Altogether this argues for the dots to edge higher in 2022 and 2023 such that the median FOMC participant anticipates a rate hike in 2023. I think any reasonable forecast likely has the economy meeting the Fed’s employment and inflation objectives as early as the end of 2022 and as such it doesn’t seem particularly credible within the context of the new framework to not expect a rate hike in 2023.

The EU and US will also commit to putting an end before July 11 to the long -standing conflict over aircraft subsidies in the Boeing-Airbus wars, and in doing so will prevent an escalation of the retaliatory measures that the EU has warned it could impose under WTO rulings should there be no deal by that date.

** In addition to a global minimum tax, and indeed as a condition of that agreement with the United States, the G7 also struck a deal on the even thornier issue of a cross-border digital tax, agreeing in its communique that the largest and most profitable multinational digital firms [read Google, Amazon, Facebook, Apple, Microsoft, etc.] will have to pay [some] tax in the countries where they operate, not just in their tax-based domiciles.

The G7 will commit to “properly embed” climate change and biodiversity loss in economic policymaking and will use carbon pricing as a policy lever. Central banks, and supervisory agencies, are to treat risks posed by climate change as financial risks.

The G7 will agree that the global financing system needs to be “greened” to better price climate risks and will call for mandatory climate related financial disclosures from companies to help markets value shares accordingly.

To avoid many different standards around the world for what constitutes a “green” or “sustainable” investment, the G7 will pledge to work among themselves and with other international partners towards one common line.

Lest there be any questions as to the seriousness of Beijing’s efforts and its intentions, a very senior official source had this to say after the ban:
There is no doubt that this time we have cracked down on encrypted virtual currency more severely than in September 2019, and the price of virtual currency will be hit even harder than last time. We must provide an absolutely safe financial environment for the pilot and promotion of the digital RMB in China [our emphasis added].

EU officials say in private that the 15% rate is likely to be good enough for Luxembourg, Ireland, and other EU tax havens. There is a very strong expectation that the G20 will reach an agreement in principle on that 15% global minimum tax rate during the G20 finance ministers and central bank governors’ meeting in Venice in the first days of July.

Once the money is raised, and disbursed, replenishment of the 500 billion euros the Commission wants distributed in grants is proposed to come from a series of EU-wide new taxes, but which now national leaders will have to approve – far from a done deal.

Taxes under consideration include a levy on non-recyclable plastics, on digital services, a carbon border adjustment tax on imports into the EU from countries with more lax CO2 emission standards, a share of the trade in CO2 emission permits for maritime and air transport, and a slice of the national corporate tax on large multinationals that benefit from operating within the EU single market.

The meeting warned of shocks overseas, and sought to deal with imported inflation, and to enhance expectations management with well-prepared policies. We noted that much more aggressive fiscal stimulus and strong economic recovery expectations in the US have resulted in rising inflation and have boosted global asset prices, triggered more capital flows to the US from emerging markets, and increased debt risks in emerging economies. We should pay attention to the changes in monetary policy in emerging economies, which may result in a short-term impact on our financial system.

Falling sales, weak starts, and rising prices are all consistent with a market where demand has pushed supply to the limit. On the existing home side of the ledger, limited inventory is holding back sales and pushing up prices. Higher prices will push lower-income purchasers out of the market while, in theory, inducing some homeowners to sell. But if you sell your house, you have a problem – finding a new one. Also in theory, builders could bring new product to the market, but in practice right now builders are constrained by high materials costs (although lumber has come down off its highs), labor shortages, and lot shortages.

The housing situation is analogous to the current automobile market. This is the best time to sell a used car, but not so great for buying a new car. Automakers are also struggling with rising costs and, most importantly, a chip shortage that severely limits new production:

In both cases, we should expect the end result of slower sales in the near term as, hopefully, the supply situation adjusts. Some commentators will suggest that slower sales signal softening demand, but don’t be fooled. It’s the supply constraints in both cases that limit growth. It can’t be “solved” with easier monetary or fiscal policy. That said, it could press the Biden administration to push an even faster reopening of the economy.

Senior Chinese sources hope the talks may be held by the end of this month. Furthermore, our understanding is that media reports that Vice-Premier Hu Chunhua has replaced the elderly but still extremely highly respected Vice-Premier Liu He as the top Sino-US trade negotiator are false, and that these negotiations are still being led by Liu.

Bottom Line: Fed speakers continue to yield no ground, leaving me unable to change my expectations about the path of policy. The data flow, however, makes the risks to the Fed’s position look increasingly one-sided. A modest April inflation number would give the Fed some room to breathe whereas a hot print will push hard against its narrative, but it won’t drop that narrative easily.

More flexibility in ETF purchases
The calls on and from what we understand even within the BOJ have been mounting to adjust the scale of its equity ETF purchases linked to the Nikkei and Topix indices as Japanese stock markets hit highs not seen for a generation.

We expect the policy review is likely to add some additional flexibility to the BOJ ETF program to enable the central bank to reduce its purchases when markets are high, or rising steeply, and to increase them when they are low, albeit without committing to any specific price levels or metrics.

Expansion of the 10-year JGB band guidance.
As we flagged just under a month ago, (see SGH 1/20/2021; “BOJ: Positioning for Steeper H2 Curve”), we believe the Bank of Japan is more than likely to expand the band within which it allows the 10-year JGB to trade by ten basis points on each side, from plus or minus 0.2% around 0.0%, to plus or minus 0.3%.