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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.
March 20, 2023
SGH Insight
If ever there was a central bank to sprint for the sidelines amid market turmoil it would be the Bank of England (BOE). Even though inflation is slowing, it remains nearly five times the bank’s mandated target and not even Andrew Bailey can run that hard.
What will still likely be a 25 basis points hike by the Bank, a move that should have been a solid bet for its policy meeting on March 23, became an iffier prospect with market strains from the failure of US-based bank Silicon Valley Bank and renewed fears regarding risk exposure to the long-ailing Credit Suisse that have dogged the market for a week.
Market Validation
What will still likely be a 25 basis points hike by the Bank, a move that should have been a solid bet for its policy meeting on March 23, became an iffier prospect with market strains from the failure of US-based bank Silicon Valley Bank and renewed fears regarding risk exposure to the long-ailing Credit Suisse that have dogged the market for a week.
Bloomberg 3/23/2023
The Bank of England pushed ahead with another interest rate increase despite turmoil in the banking sector, predicting the UK economy will avoid a recession for now and that inflation remains a risk.
The central bank raised its benchmark lending rate as expected by a quarter point to 4.25%, the highest since 2008, and left the door open to further increases if inflation persists.
The Bank of England pushed ahead with another interest rate increase despite turmoil in the banking sector, predicting the UK economy will avoid a recession for now and that inflation remains a risk.
The central bank raised its benchmark lending rate as expected by a quarter point to 4.25%, the highest since 2008, and left the door open to further increases if inflation persists.
March 21, 2023
SGH Insight
Last Minute Thoughts Ahead of the FOMC Meeting
Quick reminders as we head into this week’s FOMC meeting:
The Fed will likely leave QT unchanged. The regulatory response to the banking stress is not “undoing” QT. The current expansion of the balance sheet is temporary and will reverse on its own as institutions exit from the programs. QT is about the amount of money in the economy on a permanent basis, and the Fed is determined to “normalize” the permanent component of the balance sheet. The Fed expects that the regulatory response allows for it to use its monetary policy tools to manage inflation; QT is one of those tools, along with interest rates.
...Last Minute Thoughts Ahead of the FOMC Meeting
The rate cuts priced into markets make no sense if the economy does not experience a sudden stop. This isn’t 2008. The economy was already in recession when Lehman collapsed, and the banking sector is not vulnerable in the same way. The pattern of borrowing at the discount window indicates the challenges are largely contained to regional-specific banks with a common business model. If there is no sudden stop, these rate cuts will need to be priced out quickly. This could happen quickly if the “risk off” mood in fixed income reverses. The Fed is not going to validate that pricing in the dots tomorrow. As noted above the Fed will predict more rate hikes in the SEP.
...Last Minute Thoughts Ahead of the FOMC Meeting
Quick reminders as we head into this week’s FOMC meeting:
We expect the Fed to hike rates 25bp. The Fed is caught between managing elevated inflation and pressures on the banking system. Persistent inflation and faster than expected growth were pushing the Fed into a 50bp rate hike prior to SVB. It will likely be compelled to adapt to the financial situation by scaling that hike down to 25bp. It will be hard-pressed to walk away entirely. The risk is that the Fed responds as it has in the past to financial market instability and pauses to assess the impact of its cumulative tightening.
Market Validation
Quick reminders as we head into this week’s FOMC meeting:
The Fed will likely leave QT unchanged. The regulatory response to the banking stress is not “undoing” QT. The current expansion of the balance sheet is temporary and will reverse on its own as institutions exit from the programs. QT is about the amount of money in the economy on a permanent basis, and the Fed is determined to “normalize” the permanent component of the balance sheet. The Fed expects that the regulatory response allows for it to use its monetary policy tools to manage inflation; QT is one of those tools, along with interest rates.
...Last Minute Thoughts Ahead of the FOMC Meeting
The rate cuts priced into markets make no sense if the economy does not experience a sudden stop. This isn’t 2008. The economy was already in recession when Lehman collapsed, and the banking sector is not vulnerable in the same way. The pattern of borrowing at the discount window indicates the challenges are largely contained to regional-specific banks with a common business model. If there is no sudden stop, these rate cuts will need to be priced out quickly. This could happen quickly if the “risk off” mood in fixed income reverses. The Fed is not going to validate that pricing in the dots tomorrow. As noted above the Fed will predict more rate hikes in the SEP.
...Last Minute Thoughts Ahead of the FOMC Meeting
Quick reminders as we head into this week’s FOMC meeting:
We expect the Fed to hike rates 25bp. The Fed is caught between managing elevated inflation and pressures on the banking system. Persistent inflation and faster than expected growth were pushing the Fed into a 50bp rate hike prior to SVB. It will likely be compelled to adapt to the financial situation by scaling that hike down to 25bp. It will be hard-pressed to walk away entirely. The risk is that the Fed responds as it has in the past to financial market instability and pauses to assess the impact of its cumulative tightening.
Bloomberg 3/22/2023
FOMC continues pace of balance-sheet runoff, also known as quantitative tightening, leaving in place monthly caps of $60 billion for Treasuries that are allowed to mature without being reinvested and $35 billion for mortgage-backed securities
Powell FOMC Press Conference 3/22/2023
>> KYLE: Hi, Chair Powell. Thanks for taking the question. Kyle Campbell with American Banker. I have a couple questions about the balance sheet. First of all, I'm curious, at what point the financial supports that the Fed is extending through the discount window and through its enhanced lending facility might be at odds with the objective of reducing the balance sheet? I'm also curious what your thoughts are on not just the availability of reserves, but the distribution of them throughout the banking system. And at what point you might be concerned about it being scarce for certain banks. >> JEROME POWELL: So, people think of QE and QT in different ways. Let me be clear about how I'm thinking about these recent developments. Recent liquidity provision increased the size of our balance sheet. The intent and effects of it are very different from when we expand our balance sheet through purchases of longer-term securities. Large-scale purchases of long-term securities are really meant to alter the stance of policy by pushing down -- pushing up the price and down the rates, longer -term rates, which supports demand through channels we understand fairly well. The balance sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions. It's not intended to directly alter the stance of monetary policy. We do believe it's working. It's having its intended effect of bolstering confidence in the banking system. And, thereby, forestalling what might otherwise have been an abrupt and outsized tightening in financial conditions. So that's working. In terms of the distribution of reserves, we don't see ourselves as running into reserve shortages. We think that our program of allowing our balance sheet to run off predictably and passively is working. And, of course, we're always prepared to change that, if that changes. We don't see any evidence that that's changed.
...Chair Powell FOMC Press Conference 3/22/2023
>>MICHAEL: Michael McKee from Bloomberg Radio and Television. You've said the Fed would be raising interest rating and holding them there for some time. The markets priced in one more increase in May. Every meeting the rest of this year, they're pricing in rate cuts. Are they getting this totally wrong From the Fed? Or is there something different about the way you're looking at it given that you're now thinking that moves might be appropriate as opposed to ongoing. >> JEROME POWELL: We published an SEP today. It shows that basically participants expect relatively slow growth, rebalancing of supply and demand in the labor market, with inflation moving down gradually. In that most likely case, participants don't see rate cuts this year. They just don't.
Bloomberg 3/22/2023
The Federal Reserve raised interest rates by a quarter percentage point and signaled it’s not finished hiking, despite the risk of exacerbating a bank crisis that’s roiled global markets.
The Federal Open Market Committee voted unanimously to increase its target for the federal funds rate to a range of 4.75% to 5%, the highest since September 2007, when rates were at their peak on the eve of the financial crisis. It’s the second straight rise of 25 basis points following a string of aggressive moves starting in March 2022, when rates were near zero.
“The U.S. banking system is sound and resilient,” the Fed said in a statement in Washington after a two-day meeting.
At the same time, officials warned that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.”
FOMC continues pace of balance-sheet runoff, also known as quantitative tightening, leaving in place monthly caps of $60 billion for Treasuries that are allowed to mature without being reinvested and $35 billion for mortgage-backed securities
Powell FOMC Press Conference 3/22/2023
>> KYLE: Hi, Chair Powell. Thanks for taking the question. Kyle Campbell with American Banker. I have a couple questions about the balance sheet. First of all, I'm curious, at what point the financial supports that the Fed is extending through the discount window and through its enhanced lending facility might be at odds with the objective of reducing the balance sheet? I'm also curious what your thoughts are on not just the availability of reserves, but the distribution of them throughout the banking system. And at what point you might be concerned about it being scarce for certain banks. >> JEROME POWELL: So, people think of QE and QT in different ways. Let me be clear about how I'm thinking about these recent developments. Recent liquidity provision increased the size of our balance sheet. The intent and effects of it are very different from when we expand our balance sheet through purchases of longer-term securities. Large-scale purchases of long-term securities are really meant to alter the stance of policy by pushing down -- pushing up the price and down the rates, longer -term rates, which supports demand through channels we understand fairly well. The balance sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions. It's not intended to directly alter the stance of monetary policy. We do believe it's working. It's having its intended effect of bolstering confidence in the banking system. And, thereby, forestalling what might otherwise have been an abrupt and outsized tightening in financial conditions. So that's working. In terms of the distribution of reserves, we don't see ourselves as running into reserve shortages. We think that our program of allowing our balance sheet to run off predictably and passively is working. And, of course, we're always prepared to change that, if that changes. We don't see any evidence that that's changed.
...Chair Powell FOMC Press Conference 3/22/2023
>>MICHAEL: Michael McKee from Bloomberg Radio and Television. You've said the Fed would be raising interest rating and holding them there for some time. The markets priced in one more increase in May. Every meeting the rest of this year, they're pricing in rate cuts. Are they getting this totally wrong From the Fed? Or is there something different about the way you're looking at it given that you're now thinking that moves might be appropriate as opposed to ongoing. >> JEROME POWELL: We published an SEP today. It shows that basically participants expect relatively slow growth, rebalancing of supply and demand in the labor market, with inflation moving down gradually. In that most likely case, participants don't see rate cuts this year. They just don't.
Bloomberg 3/22/2023
The Federal Reserve raised interest rates by a quarter percentage point and signaled it’s not finished hiking, despite the risk of exacerbating a bank crisis that’s roiled global markets.
The Federal Open Market Committee voted unanimously to increase its target for the federal funds rate to a range of 4.75% to 5%, the highest since September 2007, when rates were at their peak on the eve of the financial crisis. It’s the second straight rise of 25 basis points following a string of aggressive moves starting in March 2022, when rates were near zero.
“The U.S. banking system is sound and resilient,” the Fed said in a statement in Washington after a two-day meeting.
At the same time, officials warned that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.”
March 13, 2023
SGH Insight
European Central Bank officials, on two key fronts, face a much easier decision than their counterparts at the US Federal Reserve when the Governing Council convenes on Thursday for its March monetary policy meeting.
First, when measured against their respective outlooks for core inflation this year, a reasonable metric in our view, the ECB is not nearly where the Fed is on rates, and the ECB’s long-signaled decision to hike 50 basis points on Thursday, from 2.5% to 3.0%, is from an economic and monetary policy perspective still a clear no-brainer.
Market Validation
First, when measured against their respective outlooks for core inflation this year, a reasonable metric in our view, the ECB is not nearly where the Fed is on rates, and the ECB’s long-signaled decision to hike 50 basis points on Thursday, from 2.5% to 3.0%, is from an economic and monetary policy perspective still a clear no-brainer.
Dow Jones 3/16/2023
FRANKFURT--The European Central Bank on Thursday raised interest rates by half a percentage point, pressing ahead with its fight against inflation despite concerns that this could exacerbate strains in the financial system.
The ECB said in a statement that it would increase its key rate to 3%, the highest level since 2008, following consecutive half-point rate increases in February and December. Many investors had been betting that the ECB might unveil a smaller, quarter-point rate increase on Thursday after last week's turmoil in the U.S. banking sector spread to Europe.
FRANKFURT--The European Central Bank on Thursday raised interest rates by half a percentage point, pressing ahead with its fight against inflation despite concerns that this could exacerbate strains in the financial system.
The ECB said in a statement that it would increase its key rate to 3%, the highest level since 2008, following consecutive half-point rate increases in February and December. Many investors had been betting that the ECB might unveil a smaller, quarter-point rate increase on Thursday after last week's turmoil in the U.S. banking sector spread to Europe.
January 24, 2023
SGH Insight
The Bank of Japan (BOJ) remains in no hurry to exit Yield Curve Control (YCC) and will step to the sidelines for now as Prime Minister Fumio Kishida prepares to submit to parliament next month the names of his nominees for senior roles at the central bank.
Outright abandonment of YCC remains a chess move for the next governor. In our last report, we wrote that regardless of the timing of additional tweaks, we expected the Bank to eliminate YCC during April, once Kuroda’s successor takes office (see SGH 1/13/23; “BOJ: Under New Management”).
Market Validation
Outright abandonment of YCC remains a chess move for the next governor. In our last report, we wrote that regardless of the timing of additional tweaks, we expected the Bank to eliminate YCC during April, once Kuroda’s successor takes office (see SGH 1/13/23; “BOJ: Under New Management”).
Bloomberg 3/10/2023
The Bank of Japan maintained its easing stance, sending the yen and benchmark bond yields lower, as Governor Haruhiko Kuroda held his final meeting after a decade of massive stimulus. The BOJ kept its policy settings for its negative interest rate and yield curve control program unchanged Friday, according to its statement.
The Bank of Japan maintained its easing stance, sending the yen and benchmark bond yields lower, as Governor Haruhiko Kuroda held his final meeting after a decade of massive stimulus. The BOJ kept its policy settings for its negative interest rate and yield curve control program unchanged Friday, according to its statement.
January 20, 2023
SGH Insight
The European Commission is proposing to set up new European Union sources of financing in the coming months to keep Europe’s green industry, also called the clean tech sector, from relocating to the United States to take advantage of the $369 billion “Made in the USA” subsidies for green products offered by President Biden’s “Inflation Reduction Act” (IRA) starting from January 1.
EU governments are seriously concerned that EU companies making electric cars, solar panels, batteries, wind turbines, or equipment to make hydrogen will now invest in the US to take advantage of that federal money, as talks with Washington to allow EU companies to enjoy the same status within the IRA as Canadian or Mexican companies have so far largely failed.
In a knee-jerk reaction, the Commission plans to further loosen the EU’s state aid rules so that the 27 governments of the Union can quickly offer some relief to their green sector. While that is the fastest and easiest answer, it threatens to trigger a transatlantic subsidy war and, more importantly, leaves EU countries with less fiscal space with not much room for maneuver.
Market Validation
EU governments are seriously concerned that EU companies making electric cars, solar panels, batteries, wind turbines, or equipment to make hydrogen will now invest in the US to take advantage of that federal money, as talks with Washington to allow EU companies to enjoy the same status within the IRA as Canadian or Mexican companies have so far largely failed.
In a knee-jerk reaction, the Commission plans to further loosen the EU’s state aid rules so that the 27 governments of the Union can quickly offer some relief to their green sector. While that is the fastest and easiest answer, it threatens to trigger a transatlantic subsidy war and, more importantly, leaves EU countries with less fiscal space with not much room for maneuver.
Bloomberg 3/9/2023
The European Union unveiled measures to relax its state-aid regime and boost the bloc’s clean-tech industry in response to a US climate law that provides generous subsidies.
Changes to temporary state-aid rules will allow governments to match funds offered by foreign nations under certain restrictions while continuing to allow EU countries to “cushion the impact of the current crisis in Europe,” the European Commission said Thursday.
The new measures allow governments “to give state aid in a fast, clear and predictable way,” EU Antitrust Commissioner Margrethe Vestager said in the statement. They “enable member states to accelerate net zero investments at this critical moment, while protecting the level playing field in the single market and cohesion objectives. The new rules are proportionate, targeted and temporary.”
The European Union unveiled measures to relax its state-aid regime and boost the bloc’s clean-tech industry in response to a US climate law that provides generous subsidies.
Changes to temporary state-aid rules will allow governments to match funds offered by foreign nations under certain restrictions while continuing to allow EU countries to “cushion the impact of the current crisis in Europe,” the European Commission said Thursday.
The new measures allow governments “to give state aid in a fast, clear and predictable way,” EU Antitrust Commissioner Margrethe Vestager said in the statement. They “enable member states to accelerate net zero investments at this critical moment, while protecting the level playing field in the single market and cohesion objectives. The new rules are proportionate, targeted and temporary.”
December 12, 2022
SGH Insight
...Separately, note that “higher for longer” is more economic guidance than calendar guidance. If the SEP projects larger cuts in 2024 and 2025 than anticipated, this should not be viewed as a rejection of the “higher for longer” story. That story really means the Fed will hold rates higher than typical for a cycle in the sense that it will wait for greater evidence that inflation is decelerating, and the unemployment rate is rising; it’s not a commitment to hold rates high for a specific period. Moreover, it applies to real policy rates as well as nominal. As explained by New York Federal Reserve President John Williams, projected inflation declines in 2023 would tighten financial conditions even if the Fed pauses rate hikes early in the year and the ongoing disinflation in 2024 would need to be met with rate cuts to prevent real financial conditions from tightening even further. In that case, real rates would remain high even if nominal rates fell. The Fed’s resistance to cutting rates is why I anticipate the yield curve will experience a much deeper inversion before this cycle is complete.
...The Fed is poised to raise rates 50bp at this week’s FOMC meeting and project that at least another 50bp of rate hikes remains in this cycle. That projection will place the terminal rate in sight, just two meetings away assuming the Fed downshifts to 25bp at the Jan/Feb meeting. Such a projection is something of an act of faith on the Fed’s part given that incoming data has yet to show all but the earliest signs of the labor market retrenchment the Fed believes necessary to restore price stability. Still, given the speed at which the Fed has raised rates, it would not be surprising to see the impacts of tighter financial conditions limited to only the most interest rate sensitive sectors. We know the Fed is already considering the cumulative tightening to date and policy lags when setting policy and we are looking for signs the Fed is increasingly comfortable viewing rates near 5% as the likely end of this cycle. Note that the Fed hasn’t been trying to guide rate hike expectations substantially higher. We still believe the terminal rate will be 5.125%, but that requires evidence sufficient to leave the Fed confident that the labor market will soften substantially over the next year...
...Bottom Line
The Fed will take another step forward in its campaign to bring policy rates to a sufficiently restrictive level to restore price stability. But with 450bp tightening already completed, the Fed will step down from the blistering 75bp pace of the last four meetings to a still substantial 50bp hike. The Fed’s rate projections will imply that the Fed anticipates the economy will evolve in such a way that the peak of this cycle is not far away. At this point, the data have yet to reveal the substantial rebalancing of the labor market the Fed is hoping to achieve in its quest to restore price stability. Looking for the peak of the cycle under these circumstances very much depends on the Fed having a forecast that includes a very high probability of recession. The Fed is moving closer to that point.
Market Validation
...Separately, note that “higher for longer” is more economic guidance than calendar guidance. If the SEP projects larger cuts in 2024 and 2025 than anticipated, this should not be viewed as a rejection of the “higher for longer” story. That story really means the Fed will hold rates higher than typical for a cycle in the sense that it will wait for greater evidence that inflation is decelerating, and the unemployment rate is rising; it’s not a commitment to hold rates high for a specific period. Moreover, it applies to real policy rates as well as nominal. As explained by New York Federal Reserve President John Williams, projected inflation declines in 2023 would tighten financial conditions even if the Fed pauses rate hikes early in the year and the ongoing disinflation in 2024 would need to be met with rate cuts to prevent real financial conditions from tightening even further. In that case, real rates would remain high even if nominal rates fell. The Fed’s resistance to cutting rates is why I anticipate the yield curve will experience a much deeper inversion before this cycle is complete.
...The Fed is poised to raise rates 50bp at this week’s FOMC meeting and project that at least another 50bp of rate hikes remains in this cycle. That projection will place the terminal rate in sight, just two meetings away assuming the Fed downshifts to 25bp at the Jan/Feb meeting. Such a projection is something of an act of faith on the Fed’s part given that incoming data has yet to show all but the earliest signs of the labor market retrenchment the Fed believes necessary to restore price stability. Still, given the speed at which the Fed has raised rates, it would not be surprising to see the impacts of tighter financial conditions limited to only the most interest rate sensitive sectors. We know the Fed is already considering the cumulative tightening to date and policy lags when setting policy and we are looking for signs the Fed is increasingly comfortable viewing rates near 5% as the likely end of this cycle. Note that the Fed hasn’t been trying to guide rate hike expectations substantially higher. We still believe the terminal rate will be 5.125%, but that requires evidence sufficient to leave the Fed confident that the labor market will soften substantially over the next year...
...Bottom Line
The Fed will take another step forward in its campaign to bring policy rates to a sufficiently restrictive level to restore price stability. But with 450bp tightening already completed, the Fed will step down from the blistering 75bp pace of the last four meetings to a still substantial 50bp hike. The Fed’s rate projections will imply that the Fed anticipates the economy will evolve in such a way that the peak of this cycle is not far away. At this point, the data have yet to reveal the substantial rebalancing of the labor market the Fed is hoping to achieve in its quest to restore price stability. Looking for the peak of the cycle under these circumstances very much depends on the Fed having a forecast that includes a very high probability of recession. The Fed is moving closer to that point.
Bloomberg 3/8/2023
The bond market is doubling down on the
prospect of a US recession after Federal Reserve Chair Jerome
Powell warned of a return to bigger interest-rate hikes to cool
inflation and the economy.
As swaps traders price in a full percentage point of Fed
hikes over the next four meetings, the yield on two-year
Treasury notes touched 5.08% on Wednesday, its highest level
since 2007. Critically, longer-dated yields remained stalled,
with the 10-year rate remaining relatively unchanged under 4%
and 30-year bonds having barely budged since Friday.
As a result, the closely-watched spread between 2- and 10-
year yields this week showed a discount larger than a percentage
point for the first time since 1981, when then-Fed Chair Paul
Volcker was engineering hikes that broke the back of double-
digit inflation at the cost of a lengthy recession.
Washington (AP) 12/14/22
-- The Federal Reserve reinforced its inflation fight Wednesday by raising its key interest rate for the seventh time this year and signaling more hikes to come. But the Fed announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing.
The Fed boosted its benchmark rate a half-point to a range of 4.25% to 4.5%, its highest level in 15 years. Though lower than its previous three-quarter-point hikes, the latest move will further increase the costs of many consumer and business loans and the risk of a recession.
The policymakers also forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023. That suggests that the Fed is poised to raise its benchmark rate by an additional three-quarters of a point and leave it there through next year.
In its updated forecasts, the Fed’s policymakers predicted slower growth and higher unemployment for next year and 2024. The unemployment rate is envisioned to jump to 4.6% by the end of 2023, from 3.7% today. That would mark a significant increase in joblessness that typically would reflect a recession.
Consistent with a sharp slowdown, the officials also projected that the economy will barely grow next year, expanding just 0.5%, less than half the forecast it had made in September.
Bloomberg 12/13/22
A dovish post-CPI repricing in the Fed-dated swaps market has seen the odds now favoring a downgrade to a 25bp rate hike move as early as the February policy meeting.
Swaps are still solidly pricing in a 50bp move for Wednesday’s policy announcement, little changed on the day but now an additional 84bp of hikes are priced for the February meeting, down from 91bp Monday close
An 84bp hike premium for the meeting consistent with a 50bp move for December and then 34bp additional priced for the Feb. decision
Further out, Fed peak policy rate has now dropped to around 4.82% consistent with below 100bp of additional hikes; consistent with the Fed pausing in the May meeting next year after 50bp, 25bp and 25bp hikes over the next three meetings
The bond market is doubling down on the
prospect of a US recession after Federal Reserve Chair Jerome
Powell warned of a return to bigger interest-rate hikes to cool
inflation and the economy.
As swaps traders price in a full percentage point of Fed
hikes over the next four meetings, the yield on two-year
Treasury notes touched 5.08% on Wednesday, its highest level
since 2007. Critically, longer-dated yields remained stalled,
with the 10-year rate remaining relatively unchanged under 4%
and 30-year bonds having barely budged since Friday.
As a result, the closely-watched spread between 2- and 10-
year yields this week showed a discount larger than a percentage
point for the first time since 1981, when then-Fed Chair Paul
Volcker was engineering hikes that broke the back of double-
digit inflation at the cost of a lengthy recession.
Washington (AP) 12/14/22
-- The Federal Reserve reinforced its inflation fight Wednesday by raising its key interest rate for the seventh time this year and signaling more hikes to come. But the Fed announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing.
The Fed boosted its benchmark rate a half-point to a range of 4.25% to 4.5%, its highest level in 15 years. Though lower than its previous three-quarter-point hikes, the latest move will further increase the costs of many consumer and business loans and the risk of a recession.
The policymakers also forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023. That suggests that the Fed is poised to raise its benchmark rate by an additional three-quarters of a point and leave it there through next year.
In its updated forecasts, the Fed’s policymakers predicted slower growth and higher unemployment for next year and 2024. The unemployment rate is envisioned to jump to 4.6% by the end of 2023, from 3.7% today. That would mark a significant increase in joblessness that typically would reflect a recession.
Consistent with a sharp slowdown, the officials also projected that the economy will barely grow next year, expanding just 0.5%, less than half the forecast it had made in September.
Bloomberg 12/13/22
A dovish post-CPI repricing in the Fed-dated swaps market has seen the odds now favoring a downgrade to a 25bp rate hike move as early as the February policy meeting.
Swaps are still solidly pricing in a 50bp move for Wednesday’s policy announcement, little changed on the day but now an additional 84bp of hikes are priced for the February meeting, down from 91bp Monday close
An 84bp hike premium for the meeting consistent with a 50bp move for December and then 34bp additional priced for the Feb. decision
Further out, Fed peak policy rate has now dropped to around 4.82% consistent with below 100bp of additional hikes; consistent with the Fed pausing in the May meeting next year after 50bp, 25bp and 25bp hikes over the next three meetings
March 6, 2023
SGH Insight
For all the political blowback on Governor Tiff Macklem during his bid to wrestle inflation lower, the Bank of Canada (BOC) finally appears to be catching a break.
The BOC looks set to confirm a conditional pause in its rate hike cycle, holding the key rate at 4.50% at its March 7 policy meeting following news headline inflation slowed to 5.9% from 6.3% in December.
Of course Macklem will warn that the BOC could resume tightening should inflation pressures resume an upward course and that inflation will need to continue to slow.
Market Validation
The BOC looks set to confirm a conditional pause in its rate hike cycle, holding the key rate at 4.50% at its March 7 policy meeting following news headline inflation slowed to 5.9% from 6.3% in December.
Of course Macklem will warn that the BOC could resume tightening should inflation pressures resume an upward course and that inflation will need to continue to slow.
Bloomberg 3/8/2023
The Bank of Canada kept interest rates unchanged for the first time in nine meetings and said it’s
still weighing whether additional hikes will be needed to rein in inflation.
Governing Council will continue to assess economic developments and the impact of past interest rate increases, and
is prepared to increase the policy rate further if needed to restore inflation to the 2% target,” the bank said in a statement-only decision Wednesday.
The Bank of Canada kept interest rates unchanged for the first time in nine meetings and said it’s
still weighing whether additional hikes will be needed to rein in inflation.
Governing Council will continue to assess economic developments and the impact of past interest rate increases, and
is prepared to increase the policy rate further if needed to restore inflation to the 2% target,” the bank said in a statement-only decision Wednesday.
March 6, 2023
SGH Insight
Monday Morning Notes, 3/6/23
If You Don’t Have Time This Morning
Powell will be on Capitol Hill this week for his semi-annual monetary policy testimony. He will present to the House on Tuesday and the Senate on Wednesday. Powell will stick to hawkish themes, but will he be more hawkish than what’s already priced into rates? Powell will reiterate that inflation remains too high and emphasize that even after the series of rate hikes this cycle there is still more work to be done. I expect he will add that if inflation or growth data continue to surprise on the upside, the Fed will hike higher and remain at that level longer than it currently expects.
Market Validation
Monday Morning Notes, 3/6/23
If You Don’t Have Time This Morning
Powell will be on Capitol Hill this week for his semi-annual monetary policy testimony. He will present to the House on Tuesday and the Senate on Wednesday. Powell will stick to hawkish themes, but will he be more hawkish than what’s already priced into rates? Powell will reiterate that inflation remains too high and emphasize that even after the series of rate hikes this cycle there is still more work to be done. I expect he will add that if inflation or growth data continue to surprise on the upside, the Fed will hike higher and remain at that level longer than it currently expects.
Dow Jones 3/7/2023
Federal Reserve Chair Jerome Powell said strong and sustained economic activity to start this year could prompt central bank
officials to accelerate interest-rate increases and will likely lead them to lift rates more than they expected to combat high inflation.
We will continue to make our decisions meeting by meeting," Mr. Powell said. "Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy."
Since officials last met on Feb. 1, several economic reports have revealed hiring, spending and inflation were hotter in January than expected, and data revisions showed inflation and demand for labor didn't slow as much as initially reported late last year.
Mr. Powell said data on hiring, spending, factory production and inflation partly reversed softening trends seen just a few weeks ago. Some of the upswing could reflect unseasonably warm January weather that can interfere with seasonal adjustments to economic data, he said.
"Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [policy-setting] meeting," Mr. Powell said.
Federal Reserve Chair Jerome Powell said strong and sustained economic activity to start this year could prompt central bank
officials to accelerate interest-rate increases and will likely lead them to lift rates more than they expected to combat high inflation.
We will continue to make our decisions meeting by meeting," Mr. Powell said. "Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy."
Since officials last met on Feb. 1, several economic reports have revealed hiring, spending and inflation were hotter in January than expected, and data revisions showed inflation and demand for labor didn't slow as much as initially reported late last year.
Mr. Powell said data on hiring, spending, factory production and inflation partly reversed softening trends seen just a few weeks ago. Some of the upswing could reflect unseasonably warm January weather that can interfere with seasonal adjustments to economic data, he said.
"Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [policy-setting] meeting," Mr. Powell said.
February 23, 2023
SGH Insight
The Reserve Bank of Australia (RBA), still uncomfortable with the level of underlying inflation, will likely raise rates again by 25 basis points in early March even as news of slower-than-expected wage growth in the final three months of 2022 raised hopes that the economy dodged a wage-price spiral.
This week’s release of the minutes from the February 7 policy meeting confirmed that the Board, already on edge about upside inflation risk, included in its discussion, a 50-basis-point rate hike option at the meeting.
The discussion around 50bp was prompted by the Bank’s concern about a pattern of incoming prices and wages data that had been exceeding expectations and, importantly, it served as a reminder that the Bank is not done with hikes though market pricing of a peak near 4.5% might be overdone.
It settled on a 25bps move to 3.35% and as we wrote (see SGH 2/2/23; “RBA: Upside Insurance”), the Bank is largely resigned to finishing out its hiking cycle in 25bp increments. When it concludes it is close to a possible peak rate, the RBA will caveat that pause in case the data moves against it.
Either of the next two rate moves could represent a point to pause for the RBA if the data continues to break in its favor, though the RBA still will retain the option to resume rate hikes thereafter.
Market Validation
This week’s release of the minutes from the February 7 policy meeting confirmed that the Board, already on edge about upside inflation risk, included in its discussion, a 50-basis-point rate hike option at the meeting.
The discussion around 50bp was prompted by the Bank’s concern about a pattern of incoming prices and wages data that had been exceeding expectations and, importantly, it served as a reminder that the Bank is not done with hikes though market pricing of a peak near 4.5% might be overdone.
It settled on a 25bps move to 3.35% and as we wrote (see SGH 2/2/23; “RBA: Upside Insurance”), the Bank is largely resigned to finishing out its hiking cycle in 25bp increments. When it concludes it is close to a possible peak rate, the RBA will caveat that pause in case the data moves against it.
Either of the next two rate moves could represent a point to pause for the RBA if the data continues to break in its favor, though the RBA still will retain the option to resume rate hikes thereafter.
Bloomberg 3/7/2023
Australia’s central bank signaled a pause in its 10-month tightening cycle is in prospect, prompting a selloff in the currency after policymakers delivered an expected interest-rate increase on Tuesday.
The Reserve Bank lifted its cash rate by a quarter- percentage point to 3.6%, the highest level since May 2012. Governor Philip Lowe said in his statement that in assessing. “when and how much further” rates need to go up, the RBA will pay close attention to incoming economic data.
Australia’s central bank signaled a pause in its 10-month tightening cycle is in prospect, prompting a selloff in the currency after policymakers delivered an expected interest-rate increase on Tuesday.
The Reserve Bank lifted its cash rate by a quarter- percentage point to 3.6%, the highest level since May 2012. Governor Philip Lowe said in his statement that in assessing. “when and how much further” rates need to go up, the RBA will pay close attention to incoming economic data.
November 30, 2022
SGH Insight
There is a major disconnect between market expectations and pricing, and the policy rate European Central Bank officials increasingly feel will be needed to bring inflation back down to their 2% target.
Markets have for some time converged, and remain converged, around a 3% “terminal rate” for this hiking cycle, pricing it today at around 2.8% after the drop in eurozone headline inflation readings from 10.6% in October to 10.0% in November.
As things stand, however, the ECB is likely to raise rates into the 3.5% to 4.0% range next year and look to keep them there for a while to bring inflation back down to target...
...Similarly, while analysts are keenly focused on the interplay and political tradeoffs between the start of the ECB’s balance sheet reduction and magnitude of the next interest rate hike, that kind of fine tuning of policy is now a bit of a red herring.
We expect that the ECB will not dally around with a previously planned, and widely expected, two-step process of rolling out the broad contours for shrinking its balance sheet on December 15, to be agreed and implemented at their subsequent meeting in February (some analysts are expecting even later than that).
We expect the ECB will move forward imminently with its balance sheet reduction program, and will agree, announce, and roll out the details of that program at its upcoming December 15 meeting, to take effect as soon as feasible...
Market Validation
Markets have for some time converged, and remain converged, around a 3% “terminal rate” for this hiking cycle, pricing it today at around 2.8% after the drop in eurozone headline inflation readings from 10.6% in October to 10.0% in November.
As things stand, however, the ECB is likely to raise rates into the 3.5% to 4.0% range next year and look to keep them there for a while to bring inflation back down to target...
...Similarly, while analysts are keenly focused on the interplay and political tradeoffs between the start of the ECB’s balance sheet reduction and magnitude of the next interest rate hike, that kind of fine tuning of policy is now a bit of a red herring.
We expect that the ECB will not dally around with a previously planned, and widely expected, two-step process of rolling out the broad contours for shrinking its balance sheet on December 15, to be agreed and implemented at their subsequent meeting in February (some analysts are expecting even later than that).
We expect the ECB will move forward imminently with its balance sheet reduction program, and will agree, announce, and roll out the details of that program at its upcoming December 15 meeting, to take effect as soon as feasible...
Bloomberg 2/24/23
European bonds tumbled and money market traders added to European Central Bank rate hike bets after data showed the US economy is running hotter than expected.
German two-year yields — among the most sensitive to changes in monetary policy — rose as much as 13 basis points on Friday to above 3% for the first time since 2008. Money markets now price the ECB deposit rate to peak at around 3.87% later this year compared to around 3.5% at the beginning of the year.
Bloomberg 12/15/22
*LAGARDE: ECB NEEDS TO DO MORE ON RATES THAN MARKETS PRICE
*LAGARDE: MARKET RATE BETS DON'T ALLOW ECB TO REACH 2% GOAL
*LAGARDE: ANYONE THINKING ECB IS PIVOTING IS WRONG
Yet more tough language from Lagarde as she again flags the possibility of several 50 basis points hikes. It shouldn’t be regarded as the new normal, but in current circumstances it’s the right approach, she says. “We need to take this fight and continue the battle against inflation.”
In response to Alex’s first question whether 3% is a fair assumption for a terminal rate, Lagarde says that staff projections do not allow a return to 2% inflation target in a timely manner. More needs to be done and as a result new market expectations will “hopefully” be embedded in future projections, she says.
ECB Monetary policy statement 12/15/22
The key ECB interest rates are the Governing Council’s primary tool for setting the monetary policy stance. The Governing Council today also discussed principles for normalising the Eurosystem’s monetary policy securities holdings. From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.
European bonds tumbled and money market traders added to European Central Bank rate hike bets after data showed the US economy is running hotter than expected.
German two-year yields — among the most sensitive to changes in monetary policy — rose as much as 13 basis points on Friday to above 3% for the first time since 2008. Money markets now price the ECB deposit rate to peak at around 3.87% later this year compared to around 3.5% at the beginning of the year.
Bloomberg 12/15/22
*LAGARDE: ECB NEEDS TO DO MORE ON RATES THAN MARKETS PRICE
*LAGARDE: MARKET RATE BETS DON'T ALLOW ECB TO REACH 2% GOAL
*LAGARDE: ANYONE THINKING ECB IS PIVOTING IS WRONG
Yet more tough language from Lagarde as she again flags the possibility of several 50 basis points hikes. It shouldn’t be regarded as the new normal, but in current circumstances it’s the right approach, she says. “We need to take this fight and continue the battle against inflation.”
In response to Alex’s first question whether 3% is a fair assumption for a terminal rate, Lagarde says that staff projections do not allow a return to 2% inflation target in a timely manner. More needs to be done and as a result new market expectations will “hopefully” be embedded in future projections, she says.
ECB Monetary policy statement 12/15/22
The key ECB interest rates are the Governing Council’s primary tool for setting the monetary policy stance. The Governing Council today also discussed principles for normalising the Eurosystem’s monetary policy securities holdings. From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.
February 21, 2023
SGH Insight
Tuesday Morning Notes
Whereas the Fed expected the economy would continue slowing this year, incoming data indicates that first quarter activity firmed. Worse though for the Fed, inflation also firmed, and now it threatens to decelerate more slowly than the Fed, and markets, expected. Both point to a higher terminal rate, and Fed officials increasingly recognize that they will not be able to pause as quickly as they anticipated. We think there is enough momentum in the economy to bring policy rates to a peak of 5.625%. If the Fed continues with 25bp rate hikes, that takes us out to the July meeting, but of course the actual outcome, as well as the pace, are data dependent. July is a long way off still; at this juncture, we are waiting for the next round of data to give the Fed additional direction.
Market Validation
Whereas the Fed expected the economy would continue slowing this year, incoming data indicates that first quarter activity firmed. Worse though for the Fed, inflation also firmed, and now it threatens to decelerate more slowly than the Fed, and markets, expected. Both point to a higher terminal rate, and Fed officials increasingly recognize that they will not be able to pause as quickly as they anticipated. We think there is enough momentum in the economy to bring policy rates to a peak of 5.625%. If the Fed continues with 25bp rate hikes, that takes us out to the July meeting, but of course the actual outcome, as well as the pace, are data dependent. July is a long way off still; at this juncture, we are waiting for the next round of data to give the Fed additional direction.
Bloomberg 2/24/23
The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates.
The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.
US stock futures fell and Treasury yields rose as traders firmed up bets that the Fed will raise interest rates by a quarter-point at each of the next three meetings. Investors also expect a higher terminal fed funds rate.
*FED SWAPS PRICE IN PEAK POLICY RATE OF 5.45% IN JULY 2023
The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates.
The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.
US stock futures fell and Treasury yields rose as traders firmed up bets that the Fed will raise interest rates by a quarter-point at each of the next three meetings. Investors also expect a higher terminal fed funds rate.
*FED SWAPS PRICE IN PEAK POLICY RATE OF 5.45% IN JULY 2023
December 15, 2022
SGH Insight
And while Lagarde did not place a number on that elusive “terminal rate,” we believe, as we wrote in SGH 11/30/22, “ECB: A Major Disconnect with Markets,” that means the ECB is increasingly eyeing a 3.5%-4% landing zone when all is said and done.
Market Validation
Bloomberg 2/21/23
Money markets add to ECB tightening wagers, fully pricing a half-point ECB rate hike at the March 16 policy decision for the first time.
A 50bps hike is priced versus 49.5bps on Monday; 3.76% peak rate is expected by October, 4bps higher than the prior day.
Money markets add to ECB tightening wagers, fully pricing a half-point ECB rate hike at the March 16 policy decision for the first time.
A 50bps hike is priced versus 49.5bps on Monday; 3.76% peak rate is expected by October, 4bps higher than the prior day.
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