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.

2021
June 14, 2021
SGH Insight
Altogether this argues for the dots to edge higher in 2022 and 2023 such that the median FOMC participant anticipates a rate hike in 2023. I think any reasonable forecast likely has the economy meeting the Fed’s employment and inflation objectives as early as the end of 2022 and as such it doesn’t seem particularly credible within the context of the new framework to not expect a rate hike in 2023.
Market Validation
Bloomberg 6/16/21

Treasuries Tumble, Curve Flatter as Fed Dots Show Two 2023 Hikes

Treasuries drop sharply to session lows with 10-year yields jumping back above 1.50% after Fed’s latest economic projections show two rate increases by the end of 2023. In front-end the IOER was hiked 5bp to 0.15%.

Treasury 10-year yields rose to 1.523% session highs, cheaper by 2.7bp on the day, while belly-led losses flattened 5s30s curve as low as 135.1bp, tightest levels since January.

Futures volumes over the release saw 130k 10-year note contracts trade on move down to 132-04 session lows.

Revised Fed dots show 13 officials seeing a hike by the end of 2023, while 7 officials see a hike by the end of 2022 vs 4 in March.
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June 09, 2021
SGH Insight
The EU and US will also commit to putting an end before July 11 to the long -standing conflict over aircraft subsidies in the Boeing-Airbus wars, and in doing so will prevent an escalation of the retaliatory measures that the EU has warned it could impose under WTO rulings should there be no deal by that date.
Market Validation
Bloomberg 6/15/21

The U.S. and the European Union agreed to a five-year truce in their 17-year dispute over aircraft subsidies to Airbus SE and Boeing Co. that saw the allies impose tariffs
on $11.5 billion of each other’s exports. The European Commission spent Monday night discussing the accord with member states to get the deal over the line before
an EU-U.S. summit in Brussels with President Joe Biden, according to EU officials familiar with the deliberations. A formal announcement is expected later Tuesday.
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June 07, 2021
SGH Insight
** In addition to a global minimum tax, and indeed as a condition of that agreement with the United States, the G7 also struck a deal on the even thornier issue of a cross-border digital tax, agreeing in its communique that the largest and most profitable multinational digital firms [read Google, Amazon, Facebook, Apple, Microsoft, etc.] will have to pay [some] tax in the countries where they operate, not just in their tax-based domiciles.
Market Validation
Bloomberg 6/7/21

*AMAZON SET TO BE INCLUDED IN GLOBAL TAX ACCORD ON LARGE FIRMS
*AMAZON TAX MECHANISM DETAILS STILL UNDER DISCUSSION, PEOPLE SAY
*AMAZON FALLS TO SESSION LOW AFTER BEING INCLUDED IN TAX ACCORD
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June 02, 2021
SGH Insight
The G7 will commit to “properly embed” climate change and biodiversity loss in economic policymaking and will use carbon pricing as a policy lever. Central banks, and supervisory agencies, are to treat risks posed by climate change as financial risks.

The G7 will agree that the global financing system needs to be “greened” to better price climate risks and will call for mandatory climate related financial disclosures from companies to help markets value shares accordingly.

To avoid many different standards around the world for what constitutes a “green” or “sustainable” investment, the G7 will pledge to work among themselves and with other international partners towards one common line.
Market Validation
Reuters 6/6/21

Group of Seven (G7) rich countries backed moves to force banks and companies to disclose their exposure to climate-related risks on Saturday, a measure seen as vital to efforts to safeguard the financial system from climate change shocks.

G7 finance ministers meeting in London also called for more coordination to measure what impact companies are having on the climate and environment, warning of the risk of fragmentation as local jurisdictions adopt different approaches.

"We support moving towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants...," said a final communique released after the two days of talks.

"This will help mobilise the trillions of dollars of private sector finance needed, and reinforce government policy to meet our net zero commitments," it said of a growing number of pledges by major economies to attain net-zero carbon emissions.


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May 25, 2021
SGH Insight
The meeting warned of shocks overseas, and sought to deal with imported inflation, and to enhance expectations management with well-prepared policies. We noted that much more aggressive fiscal stimulus and strong economic recovery expectations in the US have resulted in rising inflation and have boosted global asset prices, triggered more capital flows to the US from emerging markets, and increased debt risks in emerging economies. We should pay attention to the changes in monetary policy in emerging economies, which may result in a short-term impact on our financial system.
Market Validation
Bloomberg 5/29/21

Recent interest rate hikes by emerging
economies could lead to a bursting of global financial asset
bubbles, according to a senior official with China’s banking
regulator.

Unprecedented pandemic easing measures by developed
countries have enlarged such bubbles, Liang Tao, vice chairman
of China Banking and Insurance Regulatory Commission, said at
the International Finance Forum in Beijing on Saturday.
Developed countries are sticking with ultra-low rates even as
emerging economies raised their borrowing costs, potentially
resulting in the re-pricing of global assets, he said.
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May 25, 2021
SGH Insight
Liu He’s Opening Comments:
The extraordinary quantitative easing and huge stimulus package of the US are creating a new round of global inflation and asset bubbles, which are likely to cause sharp turmoil in global financial markets over the rest of the year. If that is so, it will have a negative impact on China’s economic growth, as well as on the RMB (renminbi), domestic stock, and bond markets.
I therefore decided to hold the FSDC meeting [to deliver] a strong warning. The most important topic of the meeting is to strengthen risk management and prevent financial risks. We have made risk management a priority for the financial services industry and the country. It will help reduce or avoid negative outcomes while building a solid foundation for rapid and continued growth.

Market Validation
Policy validation

Bloomberg 6/11/21

China’s banking regulator and central bank issued rules Friday to strengthen supervision of cash management products of commercial banks and wealth-management companies, according to a statement on CBIRC website.
Rules cap leverage of each cash management product at 120%
Limit investment areas for cash management products to bank deposits, bond repurchase agreements, central bank bills, CDs, some money market instruments
The rules are aimed at preventing unregulated increase in the products and mounting risks, and stabilizing market expectations.
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May 24, 2021
SGH Insight
Lest there be any questions as to the seriousness of Beijing’s efforts and its intentions, a very senior official source had this to say after the ban:
There is no doubt that this time we have cracked down on encrypted virtual currency more severely than in September 2019, and the price of virtual currency will be hit even harder than last time. We must provide an absolutely safe financial environment for the pilot and promotion of the digital RMB in China [our emphasis added].
Market Validation
Bloomberg 6/5/21

Bitcoin continued its decline on Saturday
after potentially positive catalysts from El Salvador and Square
Inc. were unable to assuage investor concerns over Chinese
regulatory risks.

The world’s largest digital coin slipped to trade around
$35,220 as of 6:31 p.m. in New York, down 5.3% in the past 24
hours. The move extends its downtrend for a second day after a
cryptic tweet from Elon Musk that hinted at a potential split
with the cryptocurrency.

Weibo, a Chinese social-media service, appears to have
blocked some crypto influencer accounts on Saturday, citing
violation of unspecified laws and Weibo community rules.
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May 24, 2021
SGH Insight
EU officials say in private that the 15% rate is likely to be good enough for Luxembourg, Ireland, and other EU tax havens. There is a very strong expectation that the G20 will reach an agreement in principle on that 15% global minimum tax rate during the G20 finance ministers and central bank governors’ meeting in Venice in the first days of July.
Market Validation
BBC 6/5/21

The G7 group of advanced economies has reached a "historic" deal to make multinational companies pay more tax.

Finance ministers meeting in London agreed to battle tax avoidance by making companies pay more in the countries where they do business.

They also agreed in principle to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.

Tech giants Amazon and Facebook are among those likely to be affected.
The deal announced on Saturday, between the US, the UK, France, Germany, Canada, Italy and Japan, plus the EU, could see billions of dollars flow to governments to pay off debts incurred during the Covid crisis.

Negotiated over many years, it will put pressure on other countries to follow suit, including at a meeting of the G20 next month, which includes China, Russia and Brazil.

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May 24, 2021
SGH Insight
Falling sales, weak starts, and rising prices are all consistent with a market where demand has pushed supply to the limit. On the existing home side of the ledger, limited inventory is holding back sales and pushing up prices. Higher prices will push lower-income purchasers out of the market while, in theory, inducing some homeowners to sell. But if you sell your house, you have a problem – finding a new one. Also in theory, builders could bring new product to the market, but in practice right now builders are constrained by high materials costs (although lumber has come down off its highs), labor shortages, and lot shortages.

The housing situation is analogous to the current automobile market. This is the best time to sell a used car, but not so great for buying a new car. Automakers are also struggling with rising costs and, most importantly, a chip shortage that severely limits new production:

In both cases, we should expect the end result of slower sales in the near term as, hopefully, the supply situation adjusts. Some commentators will suggest that slower sales signal softening demand, but don’t be fooled. It’s the supply constraints in both cases that limit growth. It can’t be “solved” with easier monetary or fiscal policy. That said, it could press the Biden administration to push an even faster reopening of the economy.
Market Validation
Bloomberg 5/27/21

U.S. Pending Home Sales Decline Unexpectedly on Lean Inventory
April contract signings fall 4.4%, third drop in four months
All regions except the Midwest posted pending sales declines

U.S. pending home sales fell unexpectedly in April for the third time in the last four months, reflecting a lack of affordable properties that continues to restrain the housing market.

The National Association of Realtors’ index of pending home sales decreased 4.4% from the prior month to 106.2, the lowest reading since May of last year, according to data released Thursday. The median estimate in a Bloomberg survey of economists called for the measure to rise 0.4%.

Elevated asking prices, reflecting the limited supply of homes on the market, are making properties less affordable and restraining sales. While declining in April, the NAR’s gauge of contract signings on existing properties is still up 53.5% from a year earlier on an unadjusted basis.

That indicates underlying buyer interest that could translate into a pickup in sales once more properties are listed for sale.

“Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes,” Lawrence Yun, chief economist at the NAR, said in a statement. “

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May 17, 2021
SGH Insight
If this goes sideways, it will because we didn’t challenge the conventional wisdom. The Fed is not ready to challenge the conventional wisdom. It is far too early in the process to think the Fed will back down from its current position. It is more likely that it hangs onto its current position even tighter if evidence mounts that challenges the conventional wisdom. Fed officials are deeply committed to returning the labor market to its pre-pandemic full employment conditions. I think the Fed’s tolerance for inflation will rise before it shifts its employment goals. It is hard for me to see it can make another choice and I can already see that happening. Last week, Federal Reserve Governor Christopher Waller said steady, above 4% inflation was the redline. That’s a surprisingly high redline; there is a lot of room between here and there and, importantly, that room is just elevated inflation, not hyperinflation. If it was hyperinflation, the Fed would be quick to act. If it’s a continuous but modest tug upward, the Fed will be quick to dismiss. That’s probably how you back yourself into a higher-inflation environment.
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May 14, 2021
SGH Insight
Senior Chinese sources hope the talks may be held by the end of this month. Furthermore, our understanding is that media reports that Vice-Premier Hu Chunhua has replaced the elderly but still extremely highly respected Vice-Premier Liu He as the top Sino-US trade negotiator are false, and that these negotiations are still being led by Liu.
Market Validation
Bloomberg 5/27/21

U.S., China Trade Chiefs Hold ‘Candid’ Talks in First Call

U.S. Trade Representative Katherine Tai and
China’s Vice Premier Liu He had a “candid” first conversation as
the two sides try to resolve some of their differences on trade.
The trade chiefs spoke Thursday morning in Beijing, China’s
Ministry of Commerce said in a statement, and “conducted candid,
pragmatic and constructive exchanges in an attitude of equality
and mutual respect.”
Read full report
May 11, 2021
SGH Insight
Bottom Line: Fed speakers continue to yield no ground, leaving me unable to change my expectations about the path of policy. The data flow, however, makes the risks to the Fed’s position look increasingly one-sided. A modest April inflation number would give the Fed some room to breathe whereas a hot print will push hard against its narrative, but it won’t drop that narrative easily.

Market Validation
Bloomberg 5/12/21

Fed’s Clarida Plays Down Significance of Rising U.S. Inflation
Fed vice chair blames rise on largely transitory forces
Clarida suggests Fed still ways away from reducing stimulus

Federal Reserve Vice Chairman Richard Clarida played down the significance of rising inflation, saying it was due largely to transitory forces.

“Readings on inflation on a year-over-year basis have recently increased and are likely to rise somewhat further before moderating later this year,” he said in the text of remarks to be delivered to the National Association for Business Economics on Wednesday. However, “I expect inflation to return to -- or perhaps run somewhat above -- our 2% longer-run goal in 2022 and 2023.”

U.S. consumer prices climbed in April by the most since 2009, bringing the year-on-year increase to 4.2%, amid a record increase in used-car costs, the Labor Department reported on Wednesday. The news drove stock market futures prices deeper into the red.
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April 12, 2021
SGH Insight
Correcting High-Tech Monopolistic Behaviors

** An important policy support to ensure a strong domestic high-tech sector, President Xi praised the big three Chinese tech companies. Alibaba, Baidu and Tencent as “the pride of the Chinese people” and committed the government to support their further development.

** But to correct a disorderly and uncontrolled expansion of the high tech sector, the government will seek to establish a comprehensive set of rules to strengthen its supervision of financial activities on internet platforms to “help correct monopolistic behaviors.”

** In order to strengthen anti-monopoly measures and to prevent uncontrolled capital expansion, ten government departments, include the NDRC, the Peoples Bank of China and the State Administration for Market Regulation have begun coordinated work to update antimonopoly policies with proposals due by September that should “safeguard fair competition” in the market.
Policy validation
Market Validation
Bloomberg 6/11/21

China’s new data security regime gives President Xi Jinping the power to shut down or fine tech companies as part of his drive to wrest control of vast reams of
data held by giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
Firms found mishandling “core state data” can be forced to cease operations, have their operating licenses revoked or fined up to 10 million yuan ($1.6 million) under a law passed Thursday by the Asian nation’s top legislative body.
Companies that leak sensitive data abroad can be hit with
similar fines and punishments, and those providing electronic
information to overseas law enforcement bodies without
permission can face financial penalties up to 5 million yuan and
business suspensions, according to the law published on the
website of the National People’s Congress.

The law, which goes into effect Sept. 1, stipulates that
major decisions involving data security will be made by central
national security officials.
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March 31, 2021
SGH Insight
There was consternation last Friday when the German constitutional court suspended the signing into law by the German president of the European Union’s “Own Resources Decision” despite its passage by overwhelming majorities in both the Bundestag and the Bundesrat just hours earlier.

** The court’s move was in response to a last minute emergency complaint filed by opponents in Germany to the EU’s recovery plan, mainly the far-right Alternative for Germany (AfD) and a group called Citizens’ Will Alliance. They argue in their petition to the Court that the plan violates German law by making the country liable for debts incurred by other EU countries.

** Friday’s suspension is a temporary measure that will probably take no more than a few weeks to be resolved. A full injunction seems very unlikely, while the court may issue a “conditional” ruling allowing the scheme to proceed with safeguards to ensure no violation of the German constitution. But the overwhelming sense is that the constitutional complaint will be dismissed.


Market Validation
(IANS 4/21/21)

German Constitutional Court allows support to EU pandemic fund

Germany's Constitutional Court gave the green light on
Wednesday for the government to back the European Union's coronavirus recovery
fund, which has set aside 750 billion euros ($900 billion) to revive the
bloc's economy.

The court threw out an urgent application for German participation in the fund
to be declared unconstitutional. Nevertheless, Wednesday's ruling is not the
last word in the case as the court has yet to make a definitive judgement, DPA
reported.

The court said its "summary examination" had not found a high likelihood of an
infringement of the constitution.

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March 17, 2021
SGH Insight
Bottom Line: Overall, the message of this FOMC meeting was that the Fed fully intends to follow the new framework when setting policy and will not be pulled into a pre-emptive policy tightening. The forecasts even foreshadowed the expected near-term inflation acceleration, effectively formalizing the stated intention to look through transitory inflation outcomes. The Fed very much intends to let the economy run hot to make up lost ground as quickly as possible. We should not doubt the Fed’s intentions when the first high inflation numbers start coming in but the reality is that this meeting will not be the end of the cat and mouse game between market participants and the Fed. This environment of steady policy in the face of improving economic conditions should remain consistent with a general steeping of the yield curve.
Market Validation
(Bloomberg 3/18/21)

Treasury Yields Top 1.75% After Powell Spurs Bets on Inflation
ING sees ‘no real barrier’ for move higher in 10-year rate
U.S. 10-year yield climbs to highest level since January 2020
Treasury yields breached key levels as traders boosted bets the Federal Reserve will allow inflation to overshoot amid an economic rebound.

Yields on the benchmark 10-year note climbed as much as 11 basis points to 1.75% -- the highest since January 2020, while the 30-year jumped to 2.5% for the first time since August 2019. Market measures of inflation expectations are near multi-year highs, with traders paring back bets the Fed would start tightening as soon as late next year. The dollar rebounded against its major peers. Treasury yields pared some gains but remained elevated during New York morning trading.

The moves came after Fed Chair Jerome Powell indicated he wasn’t concerned over the recent surge in long-term yields -- with his focus still on whether financial conditions remained accommodative. Rates have surged this year on expectations that stimulus spending and vaccine rollouts will fuel a sharper economic recovery and a pickup in inflation.

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March 10, 2021
SGH Insight
I take the Fed’s position that rate hikes are unlikely until after 2023 as a baseline (of course we get new dots next week but I don’t anticipate they will move enough to show a change in the median 2023 rate forecast). The degree of job growth needed in addition to actual inflation makes this a reasonable expectation in light of the Fed’s new policy framework.
Market Validation
(Bloomberg 3/17/21)

UST 5s30s Curve Steepens 10bp Toward 2021 High, Most in a Year

Treasury yield curve is sharply steeper in response to Federal Reserve message being articulated by Chair Powell following FOMC decision, widening 5s30s spread by 10bp, its biggest increase in a year. Front-end and intermediate yields are falling as Powell sounds dovish tones, saying it’s premature to discuss tapering asset purchases and that an announcement on SLR exemption is planned in the coming days.

Five-year yield declined as much as 6.5bp to 0.764%, while 30-year remains nearly 5bp higher on the day at around 2.42%; 5s30s curve touched 166.3bp, within 1bp of its 2021 high on Feb. 24

10-year yield briefly erased an increase of as much as 7bp to 1.689%, the highest level since January, reached before the FOMC decision; 10-year futures are near best levels of the day around 132-06

Gains led by belly of the curve richened the 2s5s10s fly by 9bp on the day while 2s10s spread exceeded 150bp for the first time since 2015

Long-end lag reflects focus on inflation outlook, and steepening of 5s30s curve by more than 10bp is largest one-day move since March 17, 2020, during the liquidity crisis
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March 10, 2021
SGH Insight
Though a close run thing, we think the 2023 median rate plot will not show a rate hike. It would require five or more of the now 18 FOMC members to join the five who in December had already penciled in one or more hikes in 2023. On balance, we think it unlikely. The linchpin to that more benign rate dot plot outcome, even if markets latch on to any signs of earlier hike expectations by a growing FOMC minority, will be core PCE projections that steadily rise across the forecasting horizon but remain still shy of an inflation overshoot in the 2023 median.
Market Validation
(Market Watch 3/17/21)

Dow Up 160 Points As Stocks Turn Higher After Fed Policy Announcement

Stock-market investors reacted positively to the Federal Reserve's policy announcement, erasing losses or extending minor gains after the central bank signaled it expected no change in interest rates through 2023 even as inflation slightly overshoots its target. The Dow Jones Industrial Average jumped as much as 200 points at its high and remained up around 160 points.

(Bloomberg 3/17/21)
Greenback Extends Broad Drop Ahead of Powell on Rate Outlook

The greenback is at a session low ahead of Fed Chair Jerome Powell’s press conference as traders sell the dollar on expectations the central bank will be on hold for the foreseeable future.

The Bloomberg Dollar Spot Index is -0.3%; commodity and emerging market currencies leading gainers; yields rise

EUR/USD is +0.5% at 1.1958 after stops are triggered above the key pivot level of 1.1952, the Feb. 5 low; eyes double top ahead of 1.20
USD/JPY erases advance and trades at 108.95


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March 09, 2021
SGH Insight
** The pace of these purchase will therefore be a topic for discussion at the Executive Board meeting today and at the wider Governing Council discussions tomorrow and Thursday. We expect the pace of PEPP purchases will be modestly stepped up as a signaling device to lean into rising yields, but within its overall “envelope” of 1.85 trillion euros that leaves plenty of room for such flexibility, as (almost) no Council member thinks the program itself needs revision. As of March 5, the ECB had conducted 878 billion euros in PEPP purchases, leaving almost a trillion still unused in its arsenal.
Market Validation
(Bloomberg 3/11/21)

Euro Fades, Bond Yields Dip as ECB Signals Faster Bond Purchases

The euro dipped from the day’s highs and German 10-year bond yields declined after the European Central Bank indicated it will step up the pace of purchases under its PEPP program over the next quarter. Rates were kept unchanged as expected.
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March 04, 2021
SGH Insight
Saudi Arabia is likely to press at today’s OPEC+ meeting for a “calibrated” increase in the group’s crude oil output starting in April, staggering an easing of its own voluntary withholding of one million barrels per day over the next few months, a cautious approach that should keep a more bullish tone to crude prices and which Riyadh believes will help stabilize benchmark crude prices in a narrow $62 to $68 a barrel price range.

The Saudi oil delegation, led by Prince Abdul Aziz al-Salman, will concede some additional output by Russia and some of the most fiscally hard-pressed OPEC+ members. But in effect, the Saudis oil stance means it is more likely than not that OPEC+ will be increasing its collective oil output by no more than 500,000 additional barrels per day in April, and only slowly building up to some 1.5 million bpd in extra crude output through the next several months.
Market Validation
(Bloomberg 3/4/21)

OPEC+ decided to keep a tight limit on oil production next month, sending prices soaring in a market that had been expecting additional supply.

The agreement is a victory for Saudi Arabia, which has consistently pushed to tighten the market. It leaves the world facing a significant supply squeeze, higher energy costs and the risk of inflation just as widespread vaccination allows economies to emerge from the Covid-19 downturn.

The cartel had been debating whether to restore as much as 1.5 million barrels a day of output. But after being urged to “keep our powder dry” by Saudi Energy Minister Prince Abdulaziz bin Salman, members agreed to hold steady at current levels -- with the exception of modest increases granted to Russia and Kazakhstan.
In a briefing after Thursday’s meeting, the prince went one step further by making the kingdom’s additional 1 million barrel-a-day production cut open ended. He gave no date for phasing out the voluntary reduction and told reporters he is in no hurry to do so.

Russia and Kazakhstan secured exemptions from the deal, allowing them to boost output by 130,000 and 20,000 barrels a day in April, respectively, “due to continued seasonal consumption patterns,” according to a statement posted on OPEC’s website. The two nations were granted similar allowances for February and March.

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March 02, 2021
SGH Insight
** And while expectations in general are that Beijing will, like last year, refrain from setting a formal GDP target for 2021, our understanding is that Premier Li Keqiang will propose an option to the NPC Standing Committee, whether adopted or not, of setting an easily met GDP target of above 6.0% as well. The Politburo’s expectations are for GDP growth this year to fall in the 8.3 - 8.5% range.
Market Validation
Policy Validation

(Bloomberg 3/5/21)

China set a conservative economic growth target that signals more restrained monetary and fiscal policies this year, in contrast to other major nations still pumping in stimulus to support growth. The government set a growth target of above 6% for the year, well below what economists forecast, and will narrow the
budget deficit to 3.2% of gross domestic product, Premier Li Keqiang said Friday at the opening of the National People’s Congress. While the fiscal gap is lower than last year, it’s above the 3% expected by many analysts, signaling Beijing still
sees a need for spending to support the recovery. “A target of over 6% will enable all of us to devote full energy to promoting reform, innovation, and high-quality
development,” said Li.
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