Connecting Global Markets and Policy

Persian Daric – First Global Reserve Currency. Guaranteed 95.83% purity gold. Introduced by Darius I the Great, 521 – 486 BC. In circulation until 330 BC defeat of the Persian Achaemenid Empire by Alexander the Great of Macedonia.
SGH Macro Advisors provides macro-policy research to the world’s most influential hedge funds, money managers, and financial policymakers.
Our firm is an industry leader in a unique and highly specialized premium media space, producing well-informed, cutting-edge reports and briefings on the major central bank, fiscal, geopolitical, and political events that drive global economies and financial markets.
Over the years we have built a reputation as a trusted, highly valued source of un-biased, un-conflicted information and insight to the policymaking and investment communities, one that is materially differentiated from street research, the press, and think tanks.
Highlights
SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.
September 18, 2023
SGH Insight
That said, Powell will still note that faster growth could slow the return to price stability and, if it continues, that could warrant another rate hike. I think the Fed will want to see if the third quarter growth spurt sustains momentum in the fourth quarter before deciding if another rate hike is necessary. Such data likely won’t be available until the December FOMC meeting at the earliest. I also expect the usual hawkish talk about the job not being done and a reminder that inflation progress could reverse as seen more than once in this cycle.
I think the Fed retains another rate hike in the 2023 dots. The balance of risks favors some downward drift in the distribution of the 2023 dots, but I think the improved growth outlook will justify retaining that last rate hike in the SEP. The risk is that the last dot disappears, although that would be akin to a declaration that the cycle is definitely over.
The improved growth outlook all will reduce the number of projected rate cuts in 2024 compared with the June SEP. The easy way to think about this is that the Fed’s forecast will simply push forward the slowing that was anticipated for the second half of 2023. If the Fed pushes it back three months, it probably delays the timing of the first rate cut in the next cycle by a quarter, which then translates into 75bp of cuts for 2024. If the Fed pushes forward the slowdown by six months, the risk is that the Fed will then expect only 50bp rate cuts in 2024.
Market Validation
I think the Fed retains another rate hike in the 2023 dots. The balance of risks favors some downward drift in the distribution of the 2023 dots, but I think the improved growth outlook will justify retaining that last rate hike in the SEP. The risk is that the last dot disappears, although that would be akin to a declaration that the cycle is definitely over.
The improved growth outlook all will reduce the number of projected rate cuts in 2024 compared with the June SEP. The easy way to think about this is that the Fed’s forecast will simply push forward the slowing that was anticipated for the second half of 2023. If the Fed pushes it back three months, it probably delays the timing of the first rate cut in the next cycle by a quarter, which then translates into 75bp of cuts for 2024. If the Fed pushes forward the slowdown by six months, the risk is that the Fed will then expect only 50bp rate cuts in 2024.
Bloomberg 9/25/2023
In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.
The new projections reflected that. Fed officials now expect their benchmark rate to be at 5.1% by the end of next year, according to their median estimate, up from 4.6% in the last projection round in June.
During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally.
Treasuries sold off after the decision, with the yields on two-, five- and 10-year US government bonds all rising to the highest in more than a decade. Wednesday’s 0.9% drop for the S&P 500 was the second-worst this year on a Fed day, second only to the 1.7% decline registered in March.
In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.
The new projections reflected that. Fed officials now expect their benchmark rate to be at 5.1% by the end of next year, according to their median estimate, up from 4.6% in the last projection round in June.
During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally.
Treasuries sold off after the decision, with the yields on two-, five- and 10-year US government bonds all rising to the highest in more than a decade. Wednesday’s 0.9% drop for the S&P 500 was the second-worst this year on a Fed day, second only to the 1.7% decline registered in March.
September 14, 2023
SGH Insight
The ECB has every reason to convey a far more tempered stance at this juncture, and a hope that this could be it for rate hikes, and that time, especially if inflation eases and thus real rates stay tight, will now be on their side.
But we suspect that our “hawkish lean” still lurks as well in the Governing Council very close beneath the surface.
With just one inflation print between now and October, that meeting will clearly be a hold. But we doubt that the decision at hand by December will be whether and when to cut, but rather an assessment of whether the ECB has done enough, as Lagarde said today, “to reinforce” the trajectory of easing inflation that it has penciled in for 2024 and through 2025.
Market Validation
But we suspect that our “hawkish lean” still lurks as well in the Governing Council very close beneath the surface.
With just one inflation print between now and October, that meeting will clearly be a hold. But we doubt that the decision at hand by December will be whether and when to cut, but rather an assessment of whether the ECB has done enough, as Lagarde said today, “to reinforce” the trajectory of easing inflation that it has penciled in for 2024 and through 2025.
Bloomberg 9/15/2023
Hawkish policymakers at the European Central Bank might still push for another interest-rate increase in December if wages keep rising and inflation proves stickier than anticipated, the Financial Times reports, citing people familiar with their thinking.
Bloomberg 9/15/2023
Another interest-rate increase by the European Central Bank can’t be ruled out — even after Thursday’s signal from officials that borrowing costs may have reached a peak, Governing Council member Bostjan Vasle said.
While slower economic growth should help policymakers in their quest to return price gains to the 2% goal, wage developments and fiscal policy still pose “significant risks,” according to Slovenia’s central bank governor. Recent energy-price pressures may also turn out to be more permanent.
“I wouldn’t exclude that further hikes might be necessary,” Vasle said in an interview in Santiago, Spain, where he’s attending a gathering of euro-zone finance chiefs. “What we’ll be doing in the future depends crucially on new information we’ll receive.”
“At the December meeting, we’ll have an additional set of new information and also new forecasts,” he said. “We’ll have three more readings of inflation, we’ll have more information on what’s going on with growth dynamics. I believe this will add to the significance of this meeting.”
Hawkish policymakers at the European Central Bank might still push for another interest-rate increase in December if wages keep rising and inflation proves stickier than anticipated, the Financial Times reports, citing people familiar with their thinking.
Bloomberg 9/15/2023
Another interest-rate increase by the European Central Bank can’t be ruled out — even after Thursday’s signal from officials that borrowing costs may have reached a peak, Governing Council member Bostjan Vasle said.
While slower economic growth should help policymakers in their quest to return price gains to the 2% goal, wage developments and fiscal policy still pose “significant risks,” according to Slovenia’s central bank governor. Recent energy-price pressures may also turn out to be more permanent.
“I wouldn’t exclude that further hikes might be necessary,” Vasle said in an interview in Santiago, Spain, where he’s attending a gathering of euro-zone finance chiefs. “What we’ll be doing in the future depends crucially on new information we’ll receive.”
“At the December meeting, we’ll have an additional set of new information and also new forecasts,” he said. “We’ll have three more readings of inflation, we’ll have more information on what’s going on with growth dynamics. I believe this will add to the significance of this meeting.”
September 12, 2023
SGH Insight
Markets are still favoring a pause and are pricing a European Central Bank rate hike this week at less than even odds.
But we are switching our expectations for the ECB interest rate decision this Thursday from a pause to a 25-basis points hike.
The more we re-run in our minds what we have heard from ECB officials, wargame their tactical choices, and analyze the data and risk management dynamics that will be debated at the Governing Council meetings tomorrow and Thursday, the less comfortable we are with our briefly held, and highly unusual for us dovish call that they will pause at this meeting.
The forecasts, as characterized by ECB Vice President Luis de Guindos, are likely to show a lower growth trajectory than expected in June, and an inflation outlook that is “more or less” as expected in June.
Putting a finer point on that inflation outlook, analysts expect that is likely to translate into a slightly higher figure in the near term, and perhaps a small tweak lower to the 2.2% outlook for 2025 due to slower economic activity. But even a small revision to 2025 inflation, if it does show up in the numbers, will be insufficient progress for ECB hawks, and the leadership, to hang their collective hats on.
Market Validation
But we are switching our expectations for the ECB interest rate decision this Thursday from a pause to a 25-basis points hike.
The more we re-run in our minds what we have heard from ECB officials, wargame their tactical choices, and analyze the data and risk management dynamics that will be debated at the Governing Council meetings tomorrow and Thursday, the less comfortable we are with our briefly held, and highly unusual for us dovish call that they will pause at this meeting.
The forecasts, as characterized by ECB Vice President Luis de Guindos, are likely to show a lower growth trajectory than expected in June, and an inflation outlook that is “more or less” as expected in June.
Putting a finer point on that inflation outlook, analysts expect that is likely to translate into a slightly higher figure in the near term, and perhaps a small tweak lower to the 2.2% outlook for 2025 due to slower economic activity. But even a small revision to 2025 inflation, if it does show up in the numbers, will be insufficient progress for ECB hawks, and the leadership, to hang their collective hats on.
Bloomberg 9/13/23
Traders ramped up wagers that the European
Central Bank will deliver a quarter-point interest-rate hike
amid growing concerns that the region faces persistently high
inflation.
Money markets now show a 70% chance that the central bank
will raise rates on Thursday, compared with a 20% probability
earlier this month.
The Times 9/14/2023
The European Central Bank (ECB) has increased interest rates for the tenth time in a row to the highest since the monetary authority was created more than two decades ago.
Rates in the eurozone were increased by 0.25 percentage points to 4 per cent in a move that surprised analysts, who thought the central bank would leave rates unchanged, although the call was tight heading into the meeting.
Traders ramped up wagers that the European
Central Bank will deliver a quarter-point interest-rate hike
amid growing concerns that the region faces persistently high
inflation.
Money markets now show a 70% chance that the central bank
will raise rates on Thursday, compared with a 20% probability
earlier this month.
The Times 9/14/2023
The European Central Bank (ECB) has increased interest rates for the tenth time in a row to the highest since the monetary authority was created more than two decades ago.
Rates in the eurozone were increased by 0.25 percentage points to 4 per cent in a move that surprised analysts, who thought the central bank would leave rates unchanged, although the call was tight heading into the meeting.
September 11, 2023
SGH Insight
Bottom Line
It’s always risky to shift a position on a call where the market odds are sitting at 50-50, and perhaps even risky ahead of a CPI report. It’s a space where it is easy to find yourself on the other side of your own call with each new data point. After all, the odds are 50-50 for a good reason. The data is stronger than expected and the Fed has highlighted that stronger than expected activity could lead it to hike rates again. At the same time, however, lower inflation reduces the urgency to hike rates again, and the Fed is balancing policy against these two considerations. While my optimism hasn’t change, and indeed the data flow has supported the growth story, the tone of the conversation now leads me to believe that even with growth coming in faster in the third quarter, as long as core inflation stays low in these next two prints, the Fed will believe it can wait past the Oct/Nov meeting until it has much more visibility on the fourth quarter to decide if it needs to push rates up another notch.
Market Validation
It’s always risky to shift a position on a call where the market odds are sitting at 50-50, and perhaps even risky ahead of a CPI report. It’s a space where it is easy to find yourself on the other side of your own call with each new data point. After all, the odds are 50-50 for a good reason. The data is stronger than expected and the Fed has highlighted that stronger than expected activity could lead it to hike rates again. At the same time, however, lower inflation reduces the urgency to hike rates again, and the Fed is balancing policy against these two considerations. While my optimism hasn’t change, and indeed the data flow has supported the growth story, the tone of the conversation now leads me to believe that even with growth coming in faster in the third quarter, as long as core inflation stays low in these next two prints, the Fed will believe it can wait past the Oct/Nov meeting until it has much more visibility on the fourth quarter to decide if it needs to push rates up another notch.
MarketWatch 9/14/2023
U.S. Treasury yields mostly dipped Thursday morning as fed funds futures traders continued to boost the chances of no further interest rate action by the Federal Reserve for the rest of this year and as the European Central Bank signaled it might also be done tightening monetary policy.U.S. bond yields edged mostly lower Thursday morning as traders continued to price in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% at its policy meeting on Sept. 20. Meanwhile, the chance of the central bank also standing pat at the subsequent meeting in November inched up to 63.4%, according to the CME FedWatch Tool. And traders boosted the likelihood of no action in December to 57.6
U.S. Treasury yields mostly dipped Thursday morning as fed funds futures traders continued to boost the chances of no further interest rate action by the Federal Reserve for the rest of this year and as the European Central Bank signaled it might also be done tightening monetary policy.U.S. bond yields edged mostly lower Thursday morning as traders continued to price in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% at its policy meeting on Sept. 20. Meanwhile, the chance of the central bank also standing pat at the subsequent meeting in November inched up to 63.4%, according to the CME FedWatch Tool. And traders boosted the likelihood of no action in December to 57.6
August 31, 2023
SGH Insight
The Canadian and Australian central banks, either finishing out or done with tightening, are turning their attention to how to fend off growing speculation that rate cuts will be brought forward – in Australia’s case, to early next year.
In Canada too, where the Bank of Canada (BOC) has not yet declared its 2% inflation goal in sight let alone attained, markets are assuming that with a headline CPI inflation rate at 3.3% in July, the BOC has topped out at a cycle peak of 5% and are expecting the BOC to cut rates by the summer of 2024.
This is notwithstanding important data in the interim including Friday’s release of second quarter GDP, forecast to have grown an annualized 1.2% in the second quarter from 3.1% a year earlier. If it fails to show growth moderating in line with the BOC’s projection of an annualized 1.5% rate, it could raise the odds of another hike sometime this year.
To be clear, while we see 5% as the BOC’s policy peak, the BOC noted in July persistent excess demand, reflecting its intention to hold rates higher and for longer than markets are pricing.
...The Canadian and Australian central banks, either finishing out or done with tightening, are turning their attention to how to fend off growing speculation that rate cuts will be brought forward – in Australia’s case, to early next year.
The RBA is just as cautious regarding the path to 2% inflation, notwithstanding this week’s stark slowing in July inflation data that has markets already tipping the RBA is done at its 4.1% cash rate.
While we agree the RBA won’t move rates again at its September 5 policy meeting, it is more likely than Canada to finish out its cycle with a final 25bp-hike, to 4.35%, though not until its November 7 policy meeting, a few days ahead of the November 10 release of the upgraded economic projections.
Market Validation
In Canada too, where the Bank of Canada (BOC) has not yet declared its 2% inflation goal in sight let alone attained, markets are assuming that with a headline CPI inflation rate at 3.3% in July, the BOC has topped out at a cycle peak of 5% and are expecting the BOC to cut rates by the summer of 2024.
This is notwithstanding important data in the interim including Friday’s release of second quarter GDP, forecast to have grown an annualized 1.2% in the second quarter from 3.1% a year earlier. If it fails to show growth moderating in line with the BOC’s projection of an annualized 1.5% rate, it could raise the odds of another hike sometime this year.
To be clear, while we see 5% as the BOC’s policy peak, the BOC noted in July persistent excess demand, reflecting its intention to hold rates higher and for longer than markets are pricing.
...The Canadian and Australian central banks, either finishing out or done with tightening, are turning their attention to how to fend off growing speculation that rate cuts will be brought forward – in Australia’s case, to early next year.
The RBA is just as cautious regarding the path to 2% inflation, notwithstanding this week’s stark slowing in July inflation data that has markets already tipping the RBA is done at its 4.1% cash rate.
While we agree the RBA won’t move rates again at its September 5 policy meeting, it is more likely than Canada to finish out its cycle with a final 25bp-hike, to 4.35%, though not until its November 7 policy meeting, a few days ahead of the November 10 release of the upgraded economic projections.
Bloomberg 9/11/2023
The Bank of Canada held interest rates steady and kept the door open to further hikes, with economists seeing its historic tightening cycle at its likely endpoint.
Policymakers led by Governor Tiff Macklem maintained the benchmark overnight lending rate at 5% on Wednesday, the highest level in 22 years. They acknowledged a rapid downshift in the economy and warned that price pressures are proving tough to wrestle all the way back to their target.
“With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, governing council decided to hold,” the bank said. Officials, however, remain “concerned about the persistence” of underlying inflation and are “prepared to increase the policy rate further if needed.”
...Bloomberg 9 /11/2023
Australia’s central bank kept its key
interest rate unchanged and maintained a tightening bias as Governor Philip Lowe wrapped up his final meeting at the helm with inflation in retreat. The Reserve Bank held its cash rate at 4.1% for a third
straight meeting on Tuesday in a decision widely anticipated by markets and economists
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the
evolving assessment of risks,” Lowe said in his post-meeting statement.
The Bank of Canada held interest rates steady and kept the door open to further hikes, with economists seeing its historic tightening cycle at its likely endpoint.
Policymakers led by Governor Tiff Macklem maintained the benchmark overnight lending rate at 5% on Wednesday, the highest level in 22 years. They acknowledged a rapid downshift in the economy and warned that price pressures are proving tough to wrestle all the way back to their target.
“With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, governing council decided to hold,” the bank said. Officials, however, remain “concerned about the persistence” of underlying inflation and are “prepared to increase the policy rate further if needed.”
...Bloomberg 9 /11/2023
Australia’s central bank kept its key
interest rate unchanged and maintained a tightening bias as Governor Philip Lowe wrapped up his final meeting at the helm with inflation in retreat. The Reserve Bank held its cash rate at 4.1% for a third
straight meeting on Tuesday in a decision widely anticipated by markets and economists
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the
evolving assessment of risks,” Lowe said in his post-meeting statement.
August 24, 2023
SGH Insight
Battlelines Drawn Heading into Powell’s Speech
Bottom Line: The Fed wants to be done as every rate hike increases the risk of a hard landing. I don’t think the Fed was committed to an Oct/Nov rate hike at the July FOMC meeting, but that’s because it had a very pessimistic outlook for growth at that time. And I think participants were very confident in that outlook, but incoming data has shaken that confidence. Reiterating our outlook, our baseline going into Powell’s speech is that he wants to say, “policy is in a good place,” but he can only really be confident this will hold at the September FOMC meeting. Thinking beyond September, I think he will recognize that the possibility of an upside surprise to growth means the Fed “may have more work to do.” It doesn’t make sense to take that option off the table now given that the Oct/Nov meeting is still a long time away and in theory the data could cut decisively either direction by then.
Market Validation
Bottom Line: The Fed wants to be done as every rate hike increases the risk of a hard landing. I don’t think the Fed was committed to an Oct/Nov rate hike at the July FOMC meeting, but that’s because it had a very pessimistic outlook for growth at that time. And I think participants were very confident in that outlook, but incoming data has shaken that confidence. Reiterating our outlook, our baseline going into Powell’s speech is that he wants to say, “policy is in a good place,” but he can only really be confident this will hold at the September FOMC meeting. Thinking beyond September, I think he will recognize that the possibility of an upside surprise to growth means the Fed “may have more work to do.” It doesn’t make sense to take that option off the table now given that the Oct/Nov meeting is still a long time away and in theory the data could cut decisively either direction by then.
Bloomberg 8/25/23
Federal Reserve Chair Jerome Powell said the US central bank is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed’s 2% target.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in the text of a speech Friday at the US central bank’s annual conference in Jackson Hole, Wyoming. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September, as investors expect.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.
Powell signaled Friday that policy has shifted to a more deliberative phase where risk-management is now “critical.”
He noted the economy may not be cooling as fast as expected, saying recent readings on economic output and consumer spending have been strong. The economy grew at a 2.4% annualized pace in the second quarter, a surprisingly robust reading that prompted many economists to boost forecasts for the third quarter and reconsider odds of a recession.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said
Federal Reserve Chair Jerome Powell said the US central bank is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed’s 2% target.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in the text of a speech Friday at the US central bank’s annual conference in Jackson Hole, Wyoming. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September, as investors expect.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.
Powell signaled Friday that policy has shifted to a more deliberative phase where risk-management is now “critical.”
He noted the economy may not be cooling as fast as expected, saying recent readings on economic output and consumer spending have been strong. The economy grew at a 2.4% annualized pace in the second quarter, a surprisingly robust reading that prompted many economists to boost forecasts for the third quarter and reconsider odds of a recession.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said
August 22, 2023
SGH Insight
Bottom Line: The Fed is walking a fine line here. Despite disinflation trends, it has proven difficult to keep rates from rising in the absence of softer growth data. It’s not evident, however, that the Fed wants conditions any tighter, but at the same time sending that signal could backfire in the form of higher inflation expectations. Without a catalyst to refocus market participants on downside risks to the economy, there looks to be room for rates to break still higher
Market Validation
BBG 8/25/23
*FED SWAPS PRICE IN ADDITIONAL RATE HIKE PREMIUM FOR NOVEMBER
*FED SWAPS PRICE IN ADDITIONAL RATE HIKE PREMIUM FOR NOVEMBER
August 23, 2023
SGH Insight
Many economists and analysts, however, are sticking with their calls for another ECB rate hike. They point to the underlying price components of the PMIs that do not paint a pretty picture and reinforce concerns over the durability in particular of service sector inflation.
Expectations in the forecasting community are that the preliminary Eurozone August CPI figures that will be released next week will paint a similar picture of stickiness in core prices, with most forecasts showing just slight improvement from July’s 5.5% reading.
While they may be right on the data, we no longer agree with the call for a September hike and now expect that the ECB will take a pass and leave rates unchanged at 3.75% at their upcoming meeting
Market Validation
Expectations in the forecasting community are that the preliminary Eurozone August CPI figures that will be released next week will paint a similar picture of stickiness in core prices, with most forecasts showing just slight improvement from July’s 5.5% reading.
While they may be right on the data, we no longer agree with the call for a September hike and now expect that the ECB will take a pass and leave rates unchanged at 3.75% at their upcoming meeting
Bloomberg 8/31/2023
Bunds are higher while the euro has extended declines as traders seem to focus on the slowdown in euro-area core inflation rather than the headline rate which held steady. Market pricing now suggests a less than 30% chance the ECB raises rates in September, down from ~40% before the data. German 10-year yields are down 5bps at 2.49% while two-year yields drops 9bps. The euro falls 0.5% versus the greenback.
Bloomberg 8/25/2023
European Central Bank policymakers are increasingly
concerned about worsening growth prospects, Reuters reports,
citing eight people familiar with the matter.
* The number policymakers advocating for a “pause” is growing
after economic indicators in the past six weeks came in below
expectations, Reuters says citing conversations on the sidelines
of Jackson Hole symposium
Bunds are higher while the euro has extended declines as traders seem to focus on the slowdown in euro-area core inflation rather than the headline rate which held steady. Market pricing now suggests a less than 30% chance the ECB raises rates in September, down from ~40% before the data. German 10-year yields are down 5bps at 2.49% while two-year yields drops 9bps. The euro falls 0.5% versus the greenback.
Bloomberg 8/25/2023
European Central Bank policymakers are increasingly
concerned about worsening growth prospects, Reuters reports,
citing eight people familiar with the matter.
* The number policymakers advocating for a “pause” is growing
after economic indicators in the past six weeks came in below
expectations, Reuters says citing conversations on the sidelines
of Jackson Hole symposium
August 16, 2023
SGH Insight
The Fed’s Forecast is at Odds with Reality
at the time of the July meeting, the Fed anticipated growth would continue to slow, and below trend growth is a prerequisite to restoring price stability. Second, the Fed’s growth forecast is quickly turning into a complete disaster.
I think we need to have an honest but harsh conversation about the second point in particular. The Fed’s GDP forecast in the June SEP was at best dead on arrival, and at worst simply ludicrous. It implied basically no growth for the second half of 2023, which was plainly wrong even at that time. It required a sudden stop in the economy that just clearly was not happening when those forecasts were made. That forecast was in June, at which point the Fed staff should have known with almost 100% certainty that growth wasn’t falling off the cliff.
Before the Fed minutes were released, the Atlanta Fed raised its estimate of Q3 growth to 5.8%. Even if the reality is half that number, it’s still a major forecasting error on the Fed’s part, and we have been pounding the table for weeks that the Fed has completely underestimated the strength of the economy. Granted, I understand in theory I might need to eat my words on that at some point, but I feel pretty safe for now given that we are already halfway through the third quarter with no sudden stop evident. And if growth is that fast in Q3, I suspect it will retain that momentum in Q4 and put a January rate hike on the table.
Market Validation
at the time of the July meeting, the Fed anticipated growth would continue to slow, and below trend growth is a prerequisite to restoring price stability. Second, the Fed’s growth forecast is quickly turning into a complete disaster.
I think we need to have an honest but harsh conversation about the second point in particular. The Fed’s GDP forecast in the June SEP was at best dead on arrival, and at worst simply ludicrous. It implied basically no growth for the second half of 2023, which was plainly wrong even at that time. It required a sudden stop in the economy that just clearly was not happening when those forecasts were made. That forecast was in June, at which point the Fed staff should have known with almost 100% certainty that growth wasn’t falling off the cliff.
Before the Fed minutes were released, the Atlanta Fed raised its estimate of Q3 growth to 5.8%. Even if the reality is half that number, it’s still a major forecasting error on the Fed’s part, and we have been pounding the table for weeks that the Fed has completely underestimated the strength of the economy. Granted, I understand in theory I might need to eat my words on that at some point, but I feel pretty safe for now given that we are already halfway through the third quarter with no sudden stop evident. And if growth is that fast in Q3, I suspect it will retain that momentum in Q4 and put a January rate hike on the table.
Financial Times 8/24/23
A top official at the US Federal Reserve has raised the spectre of further interest rate rises in the US, warning that the strength of the world’s largest economy means “we may have more to do”. In an interview with the Financial Times on Thursday, Susan Collins, president of the Boston Fed, said she was “surprised” by the economy’s resilience — including a tight labour market and robust consumer spending — despite months of higher borrowing costs. “I am not yet seeing the slowing that I think is going to be part of what we need for that sustainable trajectory to get back to 2 per cent [inflation] in a reasonable amount of time,” Collins said, later adding that “that resilience really does suggest we may have more to do”.
A top official at the US Federal Reserve has raised the spectre of further interest rate rises in the US, warning that the strength of the world’s largest economy means “we may have more to do”. In an interview with the Financial Times on Thursday, Susan Collins, president of the Boston Fed, said she was “surprised” by the economy’s resilience — including a tight labour market and robust consumer spending — despite months of higher borrowing costs. “I am not yet seeing the slowing that I think is going to be part of what we need for that sustainable trajectory to get back to 2 per cent [inflation] in a reasonable amount of time,” Collins said, later adding that “that resilience really does suggest we may have more to do”.
August 14, 2023
SGH Insight
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting.
....If You Don’t Have Time This Morning
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting. That said, I suspect the Fed also worries that policy is getting too tight, and hence we get mixed messaging that “maybe we need another hike, but rate cuts will be on the table in 2024.” The Fed can’t let policy become too tight if it wants to stick the soft landing, but I don’t think it can change its reaction function without letting inflation expectations rise. I don’t think sticking the soft landing will be as easy as the consensus increasingly appears to suggest.
Market Validation
....If You Don’t Have Time This Morning
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting. That said, I suspect the Fed also worries that policy is getting too tight, and hence we get mixed messaging that “maybe we need another hike, but rate cuts will be on the table in 2024.” The Fed can’t let policy become too tight if it wants to stick the soft landing, but I don’t think it can change its reaction function without letting inflation expectations rise. I don’t think sticking the soft landing will be as easy as the consensus increasingly appears to suggest.
Bloomberg 8/15/2023
US retail sales rose in July by more than forecast, suggesting consumers still have the wherewithal to sustain the economic expansion.
The value of retail purchases increased 0.7% in July after upward revisions in the prior two months, Commerce Department data showed Tuesday. The upbeat figure reflected increases in a variety of sales categories, including sporting goods stores, clothing outlets and restaurants and bars.
Image
...Bloomberg 8/16/2023
Federal Reserve officials at their last meeting largely remained concerned that inflation would fail to recede and suggested they may continue raising interest rates.
“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes of the US central bank’s July 25-26 policy meeting published Wednesday in Washington.
“Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate,” the Fed said.
“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening,” the minutes stated.
The latest data illustrate how American households — supported by a strong labor market and rising wages — are so far buttressing the economy against recession in the face of high interest rates. Too much strength, however, could force the Federal Reserve to pursue more aggressive policy should inflationary pressures prove sticky.
US retail sales rose in July by more than forecast, suggesting consumers still have the wherewithal to sustain the economic expansion.
The value of retail purchases increased 0.7% in July after upward revisions in the prior two months, Commerce Department data showed Tuesday. The upbeat figure reflected increases in a variety of sales categories, including sporting goods stores, clothing outlets and restaurants and bars.
Image
...Bloomberg 8/16/2023
Federal Reserve officials at their last meeting largely remained concerned that inflation would fail to recede and suggested they may continue raising interest rates.
“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes of the US central bank’s July 25-26 policy meeting published Wednesday in Washington.
“Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate,” the Fed said.
“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening,” the minutes stated.
The latest data illustrate how American households — supported by a strong labor market and rising wages — are so far buttressing the economy against recession in the face of high interest rates. Too much strength, however, could force the Federal Reserve to pursue more aggressive policy should inflationary pressures prove sticky.
August 10, 2023
SGH Insight
Published on August 10, 2023
Regarding monetary policy for the remainder of the year, one senior official says, rather tentatively it must be noted, that, “The central bank will not implement a monetary policy that is tighter than the existing one, but relatively looser in the remaining months of the year. Unlike former Premier Li Keqiang, Premier Li Qiang prefers to use monetary policy to stimulate the real economy.
Broadly speaking, Premier Li’s request of the PBoC has been to ensure that monetary policy serve the real economy, and especially at present China’s high-tech sector and private enterprises. New loans in H2 2023 should be used to stimulate four areas: 1 – the high-tech sector; 2 – private enterprises “with the characteristics of specialization, refinement, and innovation;” 3 – the real estate markets; and 4 – major infrastructure investment projects.
...While touting the need to direct policy towards the “real economy,” Premier Li has also stressed the need to support the development of financial markets, pointing to the need to “invigorate” capital markets, especially China’s domestic stock and bond markets. The task, a daunting one, is to try and lift these markets to break the psychology of retrenchment in China’s consumers.
Market Validation
Regarding monetary policy for the remainder of the year, one senior official says, rather tentatively it must be noted, that, “The central bank will not implement a monetary policy that is tighter than the existing one, but relatively looser in the remaining months of the year. Unlike former Premier Li Keqiang, Premier Li Qiang prefers to use monetary policy to stimulate the real economy.
Broadly speaking, Premier Li’s request of the PBoC has been to ensure that monetary policy serve the real economy, and especially at present China’s high-tech sector and private enterprises. New loans in H2 2023 should be used to stimulate four areas: 1 – the high-tech sector; 2 – private enterprises “with the characteristics of specialization, refinement, and innovation;” 3 – the real estate markets; and 4 – major infrastructure investment projects.
...While touting the need to direct policy towards the “real economy,” Premier Li has also stressed the need to support the development of financial markets, pointing to the need to “invigorate” capital markets, especially China’s domestic stock and bond markets. The task, a daunting one, is to try and lift these markets to break the psychology of retrenchment in China’s consumers.
Bloomberg 8/15/ 2023
China’s central bank unexpectedly reduced a key interest rate by the most since 2020 to bolster an economy that’s facing fresh risks from a worsening property slump and weak consumer spending. The People’s Bank of China lowered the rate on its one-year
loans — or medium-term lending facility — by 15 basis points to 2.5% on Tuesday, the second reduction since June
Bloomberg 8/15/2023
Chinese authorities are considering cutting the stamp duty on stock trades for the first time since 2008,
people familiar with the matter said, in what would be a major attempt to revive confidence in the world’s second-largest
equity market. Under the guidance of the State Council, regulators including the Ministry of Finance are discussing a draft
proposal, said the people, asking not to be identified discussing a private matter. The details on timing and the size
of a potential cut have yet to be determined and there’s no guarantee the proposal will be approved by senior leaders, the
people added. The finance ministry and the China Securities Regulatory Commission didn’t respond to requests seeking
comment. Any reduction in China’s 0.1% stamp duty on stock trades has the potential to trigger a knee-jerk rally in the nation’s
$9.9 trillion equity market, which is highly sensitive to policy shifts that impact market liquidity. A cut would be a boon for
Chinese brokerages as well as quantitative hedge funds who use rapid-fire trading strategies. More broadly, a rising equity
market would help Xi Jinping’s government boost consumer and business confidence — seen as key to a sustainable rebound in
the world’s second-largest economy.
China’s central bank unexpectedly reduced a key interest rate by the most since 2020 to bolster an economy that’s facing fresh risks from a worsening property slump and weak consumer spending. The People’s Bank of China lowered the rate on its one-year
loans — or medium-term lending facility — by 15 basis points to 2.5% on Tuesday, the second reduction since June
Bloomberg 8/15/2023
Chinese authorities are considering cutting the stamp duty on stock trades for the first time since 2008,
people familiar with the matter said, in what would be a major attempt to revive confidence in the world’s second-largest
equity market. Under the guidance of the State Council, regulators including the Ministry of Finance are discussing a draft
proposal, said the people, asking not to be identified discussing a private matter. The details on timing and the size
of a potential cut have yet to be determined and there’s no guarantee the proposal will be approved by senior leaders, the
people added. The finance ministry and the China Securities Regulatory Commission didn’t respond to requests seeking
comment. Any reduction in China’s 0.1% stamp duty on stock trades has the potential to trigger a knee-jerk rally in the nation’s
$9.9 trillion equity market, which is highly sensitive to policy shifts that impact market liquidity. A cut would be a boon for
Chinese brokerages as well as quantitative hedge funds who use rapid-fire trading strategies. More broadly, a rising equity
market would help Xi Jinping’s government boost consumer and business confidence — seen as key to a sustainable rebound in
the world’s second-largest economy.
July 28, 2023
SGH Insight
With a crisis of confidence deepening in the Bank of England’s (BOE) ability to wrestle the UK’s inflation problem without precipitating a recession, its Monetary Policy Committee (MPC) may opt to limp through its August 3 meeting with a 25bps hike, taking Bank rate to 5.25% even as it signals more tightening to come
Market Validation
MarketWatch 8/3/2023
The Bank of England on Thursday lifted interest rates by a quarter-point to 5.25%, its highest level since the global financial crisis and the 14th consecutive increase .
Heading into the decision, interest-rate futures had priced in a 31 basis point increase, underscoring the difficult decision the central bank had in choosing between a quarter-point and half-point move.
The decision was made by a 6-to-3 vote, with two calling for a half-point hike and one for no change at all.
U.K. inflation in June slowed to 7.9% year-over-year. The Bank of England said inflation will fall to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation.
It said risks around the inflation forecast are skewed to the upside, albeit by less than in May, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices take longer to unwind than they did to emerge.
In the simultaneously released minutes, the Bank of England conditioned further increases as an "if."
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the bank said. The central bank did say that current rates were "restrictive"
The Bank of England on Thursday lifted interest rates by a quarter-point to 5.25%, its highest level since the global financial crisis and the 14th consecutive increase .
Heading into the decision, interest-rate futures had priced in a 31 basis point increase, underscoring the difficult decision the central bank had in choosing between a quarter-point and half-point move.
The decision was made by a 6-to-3 vote, with two calling for a half-point hike and one for no change at all.
U.K. inflation in June slowed to 7.9% year-over-year. The Bank of England said inflation will fall to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation.
It said risks around the inflation forecast are skewed to the upside, albeit by less than in May, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices take longer to unwind than they did to emerge.
In the simultaneously released minutes, the Bank of England conditioned further increases as an "if."
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the bank said. The central bank did say that current rates were "restrictive"
News and Events
SGH Macro Advisors hosts roundtable meetings and events for clients and senior policymakers and will provide media availability to selective media upon request.