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(*Note, the annual limit of newly issued local government bonds is usually passed by the country’s legislature and policy advisers in March, after the country’s “two sessions.” But the State Council could be authorized to deliver a part of the quota earlier to accelerate financing for investment projects. China issued 4.47 trillion yuan in new local government bonds in 2021, and 4.55 trillion yuan in 2020).
Li expressed satisfaction with the current monetary policy and reiterated the need to make macro policies more forward-looking and targeted, step up cross-cyclical adjustments, and maintain major economic indicators within the proper range and ensure a stable job market.
China’s State Council called on local
governments to sell more special bonds this year in order to
boost investment amid a slowdown in the economy.
Premier Li Keqiang chaired a meeting of the State Council,
China’s cabinet, on Wednesday, urging local governments to have
more ongoing construction of projects at the beginning of next
year, the official Xinhua News Agency reported. It also called
on them to make better use of proceeds from special bonds to
expand domestic demand.
In practice, China publicly announced a modest release of its SPR twice over the last fourth months, but our understanding is that China has adjusted SPR data almost every month under its own timetable, without any publicly announcement. Perhaps more to the point, on oil policy, China is keen to maintain its relations with Russia and Saudi Arabia rather than be seen to simply embrace a US request.
Speaking in a daily press briefing, foreign ministry spokesman Zhao Lijian again declined to comment on whether China was participating in the oil stocks releases coordinated by the United States.
"The Chinese side will organise a release of crude oil from state reserves according to its own actual needs," said Zhao, adding that it would publish relevant information without delay.
Zhao said that China would maintain communication and co-operation to ensure the long-term stability of the oil market.
*** But even as they insist that this pricing does not conform to the ECB’s own reaction function and forecasts, our understanding is that there is a strong likelihood the ECB will seek to build some optionality into the revised Asset Purchase Program at its upcoming Governing Council meeting on December 16 to allow for a more rapid run-off of the bond purchasing program should inflationary pressures persist.
The European Central Bank’s markets chief
and the Dutch National Bank governor urged an end to emergency
stimulus, highlighting inflation risks while insisting the
recovery can weather new pandemic restrictions.
Executive Board member Isabel Schnabel and Governing
Council member Klaas Knot both suggested increasing vigilance to
the threat of surging prices, just weeks before a crucial
decision on the future of asset purchases.
“The risks to inflation are skewed to the upside,” Schnabel
said in an interview. That was the most hawkish comment yet from
one of institution’s top team of six officials before the
December meeting, prompting investors to resume bets on an
interest-rate hike next year. The plan to terminate emergency
bond buying in March is “still valid,” she added.
The need to build optionality in this next, and presumably final, leg of the ECB bond purchase program is predicated on the central bank’s commitment to sequencing lift-off on interest rates only after the completion of its asset programs.
And while the ECB is united (sort of), in pushing back on late 2022 rate hikes, there is a very broad and tacit understanding that these hikes could very well come soon after, in 2023, with considerably less certainty than is projected by the ECB leadership over its medium-term inflation forecasts.
Chief Economist Philip Lane, and ECB President Christine Lagarde, continue to emphasize that judging from where the ECB sits now, the medium term forecast is still for inflation to drop back below its 2% target level after spiking sharply higher this year, due to an essentially mean-reversion assumption that energy prices will fall back down, faith that supply constraints will ease in the fullness of time, and a technical drop off in the German VAT tax effect come January 2022.
In making the case for continued aggressive stimulus, ECB President Christine Lagarde, while acknowledging that prospects for medium term inflation have improved, even went so far as to emphasize in a November 15 speech that by the fourth quarter of 2022, Eurozone inflation could be back down at 1%.
That forecast, however, is due to a year-on-year base effect comparison to the massive spike in inflation now, in the fourth quarter of 2021, and does not reflect any certitude on the far more germane, and unknown, questions over the potential broadening of underlying inflationary pressures and expectations.
In a direct rebuttal to both Lane and Lagarde, Bundesbank President Jens Weidmann warned one week later that “the fallout from the pandemic could have a marked impact on the inflation setting. And it could well be that inflation rates will not fall below our target over the medium term, as previously forecast.”
For policy purposes, the key point is a concern that the gap between the hawkish and dovish views is in fact not that large.
As stated by ECB Governing Council Member and Belgian National Bank Governor Pierre Wunsch, while the 2023 staff forecast is likely to remain below 2%, “it wouldn’t take much for realized inflation in 2023 to be at 2% — one or two surprises or some second-round effects, so just a fraction of everything we’ve seen in the last three months.”
These differences in forecasts will clearly not be resolved over the next days or even weeks, but the ECB will need to build optionality and policy flexibility for the upside as it gauges the momentum behind underlying inflation impulses going into 2022, including when it rolls out the new “modalities” on December 16 for the 2022 Asset Purchase Program.
European Central Bank policymakers expect the central bank to raise its short-term inflation forecasts next month as uncertainty persists about how quickly it will need to respond to surging prices.
The ECB has consistently underestimated how fast eurozone inflation would rise this year as the economy rebounded from the coronavirus pandemic. Members of the central bank’s governing council said they expected it to raise its 2022 forecast again in December, according to the minutes of its October meeting, published on Thursday.
But council members agreed there was “elevated” uncertainty over the outlook for price growth in 2023 and 2024, which is one of the main yardsticks that the central bank will use to calibrate bond purchases and interest rates next year.
They believe this means they should maintain “optionality” on their future bond purchases for as long as possible, so they can respond if inflation either drops back below their target or stays above.
“While an increase in the upside risks to inflation had to be acknowledged, it was deemed important for the governing council to avoid an overreaction as well as unwarranted inaction, and to keep sufficient optionality in calibrating its monetary policy measures to address all inflation scenarios that might unfold,” it said.
Sen. Joe Manchin (D-W.Va.) told The Hill that he was “looking very favorably,” but hadn’t made a final decision, on supporting Federal Reserve Chair Jerome Powell if he’s renominated as chairman, after the two spoke on Wednesday.
“Well we’re looking very favorably towards that, because I needed that conversation with him. But I have not made up my mind yet. But I’m just saying that it helped an awful lot having him clear up a lot of the concerns I had,” Manchin told The Hill.
This is a political decision and part of that decision will be the difficulty of getting the nominee confirmed. If Republicans were to be largely united in opposition to one nominee, Manchin would be a critical vote, and his leaning toward Powell could help seal the deal (Democrat Jon Tester also leans towards Powell, Warren of course favors Federal Reserve Governor Lael Brainard).
President Joe Biden selected Jerome Powell for a second four-year term as Federal Reserve chair while elevating Governor Lael Brainard to vice chair, keeping consistency at the U.S. central bank as the nation grapples with the fastest inflation in decades and the lingering effects of Covid-19.
The move, announced by the White House on Monday, rewards Powell for helping rescue the U.S. economy from the pandemic and tasks him with protecting that recovery from a surge in consumer prices. A Republican, Powell faces what will likely be a smooth confirmation in the Senate, where he was backed for his first term as chair in an 84-13 vote and whose members he subsequently worked hard to woo.
“Eventually, if we are serious about fighting climate change, the green transition will need to bring about a measurable further rise in the price of carbon, which can be expected to lead to higher fuel and electricity prices.
These effects may become entrenched in expectations if people start to anticipate them.
Similarly, some of the bottlenecks we are observing today may not only reflect the reopening of our economy but also structural forces, such as the secular shift to electric vehicles. Adapting supply capacities to such shifts in demand can take several years.
In other words, if some factors that are by nature temporary – such as supply and demand imbalances – are stronger and last longer, then inflation may become more persistent and broad-based.”
In reading that key passage from Dr. Schnabel’s comments, we believe they are especially significant in tying socially desirable, environmentally conscious green policies to inflation, to the risk and potential for higher energy prices to stick longer than initially, and still widely assumed, by the ECB, and to its potentially longer lasting impact on inflation expectations and dynamics.
ECB’s Schnabel Sees Inflation Risks ‘Skewed to the Upside’
Official reckons resurgent pandemic won’t ‘derail’ recovery
Executive Board member Isabel Schnabel speaks in interview
European Central Bank Executive Board member Isabel Schnabel said there’s an increasing threat of inflation taking hold, as she played down the danger that resurgent coronavirus infections might impede the euro zone’s recovery.
Investors resumed bets on an interest-rate increase next year after her comments in an interview in Frankfurt on Monday, just weeks before a crucial decision on stimulus.
The Federal Reserve looks on course to
consider a more rapid drawdown of its mammoth bond-buying
program just weeks after it instituted a plan to scale the
purchases back in a methodical manner.
A trio of policy makers -- Vice Chairman Richard Clarida,
Governor Christopher Waller and St. Louis Federal Reserve Bank
President James Bullard -- signaled this week that the topic of
a faster taper might be on the table when the Federal Open
Market Committee meets Dec. 14-15.
U.S. Oct. Retail Sales Rose 1.7%, Above Estimate
Treasuries pressured lower, while breakeven inflation rates for TIPS rise to session highs after October retail sales data beats estimates.
U.S. 10-year note futures drop as low as 130-06+ and through earlier session low as well as Monday’s low; 10-year yields around 1.62% move back to slightly cheaper on the day.
U.S. 5-year TIPS breakeven climbs to 3.24%, new all-time high
Belly-led losses flatten 5s30s to session low 71.6bp following the data; futures volumes over the data included around 30k 10-year note futures trading over 3-minute period.
I bring up this scenario because it raises the possibility that the Fed may need to focus on reducing the balance sheet before hiking rates. That’s not on the radar yet; we don’t have any visibility on the Fed’s balance sheet plans after asset purchases end. All the discussion is on rate hikes. As we move closer to March, balance sheet policy will need to come into focus. That’s something I will be looking for.
Dow Jones 11/10/21
Federal Reserve Bank of St. Louis President James Bullard said
Tuesday that he was open to allowing the central bank's massive holdings of
cash and bonds to shrink at some point.
Mr. Bullard, who was speaking in a virtual appearance, was commenting on what
he would like to see happen once the U.S. central bank winds down, or tapers,
the process of expanding its holdings.
At last week's Federal Open Market Committee meeting, the Fed said it would
progressively slow its stimulus campaign of bond purchases and likely complete
that process by the middle of next year. That, in turn, opens the door to what
happens with the Fed's balance sheet: The central bank could keep it steady by
purchasing new bonds to replace maturing ones, or allow holdings to passively
shrink as securities run off.
"I think one thing we could consider going forward, which would lean a little
bit hawkish, would be to allow runoff of the balance sheet at the end of the
taper or shortly thereafter," Mr. Bullard said.
1. A tapering announcement, with tapering beginning in November and ending in the middle of next year, a pace of $15 billion per month, proportionately distributed between treasuries and MBS. This is operationally the same as $20 billion per meeting.
2. A reiteration of the basic “inflation is transitory” story with the acknowledgement that the process is taking longer than expected. I think the Fed needs to modify the language in the statement accordingly, but at the same time can’t drop the word “transitory.” If “transitory” is not in the statement, markets are going to overrun the Fed.
3. Powell will highlight the upside risks for inflation but will add that the Fed won’t know the true inflation story until at least the beginning of next year, more likely the end of the first quarter. The message is that the Fed intends to let the inflation story play out for some time yet.
4. Powell will continue to lean heavily on the inflation expectations story to justify the Fed’s faith in the “transitory inflation” forecast but at the same time will likely acknowledge the data implies greater inflation risks. The Fed likely thinks it already has room to maneuver because there is space between the end of the taper and the SEP-implied forecasts to pull rate hikes forward.
5. Powell will caution that structural changes to the labor market mean that labor force participation may not entirely return to pre-pandemic levels but add that the economy is still a long way from full employment. He will likely repeat his pre-blackout statement that reaching full employment by the latter half of next year is very possible. This is code for “it’s OK to price in rate hikes for the latter half of next year because we may hike rates if the data confirms full employment.”
6. Watch for Powell to say that “policy is in a good place.” Similarly, this is a signal that Powell isn’t ready to fight the markets, a sort of “we think our policy stance is correct and aren’t changing it for you.” Instead, Powell can see the risk relative to the September dots and doesn’t want to prevent markets from preparing for those dots to rise in the December and March SEPs. This would help avoid a surprise like that which occurred when the June SEPs were released.
FOMC Statement and Jay Powell press conference
1. In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
2. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.
3. Getting to your question our baseline expectation is supply bottle necks and shortages will persist well into next year and elevated inflation as well. As the pandemic subsides supply bottle necks will a bait. As that happens inflation will decline from elevated levels. The timing of that is uncertain. We should see inflation moving down by second for third quarter.
4. We are committed to our longer run goal of 2% inflation and to having longer term inflation expectations well anchored at this goal. If we were to see signs that the path of inflation or longer term inflation expectations was moving materially and persistently beyond levels consistent with our goal, we would use our tools to preserve price stability. We will be watching carefully to see if the economy is evolving in line with expectations.
5. if I could follow up, based on your outlook for the labor market, do you think it's possible or likely even that maximum employment could be achieved by the second half of next year? >> JEROME POWELL: If you look at the progress we made over the course of the last year, if that pace were to continue, the answer would be yes, I do think that is possible. Of course we measure maximum employment based on a wide range of figures, but it's within the realm of possibility.
6. To look at your question this way, I don't think we are behind the curve. I believe policy is well-positioned to address the range of plausible outcomes. That is what we need to do. I think it's premature to raise rates today. I don't think it's controversial. I
Fed Rate-Hike Premium Eases Following Front-End Treasuries Rally
Interest rate swaps market are cutting the amount of Fed hike premium around 2022 and 2023 area of the curve, following Tuesday’s front-end rally in Treasuries.
First rate hike has been pushed out to July from June, while 50bp or two hikes remain priced by the end of 2022; pricing of a 25bp June hike have dropped to around 60% from 80% at the end of last week
On the day, U.S. 2-year yields are lower by 4bp and heading for the largest daily drop since February (closing 4.5bp lower Feb. 26), following a wider rally across global bonds after RBA’s policy shift -- large block buyer in 2-year note futures added to front-end gains in late U.S. morning session
The front-end rally has seen U.S. rates volatility crushed, led by upper-left underperformance as rate hike premium erodes; drop in vol was aided by a large $35 million straddle strip package sold over U.S. morning session
With important decisions on the future path of the ECB’s bond purchase programs looming at its subsequent, December meeting, the October meeting will serve mainly, in the words of one official, to “gauge the mood” around the table on inflation.
Our understanding is that these deliberations are likely to lead to a change in the wording of the language around inflation in the ECB’s communications. To what exactly, we are not sure, but the upside directionality of the inflation deliberations, and further upside forecast revisions come December, we believe are all but certain.
Lagarde said inflation had dominated the Governing Council’s discussions.
“We talked about inflation, inflation, inflation,” she said.
Lagarde’s Comments on Inflation Send Euro, Bond Yields Higher
The euro touches an intraday high against the dollar and sovereign bonds in the euro zone decline after ECB President Christine Lagarde comments on inflation at a Frankfurt press conference.
Italian bonds lead euro-area declines, sending the 10-year yield surging 14bps to 1.08% as money markets bet on a 20bps ECB rate hike in December 2022
EUR/USD gains as much as 0.3% to $1.1636
Lagarde says the phase of higher inflation will last longer than expected