in May, posting their steepest weekly loss in three months.

• The oil price selloff appears to have been triggered by a return of demand pessimism, thanks to last week's report by the EIA showing a 7.3M-barrel build in U.S. crude stocks, the largest weekly increase since February and the recent revelation by the United Arab Emirates that it had raised production capacity.

Between the lines: Meanwhile, North Korea's state media claimed Sunday that an expansion of the so-called emerging BRICS nations could challenge and eventually speed up the end of the U.S. dollar's domination.

• In an article carried by the North's Korean Central News Agency, Jong Il-hyon, a North Korean international affairs analyst, criticized the U.S. for using the dollar and its military might as a means of "hegemonism."

• "The unprecedented international moves to limit the use of the dollar and the tendency of many countries to join BRICS are accelerating the end of the dollar as a key currency and the end of the U.S. hegemonism under it," the analyst said.

Follow the money: According to Bloomberg, Crown Prince Mohammed bin Salman's project will be reduced by 98% to just one-and-a-half miles and home to just 300,000 people by 2030, rather than 1.5 million.

• The Wall Street Journal reports today, citing two employees familiar with the plans, that the first 1.5 miles of The Line alone are estimated to cost more than $100 billion.

• As Saudi Arabia touted the finished project's sustainability credentials, researchers identified the construction project as one of the 15 most pressing conservation issues to watch in 2024. 

• It is part of the Crown Prince's overall 'Vision 2030' scheme to reshape his oil-dependent country's economy and image.

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