By Michael Every of Rabobank

A Material Shift

It was that 2026 rarity of a genuinely ‘quiet day’ on Monday with the US out for Presidents’ Day and much of Asia already on holiday for Lunar New Year. However, despite China staying out for the rest of the week, things are likely to shift to a higher gear from today onwards.

The RBA minutes this morning, which explained why rates were hiked 25bps, stated “the latest forecasts produced by the staff were materially stronger than those produced in August and November.” One would hope so, but why were those forecasts stronger? Far more useful is the repeated mention of “material shift” – higher. That’s the case in Australia and world-wide; but not in the way the RBA meant it. We are no longer in a world in which RBA references to (and models of) “aggregate demand” and “aggregate supply” have much relevance. Yes, demand exists. Yes, supply does too. But neither are “aggregate”. Both are now very starkly variate.

The IMF just warned Australia that it’s 5% deposit scheme for first-time home buyers will push up housing inflation and should be scrapped – as others warn it’s already too late to do so. The RBA had warned of the same thing months ago too yet now seems surprised it might have shifted their forecasts and Overnight Cash Rate. That’s as the Fed is also set to loosen bank capital requirements to try to encourage more mortgage lending, and at lower rates – though it has to be said that the US bank share of such lending has declined from 60% to 35% since 2003, arguing some reversal could be warranted in the market.

Beyond such traditional macro stories, raw materials are again of supreme importance and, as in the past, linked to national security. Demand is vast; yet supply is limited in terms of natural availability and the ‘unnatural’ outcome of China dominating their processing. There is nothing aggregate about this. You have something or you don’t. A machine minus one key widget won’t work, so is worthless. Equally, a gun minus a bullet renders you defenceless. So, what price will you pay for what you need?

This is linked to AI, which ‘Anthropic in Venezuela’ shows is about national security. Indeed, the EU Parliament just blocked its MEPs from using AI tools over cyber and privacy fears – though these are perhaps not the high priority targets for foreign intelligence services that they think they are. While politics is hardly a synonym for productivity, should the EU military drop AI, it will be left even further behind the US. Should the EU private sector drop AI too, it would only widen a productivity gap between it and the US and China. If Europe still wants in on any front, that only increases the global urgency to get raw materials and electricity flowing at as cheap a price as possible. What’s the correct interest rate for that?

Yet things are not all inflationary: quite the opposite. As China rolls out its latest agentic AI, Qwen 3.5, and Wall Street smashes firms that suddenly may not have a viable business model, a recent summit in India saw experts warn that the country needs to take immediate action to manage the AI threat to the vast number of services sector jobs it’s created. They offer that “more training” can help the country avoid being left with “obsolete skills” – but is that true? The possibilities opened up by AI could arguably see white collar jobs destroyed at a scale and pace that no political economy is prepared for, let alone a stock market. What’s the correct interest rate for that?

These are, in both the literal and the metaphorical sense of the term, material shifts. Central bank thinking is, as usual, struggling to keep up. The Fed’s Barr speaks on AI and the labor market today, and Daly on AI and the economy: they both wrote those speeches themselves, right?

Meanwhile, US talks with Iran continue today against a backdrop of the IRGC carrying out naval exercises in the Strait of Hormuz. It needs to be repeated that the US continues to surge military power into the region daily: it remains to be seen if that will see Tehran bend or not. Oil prices are up around 1.3% this morning as the market starts to get twitchy.

Russia-Ukraine peace talks continue in Geneva, as Lithuania warned against a ‘hollow” Article 5-like guarantee being offered to Ukraine, Finland warned that Russia is reinforcing its nuclear and Arctic assets near its border, the UK press speaks of Europe creating a deterrent with tactical nukes as if this is a cost-free and risk-free exercise, and Ukraine, in the background, reportedly made its fastest battlefield gains in 2.5 years.

Also note an unconfirmed report Russia allowed limited dollar trading for the first time in years. That follows the Bloomberg story last week that Moscow is prepared to offer the US a major economic deal. As noted here many times before, the geopolitical and geoeconomic landscapes are one and the same, and our financial architecture merely sits on top of it. Likewise:

• Trump said he’ll make a decision soon on whether to sell the planned $20bn package of arms to Taiwan or not – there will be regional, if not global, consequences either way.

• The EU floated that 70% of EVs must be made in there to qualify for state aid, with similar rules for aluminium: that’s a material shift towards either Gaullism or Trumpism. Yet as the Economist claims that ‘Russia’s economy has entered the death zone’, the Ukrainian press reports EU companies are keeping Moscow’s war machine running via their exports to its auto sector.

• The Eurogroup president said a new Franco-German-led ‘E6’ format to push ahead with deeper structural reforms will only be “temporary”, as Ireland, which was left out, is pushing back. Does that imply that a vanguard group form new structures and then other EU members can then join at their leisure, or will they have to go through some form of a new ‘accession’ process to qualify for this inner sanctum? That’s another material shift.

• Canada’s natural resources minister is going to Poland to promote Canada’s nuclear energy expertise. That’s as the Financial Post notes, 'We need to wake up': Atlantic Canada a microcosm of the problems facing the rest of the country’, and shares ‘David Rosenberg: Memo to Mark Carney: Don’t bring a butter knife to an economic gun fight.’

The same can be said about central bank models.