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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.
June 21, 2022
SGH Insight
The Fed intensified its commitment to its inflation target last week, accelerating the pace of rate hikes to 75bp increments and raising the expected terminal rate to 3.8%. In the statement that followed the FOMC meeting, the Fed emphasized its commitment to price stability but offered no such commitment to the employment side of the mandate. While the Fed isn’t trying to induce a recession, and while no Fed speaker will predict a recession, the Fed has already made clear that if the choice is between recession and inflation, it now chooses recession. The Fed has committed to maintaining rate hikes until inflation is clearly on a path to 2%, something that will likely not be evident in the data for several months. If inflation prevents the Fed from pivoting to rate cuts when the economy turns, a recession feels all but guaranteed under the current guidance...
...The next several months will become very uncomfortable. We have become accustomed to the Fed responding quickly to signs of economic weakness, but in recent history those have always occurred in a period of low inflation. Now the Fed will hold rates higher for longer by design, which will appear as if it is ignoring the real side of the economy. Assuming the Fed does not change its guidance, it needs to see clear and compelling evidence of slowing inflation before it can pause rate hikes. Considering that inflation lags the cycle, we aren’t likely to see significant slowing in the near-term. For example, the Cleveland Fed predicts core-CPI will be 0.49% in June, the only release before the July FOMC meeting (which helps guarantee a 75bp hike).
Moreover, one or two soft inflation prints will not likely suffice to convince the Fed that it will restore price stability given that the Fed tried that strategy last year and was badly burned when inflation rebounded in the fall after an apparent improvement over the summer. That error will create a bias in the opposite direction, and could set up a dichotomy with markets, where the Fed will tend to dismiss any good news on inflation (from, for example, any discounting that occurs when retailers try to shed excess inventories) as insufficient to justify a policy shift. At the same time, we can expect slowing in the interest rate sectors of the economy and eventually a weaker job market...
Market Validation
...The next several months will become very uncomfortable. We have become accustomed to the Fed responding quickly to signs of economic weakness, but in recent history those have always occurred in a period of low inflation. Now the Fed will hold rates higher for longer by design, which will appear as if it is ignoring the real side of the economy. Assuming the Fed does not change its guidance, it needs to see clear and compelling evidence of slowing inflation before it can pause rate hikes. Considering that inflation lags the cycle, we aren’t likely to see significant slowing in the near-term. For example, the Cleveland Fed predicts core-CPI will be 0.49% in June, the only release before the July FOMC meeting (which helps guarantee a 75bp hike).
Moreover, one or two soft inflation prints will not likely suffice to convince the Fed that it will restore price stability given that the Fed tried that strategy last year and was badly burned when inflation rebounded in the fall after an apparent improvement over the summer. That error will create a bias in the opposite direction, and could set up a dichotomy with markets, where the Fed will tend to dismiss any good news on inflation (from, for example, any discounting that occurs when retailers try to shed excess inventories) as insufficient to justify a policy shift. At the same time, we can expect slowing in the interest rate sectors of the economy and eventually a weaker job market...
Bloomberg 6/23/22
Traders Hedge Fed Cuts in 2023 as Recession Risk Hits Yields
A newfound uneasiness on where US interest rates will be a year from now has started to fester throughout the bond market, as traders seek hedges to cover against an abrupt dovish shift in the Federal Reserve’s policy plans.
With fears of a recession evolving, rates extended their plunge Thursday, taking the three-year Treasury rate down more than 20 basis points to less than 3%. Ominously, traders are also piling into hedges that protect against Fed policy rates not only topping out, but actually being cut back down toward zero as soon as next year.
The moves follow comments from Fed Chairman Jerome Powell on Wednesday which appeared to accept that steep rate increases could trigger a US recession.
Bloomberg 6/24/22
Inflation could remain high until the second half of next year, despite the Federal Reserve’s rate hikes and the after-effects of higher oil prices, according to a blog post published Friday by the New York Fed.
Inflation is accelerating both in the US and the euro area, and the expected path for policy rates has risen sharply in both economies, the researchers say.
Those factors, when combined with the potential for a slowdown in economic growth, add more uncertainty to the outlook for inflation, they say.
“Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy,” researchers wrote in the blog post.
Tighter monetary policy alone is not enough to explain the deceleration projected for U.S. inflation over the next year.
“There is an important role for disinflationary payback in the latter part of 2022 for the current inflationary consequences of recent adverse oil supply shocks, driving the downside risk to the forecast,” the post says.
Inflation is projected to ease somewhat in both the US and the euro area, “but will remain elevated by May 2023.” There is a “higher likelihood of a larger-than-expected easing of inflation in the United States compared to the euro area.”
Traders Hedge Fed Cuts in 2023 as Recession Risk Hits Yields
A newfound uneasiness on where US interest rates will be a year from now has started to fester throughout the bond market, as traders seek hedges to cover against an abrupt dovish shift in the Federal Reserve’s policy plans.
With fears of a recession evolving, rates extended their plunge Thursday, taking the three-year Treasury rate down more than 20 basis points to less than 3%. Ominously, traders are also piling into hedges that protect against Fed policy rates not only topping out, but actually being cut back down toward zero as soon as next year.
The moves follow comments from Fed Chairman Jerome Powell on Wednesday which appeared to accept that steep rate increases could trigger a US recession.
Bloomberg 6/24/22
Inflation could remain high until the second half of next year, despite the Federal Reserve’s rate hikes and the after-effects of higher oil prices, according to a blog post published Friday by the New York Fed.
Inflation is accelerating both in the US and the euro area, and the expected path for policy rates has risen sharply in both economies, the researchers say.
Those factors, when combined with the potential for a slowdown in economic growth, add more uncertainty to the outlook for inflation, they say.
“Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy,” researchers wrote in the blog post.
Tighter monetary policy alone is not enough to explain the deceleration projected for U.S. inflation over the next year.
“There is an important role for disinflationary payback in the latter part of 2022 for the current inflationary consequences of recent adverse oil supply shocks, driving the downside risk to the forecast,” the post says.
Inflation is projected to ease somewhat in both the US and the euro area, “but will remain elevated by May 2023.” There is a “higher likelihood of a larger-than-expected easing of inflation in the United States compared to the euro area.”
April 21, 2022
SGH Insight
Beijing’s New Man in Hong Kong
On July 1, John Lee Ka-chiu, a stalwart partner of Beijing’s, is expected to take the reins as Chief Executive of Hong Kong.
To show Beijing’s full-throated support of John Lee as the new Chief Executive of Hong Kong, President Xi will also deliver a speech at a meeting celebrating the 25th anniversary of Hong Kong’s “return to the motherland,” and at the inaugural ceremony of the new Chief Executive of the Hong Kong SAR (Special Administrative Region of the People’s Republic of China).
Market Validation
On July 1, John Lee Ka-chiu, a stalwart partner of Beijing’s, is expected to take the reins as Chief Executive of Hong Kong.
To show Beijing’s full-throated support of John Lee as the new Chief Executive of Hong Kong, President Xi will also deliver a speech at a meeting celebrating the 25th anniversary of Hong Kong’s “return to the motherland,” and at the inaugural ceremony of the new Chief Executive of the Hong Kong SAR (Special Administrative Region of the People’s Republic of China).
Bloomberg 6/22/22
Chinese state media trumpeted President Xi
Jinping’s “deep affection” for Hong Kong, as speculation builds
that he’ll travel to the city for handover anniversary
celebrations on July 1.
Communist Party mouthpiece People’s Daily published a
2,000-word article Monday entitled “Hong Kong’s Development is
Always Close To My Heart,” highlighting Xi’s speeches throughout
his decade in power on the city’s progress. The article was
republished Tuesday on the front page of Beijing-controlled
local newspaper Ta Kung Pao.
Hong Kong officials are preparing to celebrate 25 years of
Chinese rule in the former British colony, at an event an
unnamed state leader is expected to attend. The South China
Morning Post reported Tuesday that the current arrangement is
for Xi to visit the city, according to an unnamed source.
Chinese state media trumpeted President Xi
Jinping’s “deep affection” for Hong Kong, as speculation builds
that he’ll travel to the city for handover anniversary
celebrations on July 1.
Communist Party mouthpiece People’s Daily published a
2,000-word article Monday entitled “Hong Kong’s Development is
Always Close To My Heart,” highlighting Xi’s speeches throughout
his decade in power on the city’s progress. The article was
republished Tuesday on the front page of Beijing-controlled
local newspaper Ta Kung Pao.
Hong Kong officials are preparing to celebrate 25 years of
Chinese rule in the former British colony, at an event an
unnamed state leader is expected to attend. The South China
Morning Post reported Tuesday that the current arrangement is
for Xi to visit the city, according to an unnamed source.
June 15, 2022
SGH Insight
Going through the various cycles in the ECB’s history, Schnabel recounts periods of dangerously compressed eurozone sovereign yields, as well as the historic blow outs in southern European bond markets during the European debt crisis of 2010-12, putting the current widening of spreads in historic context in a series of charts in the appendix that are highly illustrative.
As to the current state of affairs, Schnabel reiterates the ECB position — which we have repeatedly written as well — that the ECB has dealt with fragmentation successfully many times in its history, can easily redirect Pandemic Emergency Purchase Program bond reinvestments as needed to surf any excess (peripheral) market volatility, can structure new facilities if and as needed for new situations, and that the ultimate backstop against eurozone fragmentation is the ECB’s unwavering and unquestioned commitment to the euro.
Market Validation
As to the current state of affairs, Schnabel reiterates the ECB position — which we have repeatedly written as well — that the ECB has dealt with fragmentation successfully many times in its history, can easily redirect Pandemic Emergency Purchase Program bond reinvestments as needed to surf any excess (peripheral) market volatility, can structure new facilities if and as needed for new situations, and that the ultimate backstop against eurozone fragmentation is the ECB’s unwavering and unquestioned commitment to the euro.
Bloomberg
“With regard to Italy -- I’m personally of
the standpoint that we should not do too much,” European Central
Bank Governing Council member Madis Muller told Estonian Chamber
of Commerce earlier on Wednesday.
* “We had a situation where the central bank bought up bonds on
a massive scale, including government bonds, resulting in very
low interest rates”
* “If we now end this activity, it is in and of itself expected
that interest rates rise and countries’ real fundamental
indicators start to play a bigger role. So in the case of the
Italy, which has a larger debt burden and a more complicated
outlook, it is logical that interest rates have to rise faster
than in Germany’s case”
“With regard to Italy -- I’m personally of
the standpoint that we should not do too much,” European Central
Bank Governing Council member Madis Muller told Estonian Chamber
of Commerce earlier on Wednesday.
* “We had a situation where the central bank bought up bonds on
a massive scale, including government bonds, resulting in very
low interest rates”
* “If we now end this activity, it is in and of itself expected
that interest rates rise and countries’ real fundamental
indicators start to play a bigger role. So in the case of the
Italy, which has a larger debt burden and a more complicated
outlook, it is logical that interest rates have to rise faster
than in Germany’s case”
June 14, 2022
SGH Insight
Final Thoughts Heading into the FOMC Decision
Is 75bp the new norm? Prior guidance said the Fed would continue with 50bp hikes until inflation rolled over, so will Powell signal that the same is true of 75bp? I can’t see that. It might not be until the end of the year before we see a string of sufficiently low inflation numbers such that the Fed sees the path to price stability. The Fed’s not going to commit to a path likely to mean 75bp hikes at each meeting for the rest of the year, but Powell will not rule out another 75bp hike in July or later. Powell will frame this in terms of a more “expeditious” move toward neutral and I think will not repeat the error of providing strong guidance like that leading up to this meeting...
...Aspirational market pricing? I see market participants pricing in a peak Fed funds rate at 4% next spring, an overly hawkish view that might not be validated by the SEP. I am not far behind that as I see median dots of 3.375% and 3.875% for 2022 and 2023, respectively. As I wrote that puts a 4+% rate potentially in play and that will likely be revealed in some dots, but I don’t think the median will make it there. And to be sure, whatever the end result, this is a Volcker-moment for Powell.
Market Validation
Is 75bp the new norm? Prior guidance said the Fed would continue with 50bp hikes until inflation rolled over, so will Powell signal that the same is true of 75bp? I can’t see that. It might not be until the end of the year before we see a string of sufficiently low inflation numbers such that the Fed sees the path to price stability. The Fed’s not going to commit to a path likely to mean 75bp hikes at each meeting for the rest of the year, but Powell will not rule out another 75bp hike in July or later. Powell will frame this in terms of a more “expeditious” move toward neutral and I think will not repeat the error of providing strong guidance like that leading up to this meeting...
...Aspirational market pricing? I see market participants pricing in a peak Fed funds rate at 4% next spring, an overly hawkish view that might not be validated by the SEP. I am not far behind that as I see median dots of 3.375% and 3.875% for 2022 and 2023, respectively. As I wrote that puts a 4+% rate potentially in play and that will likely be revealed in some dots, but I don’t think the median will make it there. And to be sure, whatever the end result, this is a Volcker-moment for Powell.
Bloomberg
The Federal Reserve raised interest rates by
75 basis points -- the biggest increase since 1994 -- and Chair
Jerome Powell said officials could move by that much again next
month or make a smaller half-point increase to get inflation
under control.
Slammed by critics for not anticipating the fastest price
gains in four decades and then for being too slow to respond to
them, Chairman Jerome Powell and colleagues on Wednesday
intensified their effort to cool prices by lifting the target
range for the federal funds rate to 1.5% to 1.75%.
“I do not expect moves of this size to be common,” he said
at a press conference in Washington after the decision,
referring to the larger increase. “Either a 50 basis point or a
75 basis-point increase seems most likely at our next meeting.
We will, however, make our decisions meeting by meeting.”
Bloomberg
The median prediction of officials was for a peak rate of
3.8% in 2023, and five forecast a federal funds rate above 4%;
the median projection in March was for 1.9% this year and 2.8%
next. Traders in futures markets were betting on a peak rate of
about 4% ahead of the release.
The Federal Reserve raised interest rates by
75 basis points -- the biggest increase since 1994 -- and Chair
Jerome Powell said officials could move by that much again next
month or make a smaller half-point increase to get inflation
under control.
Slammed by critics for not anticipating the fastest price
gains in four decades and then for being too slow to respond to
them, Chairman Jerome Powell and colleagues on Wednesday
intensified their effort to cool prices by lifting the target
range for the federal funds rate to 1.5% to 1.75%.
“I do not expect moves of this size to be common,” he said
at a press conference in Washington after the decision,
referring to the larger increase. “Either a 50 basis point or a
75 basis-point increase seems most likely at our next meeting.
We will, however, make our decisions meeting by meeting.”
Bloomberg
The median prediction of officials was for a peak rate of
3.8% in 2023, and five forecast a federal funds rate above 4%;
the median projection in March was for 1.9% this year and 2.8%
next. Traders in futures markets were betting on a peak rate of
about 4% ahead of the release.
June 13, 2022
SGH Insight
Powell’s Volcker Moment
That was another unpleasant day on Wall Street with stocks, bonds, and crypto all trading deep in the red. The proximate cause was a repricing of risk ahead of the FOMC meeting on the concern that the Fed would deliver a hawkish message with the dots and possibly surprise with a 75bp rate hike. One of the wild cards for me heading into this meeting was the Fed’s reaction function with respect to the elevated inflation and inflation expectations numbers. I think the Fed will reveal that reaction function by opting for the 75bp move.
Market Validation
That was another unpleasant day on Wall Street with stocks, bonds, and crypto all trading deep in the red. The proximate cause was a repricing of risk ahead of the FOMC meeting on the concern that the Fed would deliver a hawkish message with the dots and possibly surprise with a 75bp rate hike. One of the wild cards for me heading into this meeting was the Fed’s reaction function with respect to the elevated inflation and inflation expectations numbers. I think the Fed will reveal that reaction function by opting for the 75bp move.
Bloomberg
The Federal Reserve raised interest rates by
75 basis points -- the biggest increase since 1994 -- and Chair
Jerome Powell said officials could move by that much again next
month or make a smaller half-point increase to get inflation
under control.
The Federal Reserve raised interest rates by
75 basis points -- the biggest increase since 1994 -- and Chair
Jerome Powell said officials could move by that much again next
month or make a smaller half-point increase to get inflation
under control.
June 7, 2022
SGH Insight
“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” Governor Philip Lowe said in his post decision statement.
In practice, this means the RBA likely wants to raise the official cash rate another 100bps this year. Another 50bps could be in the offing when it meets July 5 before it steps down to 25bps moves at a couple of its five remaining Board meetings between August and December. That would give the Bank an opportunity to see somewhat backward looking but key quarterly inflation releases due July 27, and October 26.
Market Validation
In practice, this means the RBA likely wants to raise the official cash rate another 100bps this year. Another 50bps could be in the offing when it meets July 5 before it steps down to 25bps moves at a couple of its five remaining Board meetings between August and December. That would give the Bank an opportunity to see somewhat backward looking but key quarterly inflation releases due July 27, and October 26.
Bloomberg 6/21/22
Australia’s central bank chief Philip Lowe
said interest rates are likely to rise by 50 basis points at
most in July, prompting money markets to scrap bets he would
track the Federal Reserve with a 75 basis-point move.
Lowe was asked directly after his speech whether 75 basis
points was on the table and responded that, like this month, the
board would only be considering a rise of 25-to-50 basis points
in July.
Australia’s central bank chief Philip Lowe
said interest rates are likely to rise by 50 basis points at
most in July, prompting money markets to scrap bets he would
track the Federal Reserve with a 75 basis-point move.
Lowe was asked directly after his speech whether 75 basis
points was on the table and responded that, like this month, the
board would only be considering a rise of 25-to-50 basis points
in July.
June 15, 2022
SGH Insight
Weaker UK growth and wages data all but lock in another 25bp hike by the Bank of England tomorrow as it races to get spiraling inflation under control to avoid it ravaging household spending power and plunging the UK economy into recession.
This week’s data will likely constrain the Bank’s policy choice for this meeting to a 25bp hike despite the possibility for additional dissents for a larger move by the Bank’s Monetary Policy Committee (MPC) members. At its early May meeting when the MPC raised rated 25bp to 1%, Michael Saunders, Catherine Mann, and Jonathan Haskel dissented in favor of 50bp.
This time around, that continued pressure may however force the MPC to amend its forward guidance so that it at least widens its options for additional moves later this year.
In May the Bank said, “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in coming months,” but it noted “risks on both sides of that judgement.”
The Bank may seek to harden that guidance as it continues to navigate what it calls a narrow path between the twin risks of upside prices and the intensifying squeeze on real household incomes that is coming from higher energy and goods prices. That dichotomy is splintering consensus as members are increasingly forced to choose between hitting their inflation target within their forecast horizon and avoiding a more pronounced recession.
Market Validation
This week’s data will likely constrain the Bank’s policy choice for this meeting to a 25bp hike despite the possibility for additional dissents for a larger move by the Bank’s Monetary Policy Committee (MPC) members. At its early May meeting when the MPC raised rated 25bp to 1%, Michael Saunders, Catherine Mann, and Jonathan Haskel dissented in favor of 50bp.
This time around, that continued pressure may however force the MPC to amend its forward guidance so that it at least widens its options for additional moves later this year.
In May the Bank said, “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in coming months,” but it noted “risks on both sides of that judgement.”
The Bank may seek to harden that guidance as it continues to navigate what it calls a narrow path between the twin risks of upside prices and the intensifying squeeze on real household incomes that is coming from higher energy and goods prices. That dichotomy is splintering consensus as members are increasingly forced to choose between hitting their inflation target within their forecast horizon and avoiding a more pronounced recession.
Bloomberg
The Bank of England hiked interest rates for
a fifth straight meeting and sent its strongest signal yet that
it is prepared to unleash larger moves if needed to tame
inflation.
The nine-member Monetary Policy Committee voted 6-3 to
increase rates by 25 basis points to 1.25%, with a minority of
officials maintaining their push for a move double that size.
Still, the BOE hinted that it may join a growing global
trend for larger hikes if inflation continues to soar, saying
“it would be particularly alert to indications of more
persistent inflationary pressures, and would if necessary act
forcefully in response.”
Crucially, that language was endorsed by all the BOE’s
voters, a departure from May when two declined to sign up to
guidance that more hikes were needed.
The Bank of England hiked interest rates for
a fifth straight meeting and sent its strongest signal yet that
it is prepared to unleash larger moves if needed to tame
inflation.
The nine-member Monetary Policy Committee voted 6-3 to
increase rates by 25 basis points to 1.25%, with a minority of
officials maintaining their push for a move double that size.
Still, the BOE hinted that it may join a growing global
trend for larger hikes if inflation continues to soar, saying
“it would be particularly alert to indications of more
persistent inflationary pressures, and would if necessary act
forcefully in response.”
Crucially, that language was endorsed by all the BOE’s
voters, a departure from May when two declined to sign up to
guidance that more hikes were needed.
May 31, 2022
SGH Insight
Tuesday Morning Notes
If You Don’t Have Time This Morning
We are still waiting for data to provide guidance on the Fed’s path beyond the July FOMC meeting. As a baseline, the Fed will not skip a meeting in September but instead continue hiking through the end of the year. When and if the Fed can transition to 25bp rate hikes is still an open question. The Fed doesn’t want to get too far ahead of the data, and while it waits for the inflation and labor market data still to come before the September meeting, it has a hard time committing to anything more than a return to a “measured” pace of rate hikes in September. Still, the Fed leans hawkishly, and we think the data will most likely push the Fed to continue with another 50bp hike after the July meeting.
Market Validation
If You Don’t Have Time This Morning
We are still waiting for data to provide guidance on the Fed’s path beyond the July FOMC meeting. As a baseline, the Fed will not skip a meeting in September but instead continue hiking through the end of the year. When and if the Fed can transition to 25bp rate hikes is still an open question. The Fed doesn’t want to get too far ahead of the data, and while it waits for the inflation and labor market data still to come before the September meeting, it has a hard time committing to anything more than a return to a “measured” pace of rate hikes in September. Still, the Fed leans hawkishly, and we think the data will most likely push the Fed to continue with another 50bp hike after the July meeting.
Bloomberg 6/2/22
Federal Reserve Vice Chair Lael Brainard said market pricing for 50 bps hikes in June and July seems like a “reasonable” path, and it’s “very hard to see the case for a pause” in Sept.
Brainard speaks in interview on CNBC
If there’s no deceleration in inflation prints, it might well be appropriate to have another meeting where Fed raises rates 50 bps; could also raise by smaller amount
No. 1 challenge is to get inflation down, and Fed will do what’s necessary; she’s looking for a “consistent string of data” showing cooler inflation
Very hard to predict with precision when inflation will come down, but Fed’s tools are starting to have desired effect
“We do expect to see some cooling of a very, very strong economy over time”
Federal Reserve Vice Chair Lael Brainard said market pricing for 50 bps hikes in June and July seems like a “reasonable” path, and it’s “very hard to see the case for a pause” in Sept.
Brainard speaks in interview on CNBC
If there’s no deceleration in inflation prints, it might well be appropriate to have another meeting where Fed raises rates 50 bps; could also raise by smaller amount
No. 1 challenge is to get inflation down, and Fed will do what’s necessary; she’s looking for a “consistent string of data” showing cooler inflation
Very hard to predict with precision when inflation will come down, but Fed’s tools are starting to have desired effect
“We do expect to see some cooling of a very, very strong economy over time”
May 31, 2022
SGH Insight
Importantly, the EU is also looking into a potential ban on European firms insuring or re-insuring shipments of Russian oil to curtail Moscow’s ability to redirect its oil tankers to other countries around the world.
This is another very important space to watch. For those that recall the oil sanctions measures that were taken against Iran, the Western ban on insuring tankers carrying Iranian oil was perhaps the single most effective measure in taking a significant part of the Islamic Republic’s clandestine oil exports off markets.
Our understanding is that the United Kingdom and United States have indicated they would join the EU on a tanker insurance ban.
Market Validation
This is another very important space to watch. For those that recall the oil sanctions measures that were taken against Iran, the Western ban on insuring tankers carrying Iranian oil was perhaps the single most effective measure in taking a significant part of the Islamic Republic’s clandestine oil exports off markets.
Our understanding is that the United Kingdom and United States have indicated they would join the EU on a tanker insurance ban.
Bloomberg 6/1/22
Europe Seeks G-7 Coordination on Russian Oil Insurance Ban
The EU is working to coordinate a ban on providing the insurance services needed to ship Russian oil anywhere in the world with some G-7 members, according to people familiar with the matter, in a move that could further hit Moscow’s ability to finance its war in Ukraine.
The European Commission, the bloc’s executive arm, is in talks with the UK as part of the effort, said one of the people, who asked not to be identified because the plans are private.
A joint push to target insurers of Russian oil shipments could dramatically impair Moscow’s ability to finance President Vladimir Putin’s war. That’s because 95% of the world’s tanker liability coverage is arranged through a London-based insurance organization called the International Group of P&I Clubs that has to heed European law.
Europe Seeks G-7 Coordination on Russian Oil Insurance Ban
The EU is working to coordinate a ban on providing the insurance services needed to ship Russian oil anywhere in the world with some G-7 members, according to people familiar with the matter, in a move that could further hit Moscow’s ability to finance its war in Ukraine.
The European Commission, the bloc’s executive arm, is in talks with the UK as part of the effort, said one of the people, who asked not to be identified because the plans are private.
A joint push to target insurers of Russian oil shipments could dramatically impair Moscow’s ability to finance President Vladimir Putin’s war. That’s because 95% of the world’s tanker liability coverage is arranged through a London-based insurance organization called the International Group of P&I Clubs that has to heed European law.
May 26, 2022
SGH Insight
Fed Not Thinking About a September Pause
It has been quite the swing in market sentiment over the past few weeks as contemplation of a 75bp rate hike gave way to speculation that the Fed will pause in this cycle as early as the September meeting. We think neither scenario is likely. Our baseline remains that the Fed will hike rates 50bp in each of the next two meetings while September stands as an opportunity for the Fed to transition back to 25bp rate hikes if the data allows. We are skeptical that the data will break in the Fed’s favor by September, but that is where the debate stands. Federal Reserve Chair Jerome Powell was very clear earlier this month that he doesn’t expect the Fed to pause until there was clear and compelling evidence that the Fed was on a path to restore price stability, and it is very unlikely that such evidence will emerge this year.
Market Validation
It has been quite the swing in market sentiment over the past few weeks as contemplation of a 75bp rate hike gave way to speculation that the Fed will pause in this cycle as early as the September meeting. We think neither scenario is likely. Our baseline remains that the Fed will hike rates 50bp in each of the next two meetings while September stands as an opportunity for the Fed to transition back to 25bp rate hikes if the data allows. We are skeptical that the data will break in the Fed’s favor by September, but that is where the debate stands. Federal Reserve Chair Jerome Powell was very clear earlier this month that he doesn’t expect the Fed to pause until there was clear and compelling evidence that the Fed was on a path to restore price stability, and it is very unlikely that such evidence will emerge this year.
MarketWatch 5/31/22
Treasury yields climb steeply after Fed’s Waller says half-point rate hikes will continue until inflation subsides
U.S. government bond yields rose steeply Tuesday morning after a three-day holiday weekend, lifted by a hawkish speech from a Federal Reserve official on the need to raise interest rates beyond a neutral setting.
U.S. financial markets were closed Monday because of the Memorial Day holiday.
Tuesday’s rise in U.S. yields came as Federal Reserve Gov. Christopher Waller said in a speech in Frankfurt, Germany, on Monday that he wants to keep lifting interest rates by half percentage point increments until he sees signs that inflation is coming down.
“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation,” Waller said.
By contrast, Fed Chair Jerome Powell has said half-point rate hikes are likely at each of the Federal Open Market Committee’s meetings in June and July, but that policy makers are prepared to do either less or more depending on how the economy evolves.
Bloomberg 5/31/22
Federal Reserve Governor Christopher Waller
said he wants to keep raising interest rates in half-percentage
point steps until inflation is easing back toward the US central
bank’s goal.
“I support tightening policy by another 50 basis points for
several meetings,” he said in remarks prepared for delivery on
Monday in Frankfurt. “In particular, I am not taking 50 basis-
point hikes off the table until I see inflation coming down
closer to our 2% target,” he told an event hosted by the
Institute for Monetary and Financial Stability.
Treasury yields climb steeply after Fed’s Waller says half-point rate hikes will continue until inflation subsides
U.S. government bond yields rose steeply Tuesday morning after a three-day holiday weekend, lifted by a hawkish speech from a Federal Reserve official on the need to raise interest rates beyond a neutral setting.
U.S. financial markets were closed Monday because of the Memorial Day holiday.
Tuesday’s rise in U.S. yields came as Federal Reserve Gov. Christopher Waller said in a speech in Frankfurt, Germany, on Monday that he wants to keep lifting interest rates by half percentage point increments until he sees signs that inflation is coming down.
“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation,” Waller said.
By contrast, Fed Chair Jerome Powell has said half-point rate hikes are likely at each of the Federal Open Market Committee’s meetings in June and July, but that policy makers are prepared to do either less or more depending on how the economy evolves.
Bloomberg 5/31/22
Federal Reserve Governor Christopher Waller
said he wants to keep raising interest rates in half-percentage
point steps until inflation is easing back toward the US central
bank’s goal.
“I support tightening policy by another 50 basis points for
several meetings,” he said in remarks prepared for delivery on
Monday in Frankfurt. “In particular, I am not taking 50 basis-
point hikes off the table until I see inflation coming down
closer to our 2% target,” he told an event hosted by the
Institute for Monetary and Financial Stability.
May 23, 2022
SGH Insight
The near-term path for rates remains unchanged. Fed speakers consistently endorse the consensus view of 50bp rate hikes at the June and July FOMC meetings. The September meeting is a potential opportunity to transition back to 25bp rate hikes if the data allows. If the Fed can’t find sufficient cover in the data to see a path back to 2% inflation within the forecast horizon, it will press forward with another 50bp. Ultimately, the decision may hinge on the September SEP inflation forecast. I think that if FOMC participants see they can hold steady or even lower the 2022 and 2023 inflation forecast, they will be inclined to transition to 25bp. However, I have been skeptical that the data will break in that direction, leaving me leaning toward another 50bp hike in September. The Fed will try to form a consensus around the September outcome at the July meeting but may not have sufficient data to establish a consensus either way. That of course would put the August Jackson Hole conference in the spotlight, although arguably it’s always in the spotlight.
Market Validation
Bloomberg 5/25/22
Here are the key takeaways from the Federal Open Market Committee’s May 3-4 meeting minutes released Wednesday.
There is a strong consensus for raising interest rates by half a point at the next FOMC meetings in June and July, given that inflation is near a four-decade high. That would bring the target rate to 1.75%-2% or the lower edge of the range of a “neutral” rate -- neither restrictive nor stimulative. That will set up an important Fed symposium at Jackson Hole, Wyoming, in late August, where Federal Reserve Chair Jerome Powell’s speech will be especially vital, and a pivotal committee meeting in September. There was no discussion of a 75 basis-point move.
While the plan is to reach “neutral” expeditiously, what comes next is far less certain. The committee expects to be “well positioned” later this year to reflect on the effects of policy tightening and assess what further moves are necessary. FOMC participants felt a restrictive rate might be necessary, depending on the evolving outlook, and they are focused on risks as well.
Here are the key takeaways from the Federal Open Market Committee’s May 3-4 meeting minutes released Wednesday.
There is a strong consensus for raising interest rates by half a point at the next FOMC meetings in June and July, given that inflation is near a four-decade high. That would bring the target rate to 1.75%-2% or the lower edge of the range of a “neutral” rate -- neither restrictive nor stimulative. That will set up an important Fed symposium at Jackson Hole, Wyoming, in late August, where Federal Reserve Chair Jerome Powell’s speech will be especially vital, and a pivotal committee meeting in September. There was no discussion of a 75 basis-point move.
While the plan is to reach “neutral” expeditiously, what comes next is far less certain. The committee expects to be “well positioned” later this year to reflect on the effects of policy tightening and assess what further moves are necessary. FOMC participants felt a restrictive rate might be necessary, depending on the evolving outlook, and they are focused on risks as well.
April 19, 2022
SGH Insight
...That said, a senior official concedes, as we have written, that April may indeed prove to be the toughest month for economic growth this year. He goes on to suggest that China’s State Council will step up fiscal, investment, and monetary stimulus efforts if consumption during China’s five-day International Labor Day holiday, starting on May 1, falls short of expectations...
Market Validation
Bloomberg 5/20/22
Chinese banks cut a key interest rate for
long-term loans by a record amount, a move that would reduce
mortgage costs and may help counter weak loan demand caused by a
property slump and Covid lockdowns.
The five-year loan prime rate, a reference for home
mortgages, was lowered to 4.45% from 4.6%, according to a
statement by the People’s Bank of China Friday. That was the
largest reduction since a revamp of the rate in 2019. A majority
of economists surveyed by Bloomberg had predicted a cut by five
to 10 basis points.
The cut is a significant move to boost loan demand, as
consumer and business confidence has been battered by Covid
lockdowns and a downturn in the property sector that has seen a
string of developer defaults and falling home prices. The lower
rate will be applied to new mortgages immediately, while
existing mortgages won’t be repriced until next year at the
earliest.
Chinese banks cut a key interest rate for
long-term loans by a record amount, a move that would reduce
mortgage costs and may help counter weak loan demand caused by a
property slump and Covid lockdowns.
The five-year loan prime rate, a reference for home
mortgages, was lowered to 4.45% from 4.6%, according to a
statement by the People’s Bank of China Friday. That was the
largest reduction since a revamp of the rate in 2019. A majority
of economists surveyed by Bloomberg had predicted a cut by five
to 10 basis points.
The cut is a significant move to boost loan demand, as
consumer and business confidence has been battered by Covid
lockdowns and a downturn in the property sector that has seen a
string of developer defaults and falling home prices. The lower
rate will be applied to new mortgages immediately, while
existing mortgages won’t be repriced until next year at the
earliest.
News and Events
SGH Macro Advisors hosts roundtable meetings and events for clients and senior policymakers and will provide media availability to selective media upon request.