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While these submissions don’t always translate into the final NBS figures, Monday’s estimates ranged between 7.9% and 8.2% for the full year 2021 GDP, clustered close to market expectations of about 8.0%. The Q4 2021 estimates ranged between 3.8% and 4.2%, also close to market expectations, but a bit higher than the 3.3% consensus published on Bloomberg that seems a bit of an outlier on the downside.
Officials in Beijing maintain that China’s economy remains “on solid ground” going into the new year, with many still expressing confidence that the economy will grow by more than 5.0% in 2022. That, at least, is the plan.
China’s economy grew by 8.1% in 2021 as industrial production rose steadily through the end of the year and offset a drop off in retail sales, according to official data from China’s National Bureau of Statistics released Monday.
Fourth-quarter GDP rose by 4% from a year ago, according to the statistics bureau. That’s faster than the 3.6% increase forecast by a Reuters poll. For the full year, China economists expected an average of 8.4% growth in 2021, according to financial data provider Wind Information.
Traders Are Pricing Risk of First Half-Point Fed Hike Since 2000
Money markets are reflecting increased speculation that the Federal Reserve might opt for its first supersized boost to borrowing costs in more than two decades.
While a quarter-point increase is still the most likely scenario, swap markets are now pricing in more than 25 basis points of tightening by the end of March. With no move anticipated at this month’s meeting, this suggests traders are at least contemplating the possibility of a 50-basis-point move in March. The Fed hasn’t tightened that much in one shot since May 2000, although back then the central bank’s tightening cycle was already well underway.
Importantly, the Fed still has time to change the narrative before the blackout period. Given that the Fed will be discussing QT, it would be reasonable that ending QE immediately would also be discussed at the January FOMC meeting.
Fed May Hike Rates 4 Times in 2022 on Price Pressure, Evans Says
The Federal Open Market Committee had a median of three interest-rate increases for this year, but it could be four if the data don’t improve quickly enough on inflation, Chicago Fed President Charles Evans says.
Asked whether the FOMC could decide at its January meeting to stop asset purchases earlier than March, he says: “I have to hear the arguments. I am not sure what additional data I have seen since December” would cause favoring a change at the January meeting. “We will have to go to the meeting and talk about it”
“I would prefer to adjust the policy rate gradually and move into balance-sheet reductions earlier than we did in the last cycle,” she said in a virtual panel discussion at the Allied Social Science Associations conference Friday. “I would not prefer to do it simultaneously,” she said, adding “you could imagine adjusting the balance sheet” after “one or two hikes.”
Most likely, the data is not going to influence this path in a dovish direction. The primary risk is that the Fed adds a fourth rate hike to the March SEP. That’s the direction the data is moving.
Fed's Bullard: Four Interest Rate Rises in 2022 Now Appear Likely
Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank will need to move more aggressively on rate rises this year as it seeks to stem an inflation surge, amid a job market that could see the unemployment rate fall below 3% by the end of the year.
"We want to bring inflation under control in a way that does not disrupt the real economy, but we are also firm in our desire to get inflation to return to 2% over the medium term," Mr. Bullard said in a Wall Street Journal interview Wednesday.
He spoke just after the release of government data that showed the biggest increase in what consumers pay for goods and services since 1982, with the consumer-price index jumping by 7% in December, compared with the same month in 2020. He said the headline figure was higher than expected but consistent with his expectations, adding he sees price pressures easing over the course of the year toward a 3% reading on the personal-consumption expenditures price index.
To get there, Mr. Bullard, who holds a vote on the rate-setting Federal Open Market Committee this year, said a more hawkish path for monetary policy is needed relative to his recent expectations.
Whereas he recently believed the Fed would need to raise rates three times this year, "I actually now think we should maybe go to four hikes in 2022." He said it is important for the Fed to start raising rates "sooner rather than later" because pulling back on stimulus in the near term and doing so steadily reduces the risk of an even more aggressive path should inflation not moderate back toward the target.
The drumbeat for the Federal Reserve to
implement four quarter-point interest-rate hikes this year is
growing -- and with the speed that markets have been moving,
there’s a possibility that traders may soon look to protect
themselves against the risk of even faster tightening.
Swaps are already indicating the central bank’s target will
be 88 basis points higher by the end of this year -- seen by
many as a sign the market is baking in three hikes, plus the
possibility of a fourth in 2022 -- and momentum is building for
the first increase to take place as soon as March. With U.S.
inflation data ahead this week, as well as testimony from top
Fed officials, it could be just the beginning of a bigger
The PBoC will become more proactive in bumping up support for the real economy. Monetary policy will be targeted to further beef up support for high-tech, small, and micro businesses, green development, and other key areas and weak links of the economy.
On the aggregate side, the PBoC will leverage multiple tools to keep liquidity reasonably ample, “strengthen the stability” of credit growth, and reduce the financing costs of enterprises while keeping it all at “an overall stable” level. The PBoC will also actively ramp up structural policy support.
Beijing’s aim is for new loans to reach about 20 trillion yuan in 2022. Officials continue to support expectations that the bank reserve ratio will be cut by another 0.5 percentage points in Q1, and if truly needed, the PBoC will not rule out lowering the one-year loan prime rate (LPR) rate in the next few months.
PBOC Adopts New Loan Tools to Support Smaller Firms
China’s central bank adopts a new loan
support tool for smaller businesses from Jan. 1 through June
2023 to boost lending to smaller businesses, according to a
statement on PBOC website Jan. 1.
* PBOC will encourage local banks to increase loans to smaller
firms and cut costs, in order to ensure employment and stabilize
Our baseline is three rate hikes in 2022 plus quantitative tightening. The Fed penciled in three rate hikes for 2022 in the December SEP. While it seems like the Fed should expect four rate hikes if it anticipates a March hike, I think it expects that one quarter will be used for scaling back the size of the balance sheet. Such quantitative tightening (QT) would reduce the number of rate hikes needed to stem inflationary pressures. Waller suggested that QT should begin by this summer. That suggests a possible timeline of rate hikes in March, September, and December, with QT in June.
The risks tilt toward four hikes in 2022. The Fed’s December SEP projections of 2.7% core inflation and 3.5% unemployment at the end of 2022 appear to be an attempt to finally get ahead of the inflation story. If inflation does not decelerate as expected, the Fed will feel under pressure to add a fourth rate hike. Given the expectation that inflation remains elevated in the near term, the Fed would likely not recognize this until the middle of the year. To be sure, there is a risk that the Fed needs to pull back on its rate hike expectations, but I think that outcome would be more likely if demand were to suffer such that unemployment unexpectedly began to rise. That said, there doesn’t appear to be a big risk of that outcome now. Either way, the situation will evolve as the data rolls in over the course of the year.
Increasing conviction among investors that the Fed indeed will raise rates at least three times this year has driven up Treasury yields, with five-year rates hitting a pandemic-era high Tuesday. Markets are pricing in 63% odds of a rate hike in March.
A jump in U.S. Treasury yields helped the dollar post its largest daily gain in nearly two months on Monday, signaling that the currency could extend last year’s rally as markets anticipate the Federal Reserve will initiate a cycle of interest-rate increases this year.
The Bloomberg Dollar Spot Index climbed 0.6% in the first trading session of 2022, erasing last week’s losses, amid an across-the-board selloff in Treasuries. That drop pushed 10-year yields up by as much as 10 basis points, the largest gain since early December.
Eurodollars continue to pressure lower, with the strip dropping as much as 12bp across blue-pack contracts (Mar25-Dec25) in an aggressive bear-steepening move. White-pack contracts outperform, although May liftoff remains priced with a total of three hikes for 2022 continuing to be expected.
Into the front-end selloff,2-year yields rise to 0.80% and highest since March 2020, while further out the 7-year yields rise over 10bp on the day; around 26bp of hikes are now priced into the May FOMC meeting with 77bp priced by end of the year -- or little over three full 25bp rises
On the monetary front, the stimulus will likely come in two phases. From when the most recent Reserve Requirement Ratio cut takes effect on December 15 to the Spring Festival on February 1, there will be an injection of more liquidity into the markets through the ramping up of re-lending to banks, including through a recently introduced decarbonization supportive tool. Another RRR cut will probably come then in February, although some officials think an interest rate cut may be less likely.
For perspective on magnitude and the room for stimulus, the CEWC meeting set the CPI target for 2022 at 3.0%, the same as for 2021, but predicted inflation would rise in a more modest way, from 0.9% in 2021 to 2.2% in 2022. And so, officials believe inflation will pose no major constraints on monetary policy.
On the credit front, the CEWC pledged to stabilize credit growth, keeping total social financing growth broadly in line with nominal GDP growth.
That means next year’s credit target will be basically the same as this year, or slightly increased. That too will be front loaded — new loans are expected to reach about 20 trillion yuan in 2022, with the first quarter likely to be close to 8 trillion yuan, up about 300 billion yuan from 7.7 trillion over the same period last year.
Yicai Global 12/27/21
China’s Central Bank Vows to Promote Real Estate Market’s Healthy Development
China’s central bank has pledged to promote the real
estate market’s healthy development, saying it will safeguard the legitimate
rights and interests of homebuyers and better meet their reasonable housing
The People’s Bank of China made the commitment at its fourth-quarter monetary
policy committee meeting on Dec. 24, according to an announcement the next
Structural monetary policy tools should be used with precision to transform
those policy tools linked to the real economy into market-oriented tools that
are beneficial to small and micro enterprises as well as individual industrial
and commercial households, the PBOC said.
Special refinancing will be used to reduce carbon emissions and encourage
green and high-efficient coal application, the bank said, adding that it will
guide financial institutions to boost support for small and micro firms, tech
innovation and eco-friendly development.
The PBOC will encourage increased lending to the manufacturing sector to
ensure that financial support for private enterprises is compatible with their
contribution to economic and social development, accelerating the realization
of a green financial system aimed at peak carbon-dioxide emissions and carbon
ANOTHER COVID SPEECH — At 2:30 p.m., President JOE BIDEN will once again address the nation and outline another new plan to tackle another new, more highly transmissible variant of the coronavirus that threatens to once again push America’s health care system to its breaking point. The emphasis of the latest Biden plan, according to the White House, is to “mitigate the impact unvaccinated individuals have on our health care system, while increasing access to free testing and getting more shots in arms to keep people safe and our schools and economy open.”
It’s a plan that recognizes a few hard-earned truths about the two-year-old pandemic in America: Vaccine holdouts are here to stay, and with every new Covid-19 wave they will overload hospitals, which will need extra government support. For everyone else, widespread testing and boosters are the only alternative to lockdowns and recession.
You ask, I answer, now with some quick thoughts on next week’s dot plot.
The theme for the week is my expectation of a high probability that the Fed hikes rates in March. My view is that the balance of risks is changing rapidly, as evidenced by the Fed’s sharp pivot from patience to accelerating the pace of tapering, that March must be considered in play. To be sure, we have three months of data before we get there, so anything can happen, but the data and the Fed narrative shift are driving us in that direction.
Treasury Curve Flattens as Waller Says March Fed Meeting Is Live
The spread between U.S. Treasury 5-year and 30-year Treasuries flattened to session lows after Federal Reserve Governor Christopher Waller said he wants to put the March FOMC meeting on the table for liftoff if needed. In the wake of this week’s Fed meeting, expectations were that May was a live meeting. As mentioned earlier, Waller, an infrequent Fed speaker, was among the first to the faster taper camp.
Last night at dinner I gave my daughter the choice of either reviewing the latest issue of Fine Woodworking magazine or working through the SEP projections and re-watching Powell’s press conference. She chose the latter (kids these days, right?). Between that review, questions from clients overnight, and some other chatter that has crossed my desk, I have some additional thoughts on the results of the FOMC meeting.
Last night’s note had a short-term focus, primarily on the timing of the first rate hike. I think Powell set the stage for a March hike. The bar for a hike is pretty low at this point, just getting the Fed to reach consensus on full employment. That might sound like a big hurdle but note how many times Powell emphasized “rapid progress toward maximum employment.” We are not talking about “ground to cover” anymore. And, critically, note the absence of this line from the November press conference:
"The unemployment rate was 4.8 percent in September. This figure understates the shortfall in employment,
particularly as participation in the labor market remains subdued."
That second line isn’t in the December press conference. Why not? There is no hidden unemployment anymore now that the Fed views labor force participation as a lagging indicator. The unemployment rate is now taken at face value and the current 4.2% is just a hair over the Fed’s longer run projection of 4%. The Fed can and will dress up the full employment story with all sorts of labor market indicators, but the short version is that the economy is right on top of it already.
The Fed has plenty of time to telegraph a March rate hike. The January statement can clear the way for a rate hike and declare full employment or an expectation to meet full employment by March barring an Omicron disaster. In addition, we will have the Humphery-Hawkins testimony and even Powell’s confirmation hearings to bring everyone up to speed. Plenty of opportunities to get the word out. Powell made clear that tapering would be complete by the time of the March meeting, and any time after asset purchases end the Fed can hike. And this from Powell is about as close as he can get to autopilot without outright saying “March”:
"…so we've been calling out the fact that those were becoming longer and more persistent and larger and now
we're in a position where we're ending our taper within the next, well, by March, in two meetings and we'll be in a
position to raise interest rates as and when we think it's appropriate and we will, to the extent that's appropriate."
Because of Omicron, the debate is March versus May. If Omicron wasn’t a concern, then it would be March. And Omicron might not warrant any delay at all – see today’s move by the Bank of England.
Importantly, note that the Fed has repeatedly surprised on the hawkish side since June, so a March hike absolutely must be in play. The June dots, pulling forward the taper into 2021, the September dots, the September validation of a November taper, the acceleration of the taper, the December dots, and I think Powell all-but-validated a March hike yesterday, which I didn’t expect. Simply put, I have been on the hawkish leading edge of the curve for months and yet the Fed has still been a notch ahead of me. And, to Powell’s credit, that hawkish evolution has been accepted by the markets without disruption.
I expect the Fed will begin unwinding the balance sheet soon after rate hikes commence. That said, the Fed has just begun to struggle with this topic. Back to Powell:
"So, you know, with the balance sheet, we did have a balance sheet discussion as sort of a first discussion of
balance sheet issues today at our meeting this week. We'll have another at the next meeting and another at the
meeting after that, I suspect. These are interesting issues to discuss. Didn't make any decisions today. We
looked back at what happened in the last cycle and people thought that was interesting and informative, and
but to one degree or another people noted that this is just a different situation, and those differences should
inform the decisions we make about the balance sheet this time so haven't made any decisions at all about
when runoff would start but we'll be continuing to, in relation to when either liftoff happens or the end of the
taper but those are exactly the situations we'll be turning to in coming meetings."
The first key takeaway in that paragraph is that the last cycle is at best only a rough guide to how the Fed will manage the balance sheet this cycle. The second key takeaway is that the Fed will be considering options in the next few meetings (end of taper or liftoff). The primary difference between this cycle and the last is the strength of the rebound. As such, the Fed isn’t going to wait nearly two years after the first rate hike before it begins reducing the balance sheet. More likely is that it will happen soon after the first rate hike, within 6 months at the most. Arguably, that comparison with the last cycle also argues for a faster unwind as well.
Finally, thinking about how this year evolves, have we reached “peak hawkishness?” I think the key is the 2.7% core inflation forecast for 2022. That feels to me like the Fed is trying to get ahead of the inflation numbers after being behind all year. In other words, the Fed might think that between that forecast and the three rate hikes, it won’t have to get more hawkish in 2022. But why not just go all the way and predict four hikes if there is a high likelihood the Fed will go in March? First, going from zero to four hikes when the market anticipates two would risk sending a message that the Fed was so far behind the curve it needed to shift to a restrictive policy more quickly. Second, three hikes leaves open the possibility of using one quarter to initiate quantitative tightening (this would follow the 2017 playbook), so they already have four policy moves in mind for 2022. That leaves open the possibility of a March rate hike yet still holding the 2022 dots at three.
For the Fed to get more hawkish early in the year, we should be looking for signs that the inflation forecast is already in jeopardy. Remember, there is a widely held expectation that the Fed will get helped by the base effects pulling inflation lower after the first quarter. I would be cautious here as the Fed should look through the base effects to the monthly numbers; the Fed should clarify this distinction. The Fed could be waiting for that inflation decline before becoming more hawkish. So, my advice is to watch the month-over-month inflation numbers. The second thing to be watching is wages. The Fed is betting that wage pressures don’t intensify (note that Powell talked about wages as a signal of tightness in the labor market). That’s an obvious implication of the sustained 3.5% unemployment forecast starting next year in the context of declining inflation throughout the forecast horizon. If wage pressures become more obvious or it looks like unemployment will be sinking below 3.5% by the end of the year, the Fed will turn more hawkish. Third, of course, is watching measures of long-term inflation expectations.
That’s all for today. A lot to process after a busy week.
*WALLER: NO NEED TO DELAY BALANCE SHEET ADJUSTMENT
*WALLER: CAN START BALANCE SHEET SHRINKING SOONER AFTER LIFTOFF
*WALLER: CAN START B/S RUNOFF WITHIN ONE/TWO MEETINGS OF LIFTOFF
*WALLER FAVORS STARTING TO SHRINK BALANCE SHEET BY EARLY SUMMER
The EU will keep the list of possible new sanctions undisclosed for now to keep Russia’s President Vladimir Putin guessing, but some ideas have already been floated in off-the -record, informal conversations with EU officials involved in the preparation of the retaliation measures. One might even think they are being deliberately leaked with no fingerprints, but what do we know.
To start, in their summit conclusions, the 27 European leaders will say, "Any further military aggression against Ukraine will have massive consequences and severe cost in response," according to a draft of the statement.
That is a clear copy-paste of the same sentence in the statement of G7 foreign ministers that was issued on Dec 12th, which came after Moscow had amassed more than 100,000 troops on its border with Ukraine and Washington had briefed European capitals that an invasion of Ukraine was possible in January.
Officials say that if Russia decides to test the resolve of the West over Ukraine, the EU will adopt an "escalation ladder" approach, depending on what action Russia undertakes. It would be coordinated with the U.S., Britain, and Canada.
EU Warns Russia Further Aggression to Have Massive Consequences
The European Council stresses the urgent need for Russia to de-escalate tensions caused by the military build-up along its border with Ukraine and aggressive rhetoric, according to summit conclusions published by a spokesman in tweets.
Reiterates support for Ukraine’s territorial integrity
Warns any further military aggression “will have massive consequences and severe cost in response, including restrictive measures coordinated with partners”