The Bank of Japan (BOJ) this week removed its last hurdle to ending negative interest rates and opened a window to a move to a positive policy setting between January and April next year.
The BOJ will likely consider a 25 basis points move to set policy at 15 bps in April from minus 10 bps, with the risks weighted toward bringing that decision forward to the January BOJ forecast round rather than delaying it beyond April.


(2) Despite throwing a veritable fiscal kitchen sink at the electorate, Kishida’s popularity ratings have continued to sag, dashing his prospect of getting full party support this year should he call an early election.
With the blessing of his ruling LDP party, he will now likely wait until September next year to call elections as he tries to engineer a more positive economic runway.
Kishida is looking to three elements to help boost his standing and his chances of being reelected. Firstly, he will play a large role in ensuring the next round of wage negotiations results in another hefty increase of around 3.5% in salaries to workers in March/April next year

(3) Despite throwing a veritable fiscal kitchen sink at the electorate, Kishida’s popularity ratings have continued to sag, dashing his prospect of getting full party support this year should he call an early election.
With the blessing of his ruling LDP party, he will now likely wait until September next year to call elections as he tries to engineer a more positive economic runway.

With Governor Tiff Macklem having all but declared the peak in the Bank of Canada’s (BOC) hiking cycle, this week’s meeting will hold rates at 5% and likely pivot to conditional dovish language that suggests the central bank will ease rates early next year.
The Bank’s efforts now are focused on trying to maintain a “higher for longer” policy strategy that extends through the turn of the year before it shifts to signaling rate cuts.
For this week’s meeting, BOC staff have likely crafted language options for the post meeting statement that acknowledge the aggressive campaign of higher rates are working even as the central bank reiterates its resolve to seeing inflation back to target.
Though this meeting’s message will continue to reiterate the central bank’s willingness to raise rates again “if high inflation persists,” the Bank will note that it is patient in looking for additional confirmation that tells it the inflation job is done.

Slower-than-expected inflation in October reinforces the likelihood that the Reserve Bank of Australia (RBA) will not only stand pat when it meets on December 5, but is probably done hiking rates and will face the prospect of having to ease policy in the second half of next year.
Continued persistence in underlying inflation measures, well above the RBA’s 2-3% target range will see the RBA continue to reiterate a tightening bias in its communications at the upcoming meeting and likely through the turn of the year.
But after 425 bps of rate hikes since April 2022, we think the Bank views the 4.35%-cash rate as sufficiently restrictive to help it navigate inflation back to the top side of its 2-3% target band by the end of 2025.

• Fade hawkish Fed comments. The Fedspeak is behind the curve, and any speaker still pushing for higher rates is actively choosing to make themselves irrelevant. The Fed isn’t raising rates again (sure, yes, there is always a chance something unexpected happens, but that seems like a negligible risk now). Given where this is heading over the next year, it’s just foolish to raise rates again even if we get a couple of bad CPI prints, and Chair Powell isn’t foolish.
• That also means fade any hawkish Powell comments. This one will be hard, I get it. It’s the Chair, but remember my outlook is about where the Fed is heading, not what they are saying now. Clients keep asking if Powell will be hawkish tomorrow, and unfortunately the reaction to Powell will be in part what the market wants. It’s going to be hard to push market odds of March higher than 50% without more data, and if Powell won’t validate market pricing, which is my baseline, then market pricing for a March cut can pull back. I expect Powell will follow recent commentary with a risk that he is more dovish because if there is a chance of a March cut, he needs to start normalizing that at the next FOMC meeting.

Upcoming Data and Events

We get a steady stream of data this week but note that the November employment report won’t arrive until next week.

Monday we get new home sales for October, with the number expected to be weaker than November as buyers delayed purchases due to high mortgage rates.

...Track Waller’s evolution of his thinking on the economy and implications for monetary policy. He said this ahead of the November FOMC meeting:
What does that mean for monetary policy? I will be looking carefully at the data to see whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up. As of today, it is too soon to tell. Consequently, I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate. Should the real side of the economy soften, we will have more room to wait on any further rate hikes and let the recent run-up on longer-term rates do some of our work. But if the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run up in longer term rates.
Waller can build on this and simply say that data since this speech indicated a cooler economy with lower-than-expected inflation, validating the Fed’s decision to stay on hold in November and to remain on hold (watch and wait) in December. He will likely continue to couch his outlook as a debate about the need for another rate hike and not say that rates are “sufficiently restrictive.” Obviously, it would be a dovish surprise if he couches his outlook in terms of “how long to hold rates at this level.”

...Waller will need to tread carefully around the issue of financial conditions. I suspect he thinks any further easing is premature, but also would say that conditions have tightened since the Fed’s last rate hike, implying that the easing since the November meeting still leaves conditions restrictive. As a hawkish surprise, Waller could say the recent easing lowers the bar for another rate hike, something some market participants believe. I suspect this would be counterproductive given recent data, but if he wants to go that direction, then market participants will likely push long yields back up to 5% and will bring back that 8% mortgage rate Powell clearly didn’t like.

Published on November 20, 2023
Monday Morning Notes, 11/20/23
The Fed releases the minutes of the November FOMC meeting on Tuesday. We expect the tone of the minutes will reflect further gradual shifting toward “sufficiently restrictive,” but think the minutes will fall short of declaring that July was definitively the last rate hike. We are looking to see if participants generally agreed that rates were “probably significantly restrictive” and risks “more broadly balanced” as signals of a more dovish policy direction. We think it remains too early for the Fed to declare that this cycle’s pause began back in July because the Fed knows that with such a declaration, markets will pull forward expectations of a rate cut. The Fed won’t make such a move until it has more confidence that it is closer to a rate hike.

...Better-than-expected inflation numbers drove market pricing last week. Market participants prepared for an upside miss to the consensus expectations of 0.3% core CPI inflation; the whisper number was 0.4%. Instead, core inflation printed at 0.2% and was subsequently followed by soft PPI numbers. Combined, expectations are the core-PCE will come in below 0.2% for March and help ensure that 2023 inflation will come in well below the Fed’s September forecast of 3.8%.

We will know in the coming days how Berlin intends to handle the fallout, but suspending the constitutional debt brake for another year or two appears to be shaping up as the best option for all as things now stand. Indeed, sources close to Lindner, from within his FDP party, are acknowledging that a suspension of the debt brake may be the only solution here. One idea is to suspend the brake for 2023 only, instead of for two years, which would secure the 60 billion euros for now but effectively punt the larger problem to 2024.
A decision is likely this week possibly by or at a cabinet meeting scheduled for Thursday.

Questions and Answers
SGH Insight
What will Governor Waller say Tuesday?
His topic is “using economic data to understand the economy,” which could lend itself to new insights into the path for policy but in practice Waller typically gives one economic update per inter-meeting period and that is usually closer to the blackout. Consequently, I think he will follow the message of his last speech or Powell’s press conference and not add any new insights during the Q&A. If anything, he could use this topic and the latest JOLTS and employment reports to take a victory lap as he correctly predicted that the Fed could take the heat off the labor market without mass layoffs. That would speak toward peak rates, but I suspect he would add the caveat that the Fed has been fooled by inflation before. That said, if I were him, I would feel pretty confident about the path of inflation.

...With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle. This isn’t any more about just setting policy to prevent the 2024 inflation forecast from rising. It’s about managing that while preventing the 2024 unemployment forecast from rising as well. Regardless of any Fed protestations otherwise, market participants will likely start pricing in a greater risk of a March cut on weaker economic data.
...With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle. This isn’t any more about just setting policy to prevent the 2024 inflation forecast from rising. It’s about managing that while preventing the 2024 unemployment forecast from rising as well. Regardless of any Fed protestations otherwise, market participants will likely start pricing in a greater risk of a March cut on weaker economic data.

...Monday Morning Notes, 11/6/23
With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle. This isn’t any more about just setting policy to prevent the 2024 inflation forecast from rising. It’s about managing that while preventing the 2024 unemployment forecast from rising as well. Regardless of any Fed protestations otherwise, market participants will likely start pricing in a greater risk of a March cut on weaker economic data.
The Fed will cut rates before inflation returns to 2%. Powell has already made this point clear, and it has long been in the SEP. The June SEP had 100bp of 2024 rate cuts with a year-end core inflation projection of 2.6%. Unless you believed that 100bp was going to all come in the fourth quarter, some of those rate cuts would come when inflation was above 2.6%. Still, doing so requires the Fed to see enough softness in the inflation numbers to be confident that inflation would remain on a path to price stability even with a rate cut.

Published on November 13, 2023
According to sources accompanying Xi on his trip, the Chinese leader said his talks with President Biden will be mainly to show the world that the two countries can manage their differences and avoid and prevent misunderstandings or fierce competition from veering into confrontation or conflict. China, he said, cannot expect economic and trade relations with the US to get back on track overnight, but the talks will inject confidence into the market if relations do not get worse.

In the run up to the summit, the Biden administration has laid out its top agenda items extensively in the media; foremost of which is a resumption of the military-to-military contacts between China and the US which Beijing cut off after the visit by then Speaker of the House Nancy Pelosi to Taiwan in August of 2022.
It is also notable that the White House has elevated to the top of its agenda the export from China of the precursor chemicals used to synthesize the deadly opioid fentanyl, which has led to the mass poisoning of around 250,000 Americans since Biden took office three years ago. It will come as no surprise that China’s exports of fentanyl precursors are not on the list of Xi Jinping’s top agenda items.
According to officials from China’s security apparatus, the most important topics for Xi will be overall US-China relations, bilateral military relations, Taiwan, the South China Sea, the Israeli-Palestinian conflict, and Ukraine.
As to economic matters, there is little to no expectation from any side of a major change to the issues important to either party, and Xi has indicated that he will not engage in these at any length.

As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.

The State Council has solicited ideas from megacities such as Shanghai and Beijing. As both cities reported double-digit growth in real estate investment and new home sales in H1, the State Council will not adopt a national real estate stimulus policy, but will rather support first, second, and third tier city efforts to improve city-specific policies according to individual situations.

...As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.
The State Council has solicited ideas from megacities such as Shanghai and Beijing. As both cities reported double-digit growth in real estate investment and new home sales in H1, the State Council will not adopt a national real estate stimulus policy, but will rather support first, second, and third tier city efforts to improve city-specific policies according to individual situations.
In order to support the real estate sector in super-large and mega cities, the State Council also just ordered all 21 of these cities to promote the construction of both “Emergency and Dual Use” facilities in H2 2023, recreational facilities that can be used also in case of pandemic and emergencies. The State Council also ordered all 21 super-large and mega cities with a population greater than 5 million to speed up the transformation of the lower income “cities within cities,” to ensure the stability of the national real estate industry in H2 2023.


In order to support the real estate sector in super-large and mega cities, the State Council also just ordered all 21 of these cities to promote the construction of both “Emergency and Dual Use” facilities in H2 2023, recreational facilities that can be used also in case of pandemic and emergencies. The State Council also ordered all 21 super-large and mega cities with a population greater than 5 million to speed up the transformation of the lower income “cities within cities,” to ensure the stability of the national real estate industry in H2 2023...

...Going straight to the numbers, fiscal spending for H2 was bumped up from the original budget and is targeted to increase by just under 7%, 6.9% to be precise, from H1 spending.

In H1 2023 China’s fiscal spending rose 3.9% over the same period last year, to 13.39 trillion yuan. This 13.39 trillion-yuan figure, comprised of 1.67 trillion in central government spending and 11.72 in local government spending, represents 48.7% of the total 27.51 trillion yuan allocated for 2023, leaving 14.12 trillion yuan for H2 spending.

Thursday’s CFEAC meeting approved an additional allocation of 200 billion yuan to H2 2023 spending, to bring the total spending for H2 to 14.32 trillion yuan, about 7% higher than fiscal expenditures for H1. The extra 200 billion yuan also symbolically bumps year-on-year comps by more than 1 trillion above the 13.17 trillion that was spent in H2 of 2022, by 1.15 trillion to be precise.

The CFEAC predicts that these levels of spending will pull China’s H2 GDP growth into the 5.3-5.5% range.

The additional 200 billion yuan will be allocated as follows: 11.5 billion to subsidize targeted semiconductor and artificial intelligence enterprises, 52.5 billion to advance the “transformation of villages in super-large and mega cities,” essentially urban slums, 55 billion to spur the private economy, and 81 billion towards stimulating consumption. Local governments are urged to encourage more nongovernmental investments, including in integrated circuits, new materials, and next-generation information technology.

The CFEAC meeting stressed that fiscal policy should also be used to extend the duration of temporary policies such as value-added tax relief for micro and small-scale taxpayers.

Premier Li Qiang pledged an additional 46.5 billion yuan towards meeting the country’s “Made in China 2025” high tech objectives, of which 35 billion yuan will come from the secretive “Premier Fund.”

As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.

European Union finance ministers are slowly getting closer to an agreement on revisions to the Stability and Growth Pact (SGP) rules that govern member states’ fiscal budgets.

They will meet tomorrow (Thursday) to discuss how they feel about the latest "landing zone" - a proposal that narrows rather than solves all the differences between the EU north and south.

There seems to be agreement on the point however, that the overall focus of the new rules should be on net expenditure growth, as a single operational indicator that is completely in the hands of the government, and which would be set annually to make possible the agreed debt reduction path.

There is also agreement that defense spending should be a "relevant factor" for the Commission when it decides whether to start disciplinary steps against a government for breaching the 3% deficit limit – in effect if the excess is for military spending, the Commission will let it slide.

The deal that the EU wants to reach on the new fiscal rules this year will be among governments only. It is only expected in December since despite some overall progress, which both fiscal hawks and doves acknowledge, there is still a long way to go.