Connecting Global Markets and Policy
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SGH Macro Advisors produces concise, forward-looking proprietary reports on the major central banks and on key economic and policy developments that drive global bond, equity, and currency markets.
Founded in 2009, SGH has over the years built a reputation as a thought leader and source of well-informed, cutting-edge information, analysis, and insight on policy and financial markets. Its briefings and reports are highly valued by many of the world’s most well-known and influential hedge funds, money managers, and policymakers.
Highlights
SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of market consensus.
July 16, 2024
SGH Insight
Canada’s June inflation data has cleared the way for a second rate cut by the Bank of Canada (BOC) to 4.5%, when it meets next week and updates its quarterly projections.
Canada CPI inflation slowed to 2.7% in June from a year earlier, compared to 2.9% in May, marking the sixth monthly reading in which the rate has been inside the Bank’s control target range of 1-3%. The Bank aims to keep inflation, as measured by the total CPI, at 2%.
The data lifted pricing odds for a rate cut in July as economists and traders brought forward their expectations that the Bank would cut its benchmark overnight rates.
While the news vindicates our last report and the Bank’s expectation that restrictive policy is exerting sufficient downward pressure on prices to reach the 2% target sometime next year, we caution readers against over interpreting the pace of easing the Bank intends.
Market Validation
Canada CPI inflation slowed to 2.7% in June from a year earlier, compared to 2.9% in May, marking the sixth monthly reading in which the rate has been inside the Bank’s control target range of 1-3%. The Bank aims to keep inflation, as measured by the total CPI, at 2%.
The data lifted pricing odds for a rate cut in July as economists and traders brought forward their expectations that the Bank would cut its benchmark overnight rates.
While the news vindicates our last report and the Bank’s expectation that restrictive policy is exerting sufficient downward pressure on prices to reach the 2% target sometime next year, we caution readers against over interpreting the pace of easing the Bank intends.
Bloomberg 7/24/2024
The Bank of Canada cut interest rates by a quarter percentage point for a second consecutive meeting and signaled further easing ahead as inflation worries wane.
Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 4.5% on Wednesday, as widely expected by markets and economists in a Bloomberg survey. Officials see below-potential growth continuing to cool inflation, and said they’re spending more time discussing economic headwinds.
“With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations,” Macklem said in prepared remarks.
Macklem reiterated that it’s “reasonable” to expect further interest rate cuts, and that the bank will be taking its decisions “one at a time,” pushing back on expectations that the bank is on a predetermined cutting path.
The Bank of Canada cut interest rates by a quarter percentage point for a second consecutive meeting and signaled further easing ahead as inflation worries wane.
Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 4.5% on Wednesday, as widely expected by markets and economists in a Bloomberg survey. Officials see below-potential growth continuing to cool inflation, and said they’re spending more time discussing economic headwinds.
“With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations,” Macklem said in prepared remarks.
Macklem reiterated that it’s “reasonable” to expect further interest rate cuts, and that the bank will be taking its decisions “one at a time,” pushing back on expectations that the bank is on a predetermined cutting path.
July 15, 2024
SGH Insight
There is no expectation of an interest rate decision at the upcoming Thursday, July 18 monetary policy meeting of the European Central Bank.
Markets will, however, be keenly watching this week’s meeting for signs that President Christine Lagarde is teeing up a second 25 bps rate cut after June’s easing, which would take the policy deposit rate from 3.75% to 3.50% at the ECB’s subsequent meeting on September 12.
Given the long stretch of time and important data still to be released before then, including the July and August inflation reports, and in light of still elevated core readings on the most recent inflation prints, the Governing Council and Lagarde will not pre-commit on Thursday to a September cut.
Rather, Lagarde will keep to a strictly data dependent message in the run up to this next important quarterly forecast revision meeting.
Market Validation
Markets will, however, be keenly watching this week’s meeting for signs that President Christine Lagarde is teeing up a second 25 bps rate cut after June’s easing, which would take the policy deposit rate from 3.75% to 3.50% at the ECB’s subsequent meeting on September 12.
Given the long stretch of time and important data still to be released before then, including the July and August inflation reports, and in light of still elevated core readings on the most recent inflation prints, the Governing Council and Lagarde will not pre-commit on Thursday to a September cut.
Rather, Lagarde will keep to a strictly data dependent message in the run up to this next important quarterly forecast revision meeting.
ECB Press Conference 7/18/2024
You know, the decision that was taken this morning was a unanimous decision. But what was equal, equally unanimously determined was the fact that we were determined to be data dependent, to decide meeting by meeting, and not to have any predetermined rate path. So the question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving. Obviously, our projection from June will be a point of reference, but the projection of September, plus the, all the other element that we will be receiving will be taken into account. To decide what we do in September, but there is no predetermined path, and, and that was very strongly endorsed by, by the by the governing council.
You know, the decision that was taken this morning was a unanimous decision. But what was equal, equally unanimously determined was the fact that we were determined to be data dependent, to decide meeting by meeting, and not to have any predetermined rate path. So the question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving. Obviously, our projection from June will be a point of reference, but the projection of September, plus the, all the other element that we will be receiving will be taken into account. To decide what we do in September, but there is no predetermined path, and, and that was very strongly endorsed by, by the by the governing council.
June 18, 2024
SGH Insight
The timing of the BOJ’s strategy for continued removal of accommodation may be impacted by the political upheaval as the central bank tries to plan its next moves.
The pressure on the governing LDP will not only result in an extension of the recently expired government subsidies on electricity and gas costs to households, but also a new LDP leader installed who will reshuffle the Cabinet and announce other fiscal measures that the party hopes will shore up its standing to win the next election.
Market Validation
The pressure on the governing LDP will not only result in an extension of the recently expired government subsidies on electricity and gas costs to households, but also a new LDP leader installed who will reshuffle the Cabinet and announce other fiscal measures that the party hopes will shore up its standing to win the next election.
Bloomberg 6/21/24
Japanese Prime Minister Fumio Kishida
announced extra utility assistance and an extension of gasoline
subsidies to help households cope with inflation.
Subsidies for power bills are to start in August and stay
in place for three months, Kishida said at a news conference
Friday, adding existing gasoline subsidies would be extended
until the end of this year
Japanese Prime Minister Fumio Kishida
announced extra utility assistance and an extension of gasoline
subsidies to help households cope with inflation.
Subsidies for power bills are to start in August and stay
in place for three months, Kishida said at a news conference
Friday, adding existing gasoline subsidies would be extended
until the end of this year
May 24, 2024
SGH Insight
That May 9 meeting held Bank Rate at 5.25%, a 16-year high with Bailey suggesting at his post meeting press conference that even after the Bank decided to ease in future, that policy would likely be restrictive.
Persistence in domestic inflation may be fading slower than some on the committee previously assumed, but Bailey himself, will likely still see a path to easing rates on August 1.
In the meantime, as much as Bailey was at pains to flag the prospect of an easing at his last press conference and even touted the two inflation reports due prior to the June meeting that he hoped would set the stage for a rate cut, the negative optics of a move next month put it out of his reach.
Market Validation
That May 9 meeting held Bank Rate at 5.25%, a 16-year high with Bailey suggesting at his post meeting press conference that even after the Bank decided to ease in future, that policy would likely be restrictive.
Persistence in domestic inflation may be fading slower than some on the committee previously assumed, but Bailey himself, will likely still see a path to easing rates on August 1.
In the meantime, as much as Bailey was at pains to flag the prospect of an easing at his last press conference and even touted the two inflation reports due prior to the June meeting that he hoped would set the stage for a rate cut, the negative optics of a move next month put it out of his reach.
Bloomberg 6/20/2024
The Bank of England hinted that more policymakers may be close to backing interest rate cuts, keeping alive hopes of a loosening by the end of the summer. The UK central bank left its benchmark lending rate on hold at a 16-year high of 5.25% on Thursday. But minutes of the meeting said the decision not to cut rates was “finely balanced” for some of the nine members of the Monetary Policy Committee. Traders saw the statement as a signal that the BOE was willing to cut in coming months and moved to price more than a
50% chance of a reduction in August, from 32% before the meeting. Markets also increased the amount of easing expected for the year to 48 basis points from 43 basis points previously.
The Bank of England hinted that more policymakers may be close to backing interest rate cuts, keeping alive hopes of a loosening by the end of the summer. The UK central bank left its benchmark lending rate on hold at a 16-year high of 5.25% on Thursday. But minutes of the meeting said the decision not to cut rates was “finely balanced” for some of the nine members of the Monetary Policy Committee. Traders saw the statement as a signal that the BOE was willing to cut in coming months and moved to price more than a
50% chance of a reduction in August, from 32% before the meeting. Markets also increased the amount of easing expected for the year to 48 basis points from 43 basis points previously.
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.
December 11, 2023
SGH Insight
Monday Morning Notes, 12/11/23
If You Don’t Have Time This Morning
In the beginning of November we took an aggressive position is establishing a baseline scenario that the Fed would begin cutting rates in March 2024 for a total of 100bp in 2024. The logic of that scenario followed directly from Fed signaling, including from Chair Powell, that low inflation alone was enough to cut rates because the Fed needed to adjust policy to prevent the real policy rate from rising and overtightening monetary conditions. With inflation falling faster than expected, the Fed would pull forward the timing of rate cuts to ensure a soft-landing for the economy, in practice turning its attention to the employment mandate to prevent an unnecessary rise in unemployment. Given policy lags, if Powell was going to make a play for the soft-landing, which we believe he will attempt, the Fed would need to cut rates ahead of any significant slowing in the labor market. The longer rates stay high, the higher the chance of a hard landing, and the Fed would then need to cut rates more aggressively. A soft path for the labor markets or growth is not necessary for a rate cut but increases the probability that the Fed cuts rates in March and for a total of more than 100bp cuts in 2024.
This remains our baseline scenario.
Market Validation:
FOMC Press Conference 12/13/2023
>> STEVE LIESMAN: Steve Liesman, CNBC. Happy holidays, Chairman. Fed governor Chris Waller said if inflation continues to fall, then the Fed in the next several months could be cutting interest rates. I wonder if you could comment on whether you agree with Fed Governor Waller on that, that the Fed would become more restrictive if it didn't cut rates if inflation fell? Thank you, sir. >> JEROME POWELL: Of course, I don't comment on any other officials, even those who work at the Fed. But I'll try to answer your question more broadly. So, the way we're looking at it is really this. When we started out, right, we said, the first question is how fast to move -- and we moved very fast. The second question is, you know, really how high to raise the policy rate. And that's really the question that we're still on here. We're very focused on that, as I mentioned. People generally think that we're at or near that and think it's not likely that we will hike, although they don't take that possibility off the table. When you get to that question, and that's your answer, there's a natural -- naturally, it begins to be the next question, which is when it will become appropriate to begin dialing back the amount of policy restraint that's in place. So, that's really the next question. And that's what people are thinking about and talking about. And I would just say this. We are seeing strong growth that appears to be moderating. We're seeing a labor market that is coming back into balance by so many measures. And we're seeing inflation making real progress. These are the things we've been wanting to see. We can't know -- we still have a ways to go. No one is declaring victory. That would be premature. And we can't be guaranteed of this progress. So, we're moving carefully in making that assessment of whether we need to do more or not. And that's really the question that we're on. But of course, the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.
SGH Insight
Monday Morning Notes, 12/11/23
We believe the dots will show the median FOMC participant expects the Fed will cut rates 75bp in 2024. In anticipation of client questions, we attached probabilities to three different scenarios for the 2024 dots:
Market Validation
Bloomberg 12/13/2023
The Treasury market rallied and swaps traders dialed up bets on interest-rate cuts after the Federal Reserve opted to hold rates steady at the conclusion of its policy meeting Wednesday but surprised markets with a more aggressive forecast for monetary easing in 2024.
Yields tumbled, with the policy-sensitive two-year note’s plunging as much as 23 basis points to just under 4.50%. The yield on the 10-year note fell more than 14 basis points to a low of 4.06%. Fed swaps show about 133 basis points of reductions next year, up from 113 basis points prior to the central bank’s decision.
“The Fed is definitely more in easing mode than people were projecting. This is definitely not hawkish,” said Andrew Brenner, head of international fixed income at Natalliance Securities LLC. “They upped the number of rate cuts in 2024 to three — a lot of people were thinking two,” said Brenner, adding that Fed Chair Jay Powell might look to portray the Fed’s decision-making as more hawkish during his upcoming press conference.
SGH Insight
Monday Morning Notes, 12/11/23
At the press conference, Powell will continue to move the ball forward toward declaring the risk to the outlook as balanced but fall short of the mark. Given the normalization in the labor market, the increased confidence that third quarter growth was a fluke, and the general trend of inflation, the risks are clearly more balanced. The dovish risk here, and in the statement, is that Powell acknowledges that rates have been sufficiently restrictive since July and given that the SEP will show the Fed expects the next move will be a rate cut, that the risks are now balanced.
Market Validation
>> MIKE McKEE: Bloomberg Television Radio. Mr. Chairman, you were behind the curve in raising rates to fight inflation, and you said earlier, the full effects of our tightening cycle have not yet been felt. How will you decide when to cut rates, and how will you ensure you're not behind the curve there? >> JEROME POWELL: So, we're aware of the risk that we would hang on too long, you know. We know that that's a risk, and we're very focused on not making that mistake. And we do regard the two -- you know, we've come back into a better balance between the risk of overdoing it and the risk of underdoing it. Not only that, we were able to focus hard on the price stability mandate, and we're getting back to the point where -- which is what you do when you're very far from one of them, one of the two mandates -- you're getting now back to the point where both mandates are important, and they're more in balance, too. So, I think we'll be very much keeping that in mind as we make policy going forward.
Market Validation
If You Don’t Have Time This Morning
In the beginning of November we took an aggressive position is establishing a baseline scenario that the Fed would begin cutting rates in March 2024 for a total of 100bp in 2024. The logic of that scenario followed directly from Fed signaling, including from Chair Powell, that low inflation alone was enough to cut rates because the Fed needed to adjust policy to prevent the real policy rate from rising and overtightening monetary conditions. With inflation falling faster than expected, the Fed would pull forward the timing of rate cuts to ensure a soft-landing for the economy, in practice turning its attention to the employment mandate to prevent an unnecessary rise in unemployment. Given policy lags, if Powell was going to make a play for the soft-landing, which we believe he will attempt, the Fed would need to cut rates ahead of any significant slowing in the labor market. The longer rates stay high, the higher the chance of a hard landing, and the Fed would then need to cut rates more aggressively. A soft path for the labor markets or growth is not necessary for a rate cut but increases the probability that the Fed cuts rates in March and for a total of more than 100bp cuts in 2024.
This remains our baseline scenario.
Market Validation:
FOMC Press Conference 12/13/2023
>> STEVE LIESMAN: Steve Liesman, CNBC. Happy holidays, Chairman. Fed governor Chris Waller said if inflation continues to fall, then the Fed in the next several months could be cutting interest rates. I wonder if you could comment on whether you agree with Fed Governor Waller on that, that the Fed would become more restrictive if it didn't cut rates if inflation fell? Thank you, sir. >> JEROME POWELL: Of course, I don't comment on any other officials, even those who work at the Fed. But I'll try to answer your question more broadly. So, the way we're looking at it is really this. When we started out, right, we said, the first question is how fast to move -- and we moved very fast. The second question is, you know, really how high to raise the policy rate. And that's really the question that we're still on here. We're very focused on that, as I mentioned. People generally think that we're at or near that and think it's not likely that we will hike, although they don't take that possibility off the table. When you get to that question, and that's your answer, there's a natural -- naturally, it begins to be the next question, which is when it will become appropriate to begin dialing back the amount of policy restraint that's in place. So, that's really the next question. And that's what people are thinking about and talking about. And I would just say this. We are seeing strong growth that appears to be moderating. We're seeing a labor market that is coming back into balance by so many measures. And we're seeing inflation making real progress. These are the things we've been wanting to see. We can't know -- we still have a ways to go. No one is declaring victory. That would be premature. And we can't be guaranteed of this progress. So, we're moving carefully in making that assessment of whether we need to do more or not. And that's really the question that we're on. But of course, the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.
SGH Insight
Monday Morning Notes, 12/11/23
We believe the dots will show the median FOMC participant expects the Fed will cut rates 75bp in 2024. In anticipation of client questions, we attached probabilities to three different scenarios for the 2024 dots:
Market Validation
Bloomberg 12/13/2023
The Treasury market rallied and swaps traders dialed up bets on interest-rate cuts after the Federal Reserve opted to hold rates steady at the conclusion of its policy meeting Wednesday but surprised markets with a more aggressive forecast for monetary easing in 2024.
Yields tumbled, with the policy-sensitive two-year note’s plunging as much as 23 basis points to just under 4.50%. The yield on the 10-year note fell more than 14 basis points to a low of 4.06%. Fed swaps show about 133 basis points of reductions next year, up from 113 basis points prior to the central bank’s decision.
“The Fed is definitely more in easing mode than people were projecting. This is definitely not hawkish,” said Andrew Brenner, head of international fixed income at Natalliance Securities LLC. “They upped the number of rate cuts in 2024 to three — a lot of people were thinking two,” said Brenner, adding that Fed Chair Jay Powell might look to portray the Fed’s decision-making as more hawkish during his upcoming press conference.
SGH Insight
Monday Morning Notes, 12/11/23
At the press conference, Powell will continue to move the ball forward toward declaring the risk to the outlook as balanced but fall short of the mark. Given the normalization in the labor market, the increased confidence that third quarter growth was a fluke, and the general trend of inflation, the risks are clearly more balanced. The dovish risk here, and in the statement, is that Powell acknowledges that rates have been sufficiently restrictive since July and given that the SEP will show the Fed expects the next move will be a rate cut, that the risks are now balanced.
Market Validation
>> MIKE McKEE: Bloomberg Television Radio. Mr. Chairman, you were behind the curve in raising rates to fight inflation, and you said earlier, the full effects of our tightening cycle have not yet been felt. How will you decide when to cut rates, and how will you ensure you're not behind the curve there? >> JEROME POWELL: So, we're aware of the risk that we would hang on too long, you know. We know that that's a risk, and we're very focused on not making that mistake. And we do regard the two -- you know, we've come back into a better balance between the risk of overdoing it and the risk of underdoing it. Not only that, we were able to focus hard on the price stability mandate, and we're getting back to the point where -- which is what you do when you're very far from one of them, one of the two mandates -- you're getting now back to the point where both mandates are important, and they're more in balance, too. So, I think we'll be very much keeping that in mind as we make policy going forward.
March 19, 2024
SGH Insight
Final Thoughts Ahead of the FOMC
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.
Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
Market Validation
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.
Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
Bloomberg 3/20/24
Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.
Investor's Business Daily 3/20/24
Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.
Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.
Investor's Business Daily 3/20/24
Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.
June 10, 2024
SGH Insight
Monday Morning Notes, 6/10/24
If You Don’t Have Time This Morning
We don’t expect the language in the opening remarks will shift back toward an explicit expectation of rate cuts this year, though Powell will welcome softer inflation in April and May, assuming of course the latter occurs. He will add that the Fed still needs additional inflation data that continues a softer pattern before it obtains the confidence to cut rates.
Market Validation
If You Don’t Have Time This Morning
We don’t expect the language in the opening remarks will shift back toward an explicit expectation of rate cuts this year, though Powell will welcome softer inflation in April and May, assuming of course the latter occurs. He will add that the Fed still needs additional inflation data that continues a softer pattern before it obtains the confidence to cut rates.
FOMC Press Conference 6/12/24
So far this year, the data have not given us that greater confidence. The most recent inflation readings have been more favorable than earlier in the year however and there has been modest further progress toward our inflation objective. We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.
So far this year, the data have not given us that greater confidence. The most recent inflation readings have been more favorable than earlier in the year however and there has been modest further progress toward our inflation objective. We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.
June 14, 2024
SGH Insight
Ultimately, we expect the relief in French bond markets will not come through any intervention mechanisms, but if and when the markets “normalize” the possibility of an RN victory that might come with perhaps less dire results than feared.
One can think of that scenario as perhaps more of the “Meloni effect” in Italy, where the markets and economy did not collapse on a right-wing populist victory, as opposed to a “Truss effect” in the UK that blew up markets. And to be frank, the euro area is substantially more capable of absorbing errant policy than the smaller UK economy and markets.
Our prediction of markets “normalizing” an RN premiership may not sit well with many who are concerned about the political fall-out of a Le Pen victory, including certainly the current constellation of G7 leaders, all under pressure now after years in power except for Italy’s Georgia Meloni.
But we will go so far as to predict that markets will soon enough do just that, and internalize the impact of what may, after all, simply be a reaffirmation of the win already in France by Le Pen on July 7, rather than continue to spiral in panic.
Even if French spreads settle at a higher level than before last week’s elections, the stress is of course a far cry from the European debt crisis of 2010-12.
Market Validation
One can think of that scenario as perhaps more of the “Meloni effect” in Italy, where the markets and economy did not collapse on a right-wing populist victory, as opposed to a “Truss effect” in the UK that blew up markets. And to be frank, the euro area is substantially more capable of absorbing errant policy than the smaller UK economy and markets.
Our prediction of markets “normalizing” an RN premiership may not sit well with many who are concerned about the political fall-out of a Le Pen victory, including certainly the current constellation of G7 leaders, all under pressure now after years in power except for Italy’s Georgia Meloni.
But we will go so far as to predict that markets will soon enough do just that, and internalize the impact of what may, after all, simply be a reaffirmation of the win already in France by Le Pen on July 7, rather than continue to spiral in panic.
Even if French spreads settle at a higher level than before last week’s elections, the stress is of course a far cry from the European debt crisis of 2010-12.
Bloomberg 6/17/24
French stocks clawed back some losses and
bonds steadied as traders weighed assurances from far-right
leader Marine Le Pen that she’d work with President Emmanuel
Macron should she prevail in national elections later this
month.
France’s CAC 40 benchmark bounced 0.2% higher by late
morning, after tumbling last week to the lowest since January.
The moves helped lift the main European stock measure, while
French government bond yields steadied across the curve. In a
broader sign that last week’s risk-off sentiment was easing, the
Italian 10-year bond spread over Germany retreated.
Traders are seizing on Le Pen’s appeal to moderates and
investors that she won’t try to push Macron out. On Monday,
European Central Bank Chief Economist Philip Lane said policy
makers see no reason to be overly concerned about the financial
turbulence in France. Concern about the nation’s political
volatility spurred a flight to haven assets last week while
wiping out $258 billion from the market capitalization of the
country’s stocks.
French stocks clawed back some losses and
bonds steadied as traders weighed assurances from far-right
leader Marine Le Pen that she’d work with President Emmanuel
Macron should she prevail in national elections later this
month.
France’s CAC 40 benchmark bounced 0.2% higher by late
morning, after tumbling last week to the lowest since January.
The moves helped lift the main European stock measure, while
French government bond yields steadied across the curve. In a
broader sign that last week’s risk-off sentiment was easing, the
Italian 10-year bond spread over Germany retreated.
Traders are seizing on Le Pen’s appeal to moderates and
investors that she won’t try to push Macron out. On Monday,
European Central Bank Chief Economist Philip Lane said policy
makers see no reason to be overly concerned about the financial
turbulence in France. Concern about the nation’s political
volatility spurred a flight to haven assets last week while
wiping out $258 billion from the market capitalization of the
country’s stocks.
June 11, 2024
SGH Insight
The Bank of Japan (BOJ) will likely announce plans this week to scale back government bond purchases and lay the ground for another rate increase as early as next month.
The BOJ is looking to increase the top end of its 0.0% to 0.1% policy target band to as high as 25 basis points and that could come as soon as at its July 30-31 meeting (see SGH, 5/7/24, “BOJ: Ramping Up Hawk Talk”).
In that same report, we flagged our expectation that the BOJ would announce plans to start gradually scaling back its bond purchases from its June 13-14 meeting, and we expect the BOJ to increase its target range to 15-25bps in July and we expect another move in October.
Following its first rate hike to zero-10 bps in the overnight short-term target range in March from negative 10 bps, we reiterated our expectation that the Bank is targeting a 1% peak policy rate by the end of next year.
It is important to flag for this week how timidly the BOJ will present its plans to reduce purchases. The Bank will tread softly with language that speaks to an extended timeline while retaining an option to raise or lower future purchase amounts depending on market conditions and the economy’s performance.
Market Validation
The BOJ is looking to increase the top end of its 0.0% to 0.1% policy target band to as high as 25 basis points and that could come as soon as at its July 30-31 meeting (see SGH, 5/7/24, “BOJ: Ramping Up Hawk Talk”).
In that same report, we flagged our expectation that the BOJ would announce plans to start gradually scaling back its bond purchases from its June 13-14 meeting, and we expect the BOJ to increase its target range to 15-25bps in July and we expect another move in October.
Following its first rate hike to zero-10 bps in the overnight short-term target range in March from negative 10 bps, we reiterated our expectation that the Bank is targeting a 1% peak policy rate by the end of next year.
It is important to flag for this week how timidly the BOJ will present its plans to reduce purchases. The Bank will tread softly with language that speaks to an extended timeline while retaining an option to raise or lower future purchase amounts depending on market conditions and the economy’s performance.
Bloomberg 6/14/24
The Bank of Japan is making investors wait until its July meeting for details on its paring of bond buying, sparking renewed weakness in the yen.
Traders were surprised by the BOJ’s decision on Friday to flag a cut in debt purchases without laying out any figures or timeline. That’s being seen as a delay in the normalization of policy, given that more than half of economists surveyed by Bloomberg had expected the central bank to begin cutting its purchases.
Friday’s announcement that the benchmark rate will remain in a range between 0% and 0.1% was in line with consensus.
The yen slumped versus the dollar to its lowest level since April, before trimming its decline, while benchmark 10-year government bonds rose, sending yields lower. Swaps markets pricing showed traders reducing bets for a rate hike next month. Japanese stocks closed 0.5% higher, defying a broader decline in Asian equities.
The Bank of Japan is making investors wait until its July meeting for details on its paring of bond buying, sparking renewed weakness in the yen.
Traders were surprised by the BOJ’s decision on Friday to flag a cut in debt purchases without laying out any figures or timeline. That’s being seen as a delay in the normalization of policy, given that more than half of economists surveyed by Bloomberg had expected the central bank to begin cutting its purchases.
Friday’s announcement that the benchmark rate will remain in a range between 0% and 0.1% was in line with consensus.
The yen slumped versus the dollar to its lowest level since April, before trimming its decline, while benchmark 10-year government bonds rose, sending yields lower. Swaps markets pricing showed traders reducing bets for a rate hike next month. Japanese stocks closed 0.5% higher, defying a broader decline in Asian equities.
June 4, 2024
SGH Insight
Though the Reserve Bank of Australia’s (RBA) patience may be starting to wear thin on inflation following another round of higher-than-expected readings, we expect that slower growth and the Bank’s desire to preserve jobs, on balance, will forestall a resumption in rate hikes this month.
The Bank is leaning into its higher-for-longer policy strategy and that, as we last wrote, a restrictive 4.35% cash rate nixes any consideration of easing before the November 4-5 or December 9-10 meetings (see SGH 4/24/24; “Hawky Talk Now, easing Later”).
But there is no denying the Bank’s policy considerations have been complicated by a third successive inflation outcome in the wrong direction which has raised the risk of another rate hike by the RBA when the Board meets on June 17-18.
Another strong inflation print from the second quarter CPI inflation data which is due out on July 29 alongside the monthly data for June would put a hike to 4.6% in play for the Bank’s August 5-6 projection round meeting. July’s monthly data is due out on August 26 prior to the Bank’s September 23-24meeting.
Market Validation
The Bank is leaning into its higher-for-longer policy strategy and that, as we last wrote, a restrictive 4.35% cash rate nixes any consideration of easing before the November 4-5 or December 9-10 meetings (see SGH 4/24/24; “Hawky Talk Now, easing Later”).
But there is no denying the Bank’s policy considerations have been complicated by a third successive inflation outcome in the wrong direction which has raised the risk of another rate hike by the RBA when the Board meets on June 17-18.
Another strong inflation print from the second quarter CPI inflation data which is due out on July 29 alongside the monthly data for June would put a hike to 4.6% in play for the Bank’s August 5-6 projection round meeting. July’s monthly data is due out on August 26 prior to the Bank’s September 23-24meeting.
6/18/24 Dow Jones
The Reserve Bank of Australia continued to warn about
ongoing inflation risks at its policy meeting on Tuesday, leaving open the
potential for a further interest-rate increase if price pressures remain
stubbornly high over coming months.
As expected, the board of the RBA chose to keep the official cash rate steady
at 4.35%, where it has sat since November.
"Inflation is easing but has been doing so more slowly than previously
expected and it remains high," the RBA's policy-setting board said in a
statement.
"The board expects that it will be some time yet before inflation is
sustainably in the target range. While recent data have been mixed, they have
reinforced the need to remain vigilant to upside risks to inflation," it
added.
"The board is not ruling anything in or out," according to the statement.
The commentary suggests the RBA remains extremely cautious about Australia's
inflation outlook and that second-quarter inflation data due out at the end of
July has the potential to trigger a further tightening of policy.
The Reserve Bank of Australia continued to warn about
ongoing inflation risks at its policy meeting on Tuesday, leaving open the
potential for a further interest-rate increase if price pressures remain
stubbornly high over coming months.
As expected, the board of the RBA chose to keep the official cash rate steady
at 4.35%, where it has sat since November.
"Inflation is easing but has been doing so more slowly than previously
expected and it remains high," the RBA's policy-setting board said in a
statement.
"The board expects that it will be some time yet before inflation is
sustainably in the target range. While recent data have been mixed, they have
reinforced the need to remain vigilant to upside risks to inflation," it
added.
"The board is not ruling anything in or out," according to the statement.
The commentary suggests the RBA remains extremely cautious about Australia's
inflation outlook and that second-quarter inflation data due out at the end of
July has the potential to trigger a further tightening of policy.
June 10, 2024
SGH Insight
As to potential retaliatory measures, the message from Beijing is that China will take all measures to defend its interests, but that said, it will not seek to escalate tensions beyond a calibrated tit-for-tat.
If the EU imposes 25% tariffs on Chinese EVs, China will also impose a 25% tariff on certain EU products. If the EU tariffs affect about 4 billion euros of China’s exports, the measures taken by China will also affect 4 billion euros of EU exports.
Sources in China say there are plenty of options available if needed (and which have been floated in the public domain). In the words of one official:
We can raise temporary tariffs on imported cars with engines larger than 2.5 liters. Such a move would have a major impact on car imports from the EU, especially Germany. We can impose temporary tariffs on EU alcoholic beverages, especially brandy. Such a move would have a significant impact on brandy imports from the EU, especially France. We can launch anti-dumping investigations on certain agricultural products, including pork. We can also temporarily suspend ongoing negotiations with Airbus to buy aircraft. However, China will not escalate the situation. But make no mistake, its response will be sufficient and felt by the EU side.
Market Validation
If the EU imposes 25% tariffs on Chinese EVs, China will also impose a 25% tariff on certain EU products. If the EU tariffs affect about 4 billion euros of China’s exports, the measures taken by China will also affect 4 billion euros of EU exports.
Sources in China say there are plenty of options available if needed (and which have been floated in the public domain). In the words of one official:
We can raise temporary tariffs on imported cars with engines larger than 2.5 liters. Such a move would have a major impact on car imports from the EU, especially Germany. We can impose temporary tariffs on EU alcoholic beverages, especially brandy. Such a move would have a significant impact on brandy imports from the EU, especially France. We can launch anti-dumping investigations on certain agricultural products, including pork. We can also temporarily suspend ongoing negotiations with Airbus to buy aircraft. However, China will not escalate the situation. But make no mistake, its response will be sufficient and felt by the EU side.
Bloomberg 6/13/24
China is working towards raising tariffs on large engine vehicles, in retaliation against EU’s plan to raise tariffs on electric vehicles from the Asian nation, according to a post by Yuyuantantian WeChat account, which is affiliated with China Central Television.
• The report, which cites an unidentified person, doesn’t offer any timetable or other details of the planned retaliation
• China is also expected to make an announcement before end-August over European brandy imports after an anti-dumping probe started in January, the report says
Bloomberg 6/13/24
China’s pork industry has the right to file
investigation application to maintain normal market competition
order and defend their own legitimate rights and interests,
Chinese Commerce Ministry’s spokesman He Yadong says in a
regular briefing, in response to questions on dumping probe of
EU pork.
China is working towards raising tariffs on large engine vehicles, in retaliation against EU’s plan to raise tariffs on electric vehicles from the Asian nation, according to a post by Yuyuantantian WeChat account, which is affiliated with China Central Television.
• The report, which cites an unidentified person, doesn’t offer any timetable or other details of the planned retaliation
• China is also expected to make an announcement before end-August over European brandy imports after an anti-dumping probe started in January, the report says
Bloomberg 6/13/24
China’s pork industry has the right to file
investigation application to maintain normal market competition
order and defend their own legitimate rights and interests,
Chinese Commerce Ministry’s spokesman He Yadong says in a
regular briefing, in response to questions on dumping probe of
EU pork.
News and Events
SGH Macro Advisors hosts occasional roundtables and events for clients and senior policymakers.