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SGH Macro Advisors produces concise, forward-looking proprietary reports on the major central banks and on key economic and policy developments that drive global bond, equity, and currency markets.
Founded in 2009, SGH has over the years built a reputation as a thought leader and source of well-informed, cutting-edge information, analysis, and insight on policy and financial markets. Its briefings and reports are highly valued by many of the world’s most well-known and influential hedge funds, money managers, and policymakers.
Highlights
SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of market consensus.
April 15, 2024
SGH Insight
This is a busy week for Fed speak with an appearance by Federal Reserve Chair Jerome Powell taking center stage. We have all three members of the “Troika” on deck this week, and we expect them to confirm that market participants correctly inferred the Fed’s reaction function in the wake of the CPI report. If Powell tries to downplay the CPI/PPI combo with another “we expect core-PCE inflation will be well under 30 basis points,” market participants will lurch back towards three rate cuts and send inflation expectations higher, but we expect he, Williams, and Jefferson to lean on the “no rush” story and keep pricing away from June.
Market Validation
Bloomberg 4/17/24
Federal Reserve Chair Jerome Powell said recent inflation data have indicated it will likely take longer for the central bank to attain the confidence needed to lower interest rates.
Powell pointed to the lack of additional progress made on inflation after the rapid decline seen at the end of last year. He said if price pressures persist, the Fed can keep rates steady for “as long as needed.”
“The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence,” Powell said Tuesday in a panel discussion alongside Bank of Canada Governor Tiff Macklem at the Wilson Center in Washington.
“Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he said.
Powell’s remarks represent a shift in his message following a third straight month in which a key measure of inflation exceeded analyst forecasts. It also shows officials see little urgency to cut rates and suggests that any reductions in 2024 may come relatively late in the year, if at all.
Federal Reserve Chair Jerome Powell said recent inflation data have indicated it will likely take longer for the central bank to attain the confidence needed to lower interest rates.
Powell pointed to the lack of additional progress made on inflation after the rapid decline seen at the end of last year. He said if price pressures persist, the Fed can keep rates steady for “as long as needed.”
“The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence,” Powell said Tuesday in a panel discussion alongside Bank of Canada Governor Tiff Macklem at the Wilson Center in Washington.
“Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he said.
Powell’s remarks represent a shift in his message following a third straight month in which a key measure of inflation exceeded analyst forecasts. It also shows officials see little urgency to cut rates and suggests that any reductions in 2024 may come relatively late in the year, if at all.
April 9, 2024
SGH Insight
It seems that some of the market focus is on the potential for a wildcard hawkish pushback at this week’s meeting on the need for a cut by June, but we believe there will be no such strong pushback, if any.
If anything, the contingent that tried to put April on the table will make their case for a cut on Thursday, even though that will also go nowhere. Consensus around June, by the March 7 meeting, was of course effectively already in hand.
The message will be that no rate cut path (beyond June) should be taken for granted, and that all decisions will be data dependent.
Market Validation
If anything, the contingent that tried to put April on the table will make their case for a cut on Thursday, even though that will also go nowhere. Consensus around June, by the March 7 meeting, was of course effectively already in hand.
The message will be that no rate cut path (beyond June) should be taken for granted, and that all decisions will be data dependent.
Bloomberg 4/11/2024
The European Central Bank held interest rates steady for a fifth meeting, while sending its clearest signal yet that cooling inflation will soon allow it to commence cuts.
The deposit rate was left at a record-high 4%, as overwhelmingly predicted by a Bloomberg poll. But the Governing Council flagged a possible reduction in its accompanying statement for the first time, contingent on its economic forecasts indicating consumer-price growth is safely headed to 2%.
“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” the ECB said Thursday.
While it said it would remain data-dependent and isn’t “pre-committing to a particular rate path,” President Christine Lagarde again signaled the prospect of a move in two months’ time.
Bloomberg 4/11/2024
A few Governing Council members were ready to cut rates today. Lagarde said that there will be a lot more data available at the next policy meeting in June — cementing expectations that the first cut will happen then.
The European Central Bank held interest rates steady for a fifth meeting, while sending its clearest signal yet that cooling inflation will soon allow it to commence cuts.
The deposit rate was left at a record-high 4%, as overwhelmingly predicted by a Bloomberg poll. But the Governing Council flagged a possible reduction in its accompanying statement for the first time, contingent on its economic forecasts indicating consumer-price growth is safely headed to 2%.
“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” the ECB said Thursday.
While it said it would remain data-dependent and isn’t “pre-committing to a particular rate path,” President Christine Lagarde again signaled the prospect of a move in two months’ time.
Bloomberg 4/11/2024
A few Governing Council members were ready to cut rates today. Lagarde said that there will be a lot more data available at the next policy meeting in June — cementing expectations that the first cut will happen then.
April 4, 2024
SGH Insight
Sticky inflation expectations coupled with still robust employment growth may have pushed out the Bank of Canada’s (BOC) timing for a first interest rate cut but likely only by a couple of months.
The BOC will likely hold rates at 5% for a sixth consecutive meeting when it meets April 10 and use its updated projections and post meeting press conference to signal that it needs a few more inflation prints showing trend inflation slowing toward target, before it will loosen policy.
The Bank is likely looking for at least two more monthly inflation readings that confirm a six-month trend downward in prices before it considers a rate cut most likely in the July 24 forecast round which softer-than-expected data could bring forward to the June 5 meeting.
Market Validation
The BOC will likely hold rates at 5% for a sixth consecutive meeting when it meets April 10 and use its updated projections and post meeting press conference to signal that it needs a few more inflation prints showing trend inflation slowing toward target, before it will loosen policy.
The Bank is likely looking for at least two more monthly inflation readings that confirm a six-month trend downward in prices before it considers a rate cut most likely in the July 24 forecast round which softer-than-expected data could bring forward to the June 5 meeting.
Monetary Policy Report Press Conference Opening 4/10/2024
I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained. The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip.
In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed.
I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained. The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip.
In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed.
March 27, 2024
SGH Insight
Fed Speak and Discussion
While the Fed has been circling around a June rate cut, the dominant risk at this point remains that the Fed pushes that cut until later in the year. And even if that rate cut happens, the resilience of the economy means the Fed may do no more than remove the final one or two insurance hikes from last year. At this point, the path to a series of rate cuts as envisioned in the Summary of Economic projections remains elusive.
While the SEP’s increased inflation projection combined with retaining a median projection of three rate cuts in 2024 appears dovish on the surface, we caution against that interpretation. The updated inflation forecasts simply account for the base effects associated with the January inflation print and not a fundamental shift in the inflation outlook. Indeed, meeting the current 2.6% projection requires that monthly inflation falls back below 0.2%, consistent with modal market expectations. And the 2025 and 2026 projections held steady, meaning no change in when the Fed anticipates it will restore price stability.
2.Strategic Considerations
Market participants remain trapped in the chop. Lacking a clear directional trade, the focus falls on the riskier strategy of chasing tactical opportunities:
1. The direction of travel at the Fed is fewer rate cuts in 2024, but market participants still resist that move. The debate at the Fed is between two and three rate cuts, the market prices between three and four rate cuts as it includes the risk of negative outcomes currently not in the Fed’s modal outlook. Moreover, market participants see the median SEP dot as a barrier best not to cross without strong support. Getting that support requires data that changes the debate at the Fed to one or two rate cuts.
Market Validation
Fed Speak and Discussion
While the Fed has been circling around a June rate cut, the dominant risk at this point remains that the Fed pushes that cut until later in the year. And even if that rate cut happens, the resilience of the economy means the Fed may do no more than remove the final one or two insurance hikes from last year. At this point, the path to a series of rate cuts as envisioned in the Summary of Economic projections remains elusive.
While the SEP’s increased inflation projection combined with retaining a median projection of three rate cuts in 2024 appears dovish on the surface, we caution against that interpretation. The updated inflation forecasts simply account for the base effects associated with the January inflation print and not a fundamental shift in the inflation outlook. Indeed, meeting the current 2.6% projection requires that monthly inflation falls back below 0.2%, consistent with modal market expectations. And the 2025 and 2026 projections held steady, meaning no change in when the Fed anticipates it will restore price stability.
2.Strategic Considerations
Market participants remain trapped in the chop. Lacking a clear directional trade, the focus falls on the riskier strategy of chasing tactical opportunities:
1. The direction of travel at the Fed is fewer rate cuts in 2024, but market participants still resist that move. The debate at the Fed is between two and three rate cuts, the market prices between three and four rate cuts as it includes the risk of negative outcomes currently not in the Fed’s modal outlook. Moreover, market participants see the median SEP dot as a barrier best not to cross without strong support. Getting that support requires data that changes the debate at the Fed to one or two rate cuts.
Bloomberg 3/28/24
Federal Reserve Governor Christopher Waller said there is no rush to lower interest rates, emphasizing that recent economic data warrants delaying or reducing the number of
cuts seen this year. Waller called recent inflation figures “disappointing” and
said he wants to see “at least a couple months of better inflation data” before cutting. He pointed to a strong economy and robust hiring as further reasons the Fed has room to wait to gain confidence that inflation is on a sustained path toward the 2% target.
“In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data,” Waller said in prepared remarks Wednesday
before the Economic Club of New York titled “There’s Still No Rush.”
2.Bloomberg 3/28/2024
Bonds fell and stocks fluctuated after Federal Reserve Governor Christopher Waller threw cold water on expectations for interest-rate cuts. Treasury yields rose across the US curve, with shorter-maturities leading the moves. The dollar extended its quarterly advance. S&P 500 futures swung between gains and losses after the benchmark gauge closed at an all-time high. Waller called recent inflation figures “disappointing” and said he wants to see “at least a couple months of better inflation data” before cutting. He pointed to a strong economy and robust hiring as further reasons the Fed has room to wait to gain confidence that inflation is on a sustained path toward the 2% target.
Federal Reserve Governor Christopher Waller said there is no rush to lower interest rates, emphasizing that recent economic data warrants delaying or reducing the number of
cuts seen this year. Waller called recent inflation figures “disappointing” and
said he wants to see “at least a couple months of better inflation data” before cutting. He pointed to a strong economy and robust hiring as further reasons the Fed has room to wait to gain confidence that inflation is on a sustained path toward the 2% target.
“In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data,” Waller said in prepared remarks Wednesday
before the Economic Club of New York titled “There’s Still No Rush.”
2.Bloomberg 3/28/2024
Bonds fell and stocks fluctuated after Federal Reserve Governor Christopher Waller threw cold water on expectations for interest-rate cuts. Treasury yields rose across the US curve, with shorter-maturities leading the moves. The dollar extended its quarterly advance. S&P 500 futures swung between gains and losses after the benchmark gauge closed at an all-time high. Waller called recent inflation figures “disappointing” and said he wants to see “at least a couple months of better inflation data” before cutting. He pointed to a strong economy and robust hiring as further reasons the Fed has room to wait to gain confidence that inflation is on a sustained path toward the 2% target.
April 4, 2024
SGH Insight
Strong growth remains a risk for rate cuts; we don’t think there is “no knockout” for growth. There has to be some limit. The direction of travel in the dots has been toward fewer rate cuts for this year, and nine FOMC members expect less than three rate cuts. And certainly solid activity could be the deciding factor on borderline inflation prints as it would lend itself to the “no rush” story. And even if growth were not to dissuade the Fed from a June cut, it could reduce the number of cuts in 2024 if it prompts the Fed to hold steady after taking back the last rate hike or two. That would turn any rate cuts into a 1995-style correction rather than the beginning of a series of rate cuts.
Market Validation
Bloomberg 4/5/2024
A rough start to the year for bond traders just got worse as the release of key US employment data showed a buoyant labor market with few of the stresses that could prompt the Federal Reserve to lower interest rates.
Treasury yields rose and traders pushed back when they foresee the Fed cutting rates for the first time in the wake of another hot reading on job creation. US payrolls rose in March by the most in nearly a year and the unemployment rate held steady.
US yields pushed near their highest levels of 2024 with the benchmark 10-year rate jumping eight basis points to about 4.39% as the fresh dose of data doused hopes that the Fed will move to reduce rates soon.
Treasury futures now show the first cut from the US central bank not coming until September, and reduced the probability it comes in June to only about 52% . For all of 2024, traders now see only about 67 basis points of rate reductions — lagging behind the three quarter—point reduction Fed officials have signaled.
A rough start to the year for bond traders just got worse as the release of key US employment data showed a buoyant labor market with few of the stresses that could prompt the Federal Reserve to lower interest rates.
Treasury yields rose and traders pushed back when they foresee the Fed cutting rates for the first time in the wake of another hot reading on job creation. US payrolls rose in March by the most in nearly a year and the unemployment rate held steady.
US yields pushed near their highest levels of 2024 with the benchmark 10-year rate jumping eight basis points to about 4.39% as the fresh dose of data doused hopes that the Fed will move to reduce rates soon.
Treasury futures now show the first cut from the US central bank not coming until September, and reduced the probability it comes in June to only about 52% . For all of 2024, traders now see only about 67 basis points of rate reductions — lagging behind the three quarter—point reduction Fed officials have signaled.
December 11, 2023
SGH Insight
The Bank of Japan (BOJ) will keep policy unchanged on December 18-19 but introduce subtle language changes that will herald a likely exit from negative interest rates between January and April next year.
January signaling of an impending move would light up the BOJ’s March 18-19 meeting as an option for a move, especially if the Bank wants to get a move in before the US Federal Reserve sends rates in an opposite direction.
The BOJ’s March two-day meeting overlaps with the Fed’s March 19-20 forecast round meeting. The BOJ is sure to be contemplating whether a smoother exit from negative rates is more likely if it moves before the Fed.
Market Validation
January signaling of an impending move would light up the BOJ’s March 18-19 meeting as an option for a move, especially if the Bank wants to get a move in before the US Federal Reserve sends rates in an opposite direction.
The BOJ’s March two-day meeting overlaps with the Fed’s March 19-20 forecast round meeting. The BOJ is sure to be contemplating whether a smoother exit from negative rates is more likely if it moves before the Fed.
Bloomberg 3/19/24
The Bank of Japan scrapped the world’s last
negative interest rate, ending the most aggressive monetary
stimulus program in modern history, while also indicating that
financial conditions will stay accommodative for now.
The bank’s board voted 7-2 to set a new policy rate range
of between 0% and 0.1%, shifting from a -0.1% short-term
interest rate, according to a statement at the conclusion of its
two-day meeting Tuesday. The BOJ also scrapped its complex yield
curve control program while pledging to continue buying long-
term government bonds as needed, and ended purchases of
exchange-traded funds.
The Bank of Japan scrapped the world’s last
negative interest rate, ending the most aggressive monetary
stimulus program in modern history, while also indicating that
financial conditions will stay accommodative for now.
The bank’s board voted 7-2 to set a new policy rate range
of between 0% and 0.1%, shifting from a -0.1% short-term
interest rate, according to a statement at the conclusion of its
two-day meeting Tuesday. The BOJ also scrapped its complex yield
curve control program while pledging to continue buying long-
term government bonds as needed, and ended purchases of
exchange-traded funds.
February 5, 2024
SGH Insight
Monday Morning Notes, 2/5/24
A lighter week for data that might begin with a bang. Monday morning, we get the January services sector PMIs for S&P Global and ISM. Given the recent run of data, it seems like we should be looking for an upside surprise. The ISM number should get a boost from the reversal of the shockingly low employment number in December. We don’t know how to explain another weak number in the context of the employment report. Upside surprise for the ISM measure could be the catalyst that forces market participants to undo the move in rates since last November.
Market Validation
A lighter week for data that might begin with a bang. Monday morning, we get the January services sector PMIs for S&P Global and ISM. Given the recent run of data, it seems like we should be looking for an upside surprise. The ISM number should get a boost from the reversal of the shockingly low employment number in December. We don’t know how to explain another weak number in the context of the employment report. Upside surprise for the ISM measure could be the catalyst that forces market participants to undo the move in rates since last November.
Bloomberg 2/5/24
Treasury yields extended Friday’s surge, pushing the two-year note’s toward its highest level this year, as strong economic data reinforced the message of Federal Reserve officials including Chair Jerome Powell that interest-rate cuts are unlikely to begin before May.
Yields across the maturity spectrum climbed as much as 10 basis points on the day, reaching session highs after the ISM gauge of service-sector activity for January exceeded economist estimates. Friday was the US bond market’s worst day in nearly a year after stronger-than-anticipated January employment data dashed hopes for a speedy pivot toward easier monetary policy.
The chance of a quarter-point cut in March dwindled to almost 10% after Powell said in an interview with CBS’s 60 Minutes which aired Sunday that Americans may have to wait beyond the Fed’s next meeting to cut interest rates. Minneapolis Fed President Neel Kashkari made similar comments Monday, and nine other central bank officials are slated to speak this week.
Treasury yields extended Friday’s surge, pushing the two-year note’s toward its highest level this year, as strong economic data reinforced the message of Federal Reserve officials including Chair Jerome Powell that interest-rate cuts are unlikely to begin before May.
Yields across the maturity spectrum climbed as much as 10 basis points on the day, reaching session highs after the ISM gauge of service-sector activity for January exceeded economist estimates. Friday was the US bond market’s worst day in nearly a year after stronger-than-anticipated January employment data dashed hopes for a speedy pivot toward easier monetary policy.
The chance of a quarter-point cut in March dwindled to almost 10% after Powell said in an interview with CBS’s 60 Minutes which aired Sunday that Americans may have to wait beyond the Fed’s next meeting to cut interest rates. Minneapolis Fed President Neel Kashkari made similar comments Monday, and nine other central bank officials are slated to speak this week.
March 18, 2024
SGH Insight
(1) Monday Morning Notes, 3/18/24
We forego our usual Monday morning format to focus on the FOMC meeting and market implications.
We expect the FOMC will conclude its two-day meeting this week with few new signals about the direction of monetary policy. The Fed isn’t cutting rates this week, very likely isn’t cutting in May, and although the Fed is circling around a June cut, uncertainty around the inflation outlook leaves a June cut still up in the air. Given the time remaining before the Fed needs to decide on a June cut and that they don’t yet have a complete picture of the first quarter, FOMC participants are likely not in a rush to make substantial changes in the SEP projections.
To be sure, the balance of risks to our expectations are on the hawkish side for the SEP projections. And Federal Reserve Chair Jerome Powell can be something of a wildcard. Overall, though, we think the objective for the Fed is to get out of this meeting without making fresh waves in the financial markets.
(2) 3.Published on March 18, 2024
Inflation: Elevated January and February inflation readings create fresh base effects for the core-PCE forecast, but speakers have tended to see this as a bump in the road rather than reason to fundamentally reassess the inflation story. At least not yet. And recall that in December, monthly inflation readings were running below a 2% annualized rate and implied that the Fed would need to lower the inflation forecast in March. Recent numbers are in that sense a validation of the Fed’s December projections. Still, the clear risk is that the Fed pencils in a 2.6%, and either outcome will be considered hawkish as it indicates a direction of travel toward fewer than 75bp of rate cuts.
(3) Monday Morning Notes, 3/18/24
We think FOMC participants will reveal some increased hawkishness via an increase in the 2026 median dot. It is possible that the 2025 dot could rise as well, although the Fed’s models likely deliver a smooth transition toward normal via 25bp rate cuts each quarter. That means that the resilience of the economy and possibly an elevated neutral rate will lead to an earlier end to rate cuts than expected in December. Of course, if the 2025 median dot were to rise, the 2026 dot likely would as well, making the 2026 dot a safer hawkish bet. The risks are weighted toward the long run dot rising as well, but we can’t make this a high conviction base case. A higher 2026 dot would signal a de facto increase in neutral rate estimates without needing to commit to such an increase.
(4) Monday Morning Notes, 3/18/24
If questioned, Powell may need to explain his “not far” comment from Humphrey-Hawkins, and his explanation will make it sound further away than it first appeared because he can’t commit to June.
(5) Monday Morning Notes, 3/18/24
Pressed on the inflation outlook, we expect that we will restate the “bumpy path” story while adding that continued elevated inflation readings would imply that progress on inflation goals has stalled. He won’t kill a June cut, but he can’t credibly commit to it either.
(6)Monday Morning Notes, 3/18/24
The Fed will begin developing a plan for tapering quantitative tightening that will set guidance on the Fed’s longer run intentions for the size and composition of the balance sheet but won’t announce any such plans this week. The minutes of the January FOMC meeting foreshadowed this outcome:
In light of ongoing reductions in usage of the ON RRP facility, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff.
Typically, the Fed begins these kinds of deliberations with staff presentations the first meeting, discussion of those presentations among FOMC participants at the following meeting, and a decision at the next meeting which might be guidance for future meetings or immediate implementation. That puts June as the likely earliest meeting for the Fed to announce a plan for the balance sheet, with the actual implementation likely later.
(7)Final Thoughts Ahead of the FOMC
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.
Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
Market Validation
We forego our usual Monday morning format to focus on the FOMC meeting and market implications.
We expect the FOMC will conclude its two-day meeting this week with few new signals about the direction of monetary policy. The Fed isn’t cutting rates this week, very likely isn’t cutting in May, and although the Fed is circling around a June cut, uncertainty around the inflation outlook leaves a June cut still up in the air. Given the time remaining before the Fed needs to decide on a June cut and that they don’t yet have a complete picture of the first quarter, FOMC participants are likely not in a rush to make substantial changes in the SEP projections.
To be sure, the balance of risks to our expectations are on the hawkish side for the SEP projections. And Federal Reserve Chair Jerome Powell can be something of a wildcard. Overall, though, we think the objective for the Fed is to get out of this meeting without making fresh waves in the financial markets.
(2) 3.Published on March 18, 2024
Inflation: Elevated January and February inflation readings create fresh base effects for the core-PCE forecast, but speakers have tended to see this as a bump in the road rather than reason to fundamentally reassess the inflation story. At least not yet. And recall that in December, monthly inflation readings were running below a 2% annualized rate and implied that the Fed would need to lower the inflation forecast in March. Recent numbers are in that sense a validation of the Fed’s December projections. Still, the clear risk is that the Fed pencils in a 2.6%, and either outcome will be considered hawkish as it indicates a direction of travel toward fewer than 75bp of rate cuts.
(3) Monday Morning Notes, 3/18/24
We think FOMC participants will reveal some increased hawkishness via an increase in the 2026 median dot. It is possible that the 2025 dot could rise as well, although the Fed’s models likely deliver a smooth transition toward normal via 25bp rate cuts each quarter. That means that the resilience of the economy and possibly an elevated neutral rate will lead to an earlier end to rate cuts than expected in December. Of course, if the 2025 median dot were to rise, the 2026 dot likely would as well, making the 2026 dot a safer hawkish bet. The risks are weighted toward the long run dot rising as well, but we can’t make this a high conviction base case. A higher 2026 dot would signal a de facto increase in neutral rate estimates without needing to commit to such an increase.
(4) Monday Morning Notes, 3/18/24
If questioned, Powell may need to explain his “not far” comment from Humphrey-Hawkins, and his explanation will make it sound further away than it first appeared because he can’t commit to June.
(5) Monday Morning Notes, 3/18/24
Pressed on the inflation outlook, we expect that we will restate the “bumpy path” story while adding that continued elevated inflation readings would imply that progress on inflation goals has stalled. He won’t kill a June cut, but he can’t credibly commit to it either.
(6)Monday Morning Notes, 3/18/24
The Fed will begin developing a plan for tapering quantitative tightening that will set guidance on the Fed’s longer run intentions for the size and composition of the balance sheet but won’t announce any such plans this week. The minutes of the January FOMC meeting foreshadowed this outcome:
In light of ongoing reductions in usage of the ON RRP facility, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff.
Typically, the Fed begins these kinds of deliberations with staff presentations the first meeting, discussion of those presentations among FOMC participants at the following meeting, and a decision at the next meeting which might be guidance for future meetings or immediate implementation. That puts June as the likely earliest meeting for the Fed to announce a plan for the balance sheet, with the actual implementation likely later.
(7)Final Thoughts Ahead of the FOMC
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.
Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
(1) Bloomberg 3/20/24
Federal Reserve officials maintained their outlook for three quarter-point rate cuts this year but forecast fewer cuts than before in 2025 following a recent uptick in inflation.
Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25% to 5.5%, the highest since 2001, for a fifth straight meeting. Policymakers signaled they remain on track to cut rates this year for the first time since March 2020, but they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.
Policymakers also lifted slightly their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.
Policymakers updated their projections for inflation and economic growth for 2024, raising their forecast for underlying inflation to 2.6% from 2.4%, and boosting the growth forecast to 2.1% from 1.4%. They also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.
(2) Bloomberg 3/20/2024
Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
o 2024 median PCE inflation 2.4% vs 2.4%
o 2025 median PCE inflation 2.2% vs 2.1%
o 2026 median PCE inflation 2.0% vs 2.0%
• 2024 median core PCE inflation 2.6% vs 2.4%
• 2025 median core PCE inflation 2.2% vs 2.2%
2026 median core PCE inflation 2.0% vs 2.0%
(3) Bloomberg 3/30/34
Median assessment of appropriate pace of policy:
• 2024 4.625% (range 4.375% to 5.375%); prior 4.625%
• 2025 3.875% (range 2.625% to 5.375%); prior 3.625%
• 2026 3.125% (range 2.375% to 4.875%); prior 2.875%
• Longer Run 2.5625% (range 2.375% to 3.750%); prior 2.5%
(4) FOMC Press Conference Transcript 3/20/24
>> Thank you, Chair Powell. Not to harp too much more on confidence and inflation but you did say earlier in this press conference that the recent inflation data hasn't raised confidence but when you testified before the senate a couple weeks ago you told lawmakers you are not far from cutting rates. Are you still in that belief or not? What are we to take by those words? Not far. >> My main message in those days is that the committee needs to maintain confidence and we don't expect it will be appropriate to begin to reduce rates until we're more confident than that. I said that any number of times. Those are the main part of the message we repeated today in that statement. To the language you mentioned, I really pointed out that we had made significant progress over the past year and what we're looking for was confirmation that that progress will continue. We had a series of inflation readings over the second half of last year that were really much lower. We didn't over-react as I mentioned. But that is what I had in mind.
(5) FOMC Press Conference Transcript 3/20/24
CHAIRPERSON: It certainly hasn't raised anyone's confidence, but I would say that the story is really essentially the same. And that is of inflation coming down gradually toward 2% on a sometimes-bumpy path as I mentioned. I think that is what you still see. We've got 9 months of 2.5% inflation now. We've had 2 months of bumpy inflation. It's going to be a bumpy ride. We've consistently said that. Now we have bumps. We can't know that. That is why we are approaching this question carefully. It is very important for everyone that we serve that we do get inflation sustainably down. Every situation is different but the historical record is you need to approach that carefully and not have to come back and raise rates again if you cut it prematurely.
(6) FOMC Press Conference Transcript 3/20/24
At this meeting we discussed issues related to slowing the pace of decline in our securities holdings. While we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of run-off fairly soon. Consistent with the plans we proefsly issued. The decision to slow the pace of run-off does not mean our balance sheet will shrink but allows us to approach that ultimate level more gradually. In particular, slowing the pace of run-off will help ensure the transition reducing the possibility of money markets and facilitating the ongoing decline in security holdings, increasing the ample reserves.
(7) Bloomberg 3/20/24
Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.
Ivestor's Business Daily 3/20/24
Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.
Federal Reserve officials maintained their outlook for three quarter-point rate cuts this year but forecast fewer cuts than before in 2025 following a recent uptick in inflation.
Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25% to 5.5%, the highest since 2001, for a fifth straight meeting. Policymakers signaled they remain on track to cut rates this year for the first time since March 2020, but they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.
Policymakers also lifted slightly their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.
Policymakers updated their projections for inflation and economic growth for 2024, raising their forecast for underlying inflation to 2.6% from 2.4%, and boosting the growth forecast to 2.1% from 1.4%. They also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.
(2) Bloomberg 3/20/2024
Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
o 2024 median PCE inflation 2.4% vs 2.4%
o 2025 median PCE inflation 2.2% vs 2.1%
o 2026 median PCE inflation 2.0% vs 2.0%
• 2024 median core PCE inflation 2.6% vs 2.4%
• 2025 median core PCE inflation 2.2% vs 2.2%
2026 median core PCE inflation 2.0% vs 2.0%
(3) Bloomberg 3/30/34
Median assessment of appropriate pace of policy:
• 2024 4.625% (range 4.375% to 5.375%); prior 4.625%
• 2025 3.875% (range 2.625% to 5.375%); prior 3.625%
• 2026 3.125% (range 2.375% to 4.875%); prior 2.875%
• Longer Run 2.5625% (range 2.375% to 3.750%); prior 2.5%
(4) FOMC Press Conference Transcript 3/20/24
>> Thank you, Chair Powell. Not to harp too much more on confidence and inflation but you did say earlier in this press conference that the recent inflation data hasn't raised confidence but when you testified before the senate a couple weeks ago you told lawmakers you are not far from cutting rates. Are you still in that belief or not? What are we to take by those words? Not far. >> My main message in those days is that the committee needs to maintain confidence and we don't expect it will be appropriate to begin to reduce rates until we're more confident than that. I said that any number of times. Those are the main part of the message we repeated today in that statement. To the language you mentioned, I really pointed out that we had made significant progress over the past year and what we're looking for was confirmation that that progress will continue. We had a series of inflation readings over the second half of last year that were really much lower. We didn't over-react as I mentioned. But that is what I had in mind.
(5) FOMC Press Conference Transcript 3/20/24
CHAIRPERSON: It certainly hasn't raised anyone's confidence, but I would say that the story is really essentially the same. And that is of inflation coming down gradually toward 2% on a sometimes-bumpy path as I mentioned. I think that is what you still see. We've got 9 months of 2.5% inflation now. We've had 2 months of bumpy inflation. It's going to be a bumpy ride. We've consistently said that. Now we have bumps. We can't know that. That is why we are approaching this question carefully. It is very important for everyone that we serve that we do get inflation sustainably down. Every situation is different but the historical record is you need to approach that carefully and not have to come back and raise rates again if you cut it prematurely.
(6) FOMC Press Conference Transcript 3/20/24
At this meeting we discussed issues related to slowing the pace of decline in our securities holdings. While we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of run-off fairly soon. Consistent with the plans we proefsly issued. The decision to slow the pace of run-off does not mean our balance sheet will shrink but allows us to approach that ultimate level more gradually. In particular, slowing the pace of run-off will help ensure the transition reducing the possibility of money markets and facilitating the ongoing decline in security holdings, increasing the ample reserves.
(7) Bloomberg 3/20/24
Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.
Ivestor's Business Daily 3/20/24
Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.
March 13, 2024
SGH Insight
As for the destination for rates, the BOJ plans for a gradual removal of accommodation may ultimately be interrupted by global economic softening over the next 12 months, so the BOJ will likely shy away from explicitly answering questions about its next moves.
Market Validation
Bloomberg 3/19/24
The Bank of Japan scrapped the world’s last
negative interest rate, ending the most aggressive monetary
stimulus program in modern history, while also indicating that
financial conditions will stay accommodative for now.
The lack of signaling on any future rate hikes weighed on
the yen — which slid past the closely watched 150 mark versus
the dollar — while benchmark government bond yields edged lower.
The weaker currency supported Japanese equities, helping the
Nikkei 225 Stock Average reclaim the key 40,000 level.
The Bank of Japan scrapped the world’s last
negative interest rate, ending the most aggressive monetary
stimulus program in modern history, while also indicating that
financial conditions will stay accommodative for now.
The lack of signaling on any future rate hikes weighed on
the yen — which slid past the closely watched 150 mark versus
the dollar — while benchmark government bond yields edged lower.
The weaker currency supported Japanese equities, helping the
Nikkei 225 Stock Average reclaim the key 40,000 level.
March 19, 2024
SGH Insight
The Bank of England (BOE) is tipping toward a June cut in Bank Rate, awaiting confirmation that headline inflation is going to continue to slow and squeeze out the risk of persistence in underlying price impulses.
With BOE committee members divided over how entrenched inflation persistence is, and looking to new data to judge how long to maintain rates at 5.25%, the MPC will vote to hold rates steady again when it meets Thursday.
How members split on that vote, however, could convey how much time the Bank is willing to wait before it starts to signal the prospect of lower rates.
Cautious inflation comments from hawkish voices inside the committee who have been worried about the residual stickiness of services inflation in particular, are on the whole, slightly more muted since the last meeting.
There is a risk too that external member Jonathan Haskel, a key inflation hawk, could join the majority ranks of the committee in voting for unchanged rates at the March 21 meeting.
If he does so, it could be a strong signal the Bank is inching its way toward a midyear easing. Haskel along with fellow inflation hawk Catherine Mann, who was recently reappointed for another term as an external member, both wanted another rate hike at the Bank’s February 1 meeting,
Market Validation
With BOE committee members divided over how entrenched inflation persistence is, and looking to new data to judge how long to maintain rates at 5.25%, the MPC will vote to hold rates steady again when it meets Thursday.
How members split on that vote, however, could convey how much time the Bank is willing to wait before it starts to signal the prospect of lower rates.
Cautious inflation comments from hawkish voices inside the committee who have been worried about the residual stickiness of services inflation in particular, are on the whole, slightly more muted since the last meeting.
There is a risk too that external member Jonathan Haskel, a key inflation hawk, could join the majority ranks of the committee in voting for unchanged rates at the March 21 meeting.
If he does so, it could be a strong signal the Bank is inching its way toward a midyear easing. Haskel along with fellow inflation hawk Catherine Mann, who was recently reappointed for another term as an external member, both wanted another rate hike at the Bank’s February 1 meeting,
Bloomberg 3/22/24
UK bonds rallied as traders amped up bets on
monetary easing after two of the Bank of England’s most hawkish
policymakers withdrew their support for interest rate hikes at
Thursday’s decision.
The yield on two-year gilts fell 12 basis points to 4.12%,
the largest move in over a month, on the dovish tilt. Sterling
extended its decline to 0.5%, trading as low as $1.2726, as
traders added to bets on monetary easing. BOE officials voted to
hold policy steady for a fifth straight meeting as widely
expected.
Traders now see around 80 basis points of rate cuts in 2024
compared to 75 basis points before the decision. While the first
cut is still fully priced by August, the market-implied chances
for a move by June rose to around 80%.
UK bonds rallied as traders amped up bets on
monetary easing after two of the Bank of England’s most hawkish
policymakers withdrew their support for interest rate hikes at
Thursday’s decision.
The yield on two-year gilts fell 12 basis points to 4.12%,
the largest move in over a month, on the dovish tilt. Sterling
extended its decline to 0.5%, trading as low as $1.2726, as
traders added to bets on monetary easing. BOE officials voted to
hold policy steady for a fifth straight meeting as widely
expected.
Traders now see around 80 basis points of rate cuts in 2024
compared to 75 basis points before the decision. While the first
cut is still fully priced by August, the market-implied chances
for a move by June rose to around 80%.
April 1, 2024
SGH Insight
First, to make one thing clear, our probe of how far ECB rate cuts will go beyond 100 bps this year in no way implies that we expect the upcoming April 11 Monetary Policy Meeting, as Banque de France Governor Francois Villeroy de Galhau would like, to actually be “live” for a cut.
A cut at the next, June 6 ECB meeting, is in fact about as strong of a consensus deal as any central bank could possibly deliver, and to signal in advance. Indeed, since early January we have been predicting this meeting for when the ECB will begin its rate cutting cycle.
Market Validation
A cut at the next, June 6 ECB meeting, is in fact about as strong of a consensus deal as any central bank could possibly deliver, and to signal in advance. Indeed, since early January we have been predicting this meeting for when the ECB will begin its rate cutting cycle.
ECB MONETARY POLICY ACCOUNT 4/4/2024
Members underlined the need for policy to remain data-dependent and to continue to be based on the elements of the reaction function already communicated. While it was wise to await incoming data and evidence, the case for considering rate cuts was strengthening. This was based on the latest ECB staff projections, the further progress on the three criteria specified by the Governing Council in 2023, more contained projection errors and a more balanced risk assessment, with the date of a first rate cut coming more clearly into view. It was also recalled that the ECB’s focus and mandate were price stability in the euro area, although spillovers from other major policy areas would naturally be taken into account.
It was highlighted that, in addition to new staff projections, the Governing Council would have significantly more data and information by the June meeting, especially on wage dynamics. By contrast, the new information available in time for the April meeting would be much more limited, making it harder to be sufficiently confident about the sustainability of the disinflation process by then.
Members underlined the need for policy to remain data-dependent and to continue to be based on the elements of the reaction function already communicated. While it was wise to await incoming data and evidence, the case for considering rate cuts was strengthening. This was based on the latest ECB staff projections, the further progress on the three criteria specified by the Governing Council in 2023, more contained projection errors and a more balanced risk assessment, with the date of a first rate cut coming more clearly into view. It was also recalled that the ECB’s focus and mandate were price stability in the euro area, although spillovers from other major policy areas would naturally be taken into account.
It was highlighted that, in addition to new staff projections, the Governing Council would have significantly more data and information by the June meeting, especially on wage dynamics. By contrast, the new information available in time for the April meeting would be much more limited, making it harder to be sufficiently confident about the sustainability of the disinflation process by then.
March 7, 2024
SGH Insight
Regarding the path from here, we stick to what we wrote earlier this week, and a message we have also conveyed in our last few reports.
From SGH 3/4/24 “ECB: The March Meeting and Beyond:”
To start, we do not expect that the ECB’s 2024 rate cuts will be any shallower than the 75 basis points of 2024 rate cuts that were incorporated into its December 2023 forecast round, a forecast that is going to be revised downwards on both inflation and growth.
In fact, we consider 75 basis points to be a minimum for what the ECB will need to deliver this year, with the likelihood that it cuts by 100 bps, or possibly even more.
A hypothetical path of pulling off 25 bp cuts at each forecast meeting in June, September, and December would be elegant, and we expect at this time could appeal to many Governing Council members.
But we suspect it may be too slow to deliver to the eurozone economy, which is at greater risk of undershooting its 2% target than, for example, the US economy, what it needs.
Market Validation
From SGH 3/4/24 “ECB: The March Meeting and Beyond:”
To start, we do not expect that the ECB’s 2024 rate cuts will be any shallower than the 75 basis points of 2024 rate cuts that were incorporated into its December 2023 forecast round, a forecast that is going to be revised downwards on both inflation and growth.
In fact, we consider 75 basis points to be a minimum for what the ECB will need to deliver this year, with the likelihood that it cuts by 100 bps, or possibly even more.
A hypothetical path of pulling off 25 bp cuts at each forecast meeting in June, September, and December would be elegant, and we expect at this time could appeal to many Governing Council members.
But we suspect it may be too slow to deliver to the eurozone economy, which is at greater risk of undershooting its 2% target than, for example, the US economy, what it needs.
Bloomberg Economics 4/4/2024
The account from the European Central Bank’s meeting on March 6-7 essentially confirmed an interest-rate reduction will materialize in June and several more will follow this year. That’s in line with the view of Bloomberg Economics for 100 basis points of cuts in 2024.
• A rate cut is clearly coming. “The case for considering rate cuts was strengthening,” the minutes stated.
• June is the most likely timing for the first move. “It was highlighted that, in addition to new staff projections, the Governing Council would have significantly more data and information by the June meeting, especially on wage dynamics. By contrast, the new information available in time for the April meeting would be much more limited, making it harder to be sufficiently confident about the sustainability of the disinflation process by then,” the account indicated.
• After the first move in June, another 75 bps in cuts seems likely. “Market expectations for future interest rates were seen as broadly in line with macroeconomic fundamentals, including the inflation outlook and interest rate assumptions as embedded in the latest staff projections,” the report revealed. Traders were pricing in a total of nearly 100 bps in cuts for 2024 on the eve of the meeting.
The account from the European Central Bank’s meeting on March 6-7 essentially confirmed an interest-rate reduction will materialize in June and several more will follow this year. That’s in line with the view of Bloomberg Economics for 100 basis points of cuts in 2024.
• A rate cut is clearly coming. “The case for considering rate cuts was strengthening,” the minutes stated.
• June is the most likely timing for the first move. “It was highlighted that, in addition to new staff projections, the Governing Council would have significantly more data and information by the June meeting, especially on wage dynamics. By contrast, the new information available in time for the April meeting would be much more limited, making it harder to be sufficiently confident about the sustainability of the disinflation process by then,” the account indicated.
• After the first move in June, another 75 bps in cuts seems likely. “Market expectations for future interest rates were seen as broadly in line with macroeconomic fundamentals, including the inflation outlook and interest rate assumptions as embedded in the latest staff projections,” the report revealed. Traders were pricing in a total of nearly 100 bps in cuts for 2024 on the eve of the meeting.
News and Events
SGH Macro Advisors hosts occasional roundtables and events for clients and senior policymakers.