Highlights

SGH reports are highly valued for helping clients understand and stay ahead of the news cycle on central banks and macro policy events that drive the global economies and financial markets.

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2024
September 25, 2024
SGH Insight
The Bank of Japan (BOJ) has pushed out the timing of its next interest rate hike beyond October on increased fears about downside risks to the US economy and to avoid domestic political issues related to the upcoming change in Japan’s ruling party leadership.

The decision reflects an important shift in strategic thinking by the BOJ and favors a later move by the BOJ, either at the December 18-19 meeting or into next year if the BOJ’s fears about the US are realized.
Market Validation
Reuters 10/1/24
Bank of Japan policymakers discussed the need to go slow in raising interest rates as jittery markets clouded the outlook, a summary of their September meeting showed, reducing the chance of a near-term rate hike.
The summary also showed how the U.S. Federal Reserve's decision to deliver an oversized reduction in borrowing costs, which came a day before the BOJ's Sept. 19-20 meeting, led to increased worries about the U.S. economic outlook.
"Uncertainties have heightened about the U.S. economy and the pace of rate cuts by the Fed. Attention needs to be paid to the possibility that these factors will have a negative impact on the yen's exchange rates and corporate profits in Japan," one member was quoted as saying.
Read Full Report
September 24, 2024
SGH Insight
Consumption: Notably absent in the PBoC package was coordination with the fiscal side with a plan to directly stimulate sagging consumption. But we suspect and have written that this will likely be forthcoming.
Market Validation
Reuters 9/26/24
China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of a fresh fiscal stimulus, said two sources with knowledge of the matter, adding to a string of measures to battle strong deflationary pressures and faltering economic growth.
As part of the package, the Ministry of Finance (MOF) plans to issue 1 trillion yuan of special sovereign debt primarily to stimulate consumption amid growing concerns about a stuttering post-COVID economic recovery, said the sources.
Read Full Report
September 23, 2024
SGH Insight
With the Reserve Bank of Australia (RBA) all but certain to stand pat at this week’s policy meeting following last week’s news of sharply stronger-than-expected jobs growth, we guide clients to looks for clues as to whether the Bank opts to leave any rhetorical room to cut rates before the end of the year.

We maintain our view that the RBA’s current policy stance and recent commentary do retain room for the Bank to shift to an easing bias and reduce rates before year’s end, even if RBA Governor Michele Bullock maintains a hawkish posture at this week’s post meeting press conference.
Market Validation
Bloomberg 9/24/24
Australia’s central bank signaled it will
keep its key interest rate at a 12-year high in the near term as
it struggles with stubborn inflation that’s holding it back from
joining a global easing cycle.
“Based on what we know at the moment rates will remain on
hold for the time being,” Governor Michele Bullock told a press
conference in Sydney on Tuesday after keeping the cash rate at
4.35% for a seventh straight meeting. Still, the RBA isn’t
“ruling anything in or out” on policy, she said.
Unlike in August when policymakers put a rate rise on the
table, this time around a hike wasn’t “explicitly considered,”
Bullock told reporters, sending the currency and bond yields
lower.
Read Full Report
September 20, 2024
SGH Insight
China’s political leadership is aware that the urgency has significantly increased for a cut in the Reserve Requirement Ratio (RRR) for banks, in the very near future, which coordinated with strengthened fiscal support would alleviate pressure on China’s commercial banks and mitigate the impact of a large volume of maturing medium-term lending facilities on market liquidity.

The PBoC is also likely to cut rates further in the very near future, which could mean the closing days of September, and introduce additional policy measures to reduce financing costs for enterprises and households, all within the mantra of maintaining “reasonable and sufficient liquidity,” but now also in accordance with the dictate of “sooner rather than later.”

We would push back against any narrative that the Fed rate cut made an ensuing PBoC move politically awkward, as the Fed’s shift in policy stance in fact creates more favorable conditions for China to cut interest rates.

The PBoC will soon opt for more easing as the US is poised for an interest rate cut cycle, and as headwinds are emerging amid efforts to stabilize domestic economic momentum.

The remaining days of this month may still be the window in which China cuts the RRR, and lending rate, as it continues to seek to mitigate the financial burden on the public of outstanding mortgages.
Market Validation
Bloomberg 9/24/24
China’s central bank unveiled a broad
package of monetary stimulus measures to revive the world’s
second-largest economy, underscoring mounting alarm within Xi
Jinping’s government over slowing growth and depressed investor
confidence.
People’s Bank of China governor Pan Gongsheng cut a key
short-term interest rate and announced plans to reduce the
amount of money banks must hold in reserve to the lowest level
since at least 2018, appearing at a rare briefing alongside two
of the country’s other top financial regulators in Beijing. That
marked the first time reductions to both measures were revealed
on the same day since at least 2015.
Read Full Report
September 17, 2024
SGH Insight
The Bank of Japan (BOJ) will likely sit tight on rates at its September 19-20 policy meeting as the country gears up for a change in political leadership and the US Federal Reserve kicks off its easing cycle.

The BOJ, having pulled nominal rates out of negative territory in March for the first time in 17 years, is in a good place. It lifted the policy rate to 25 bps in July, with officials pledging follow-up moves as long as the economy continues to track to its projections. It will get a fresh inflation reading on day two of its policy meeting.

Shifting expectations for US rates which coincided with the huge unwind of yen-related carry trades produced just the kind of level-shift higher in the yen that authorities had been seeking for months – even if a bit volatile.

Its July hike also reduced the urgency for additional immediate action and has allowed the BOJ a little breathing room to monitor whether rising wages – which now importantly includes the first rise in real wages in 28 months – are helping to cement the long sought-after virtuous cycle between wages and prices.
Market Validation
BBG 9/19/24
The Bank of Japan kept policy unchanged Friday as it avoided a repetition of the market meltdown that followed its July rate hike, while still keeping the ground prepared for a ramping up of borrowing costs in the coming months.

The immediate market reaction was muted this time, with stocks maintaining their gains and only a relatively small strengthening of the yen after the BOJ met expectations by holding the unsecured overnight call rate at around 0.25%.

In a busy week for central banking that saw the Federal Reserve finally embark on rate cuts, the BOJ was expected to stand pat by all economists surveyed by Bloomberg.

A hold decision seemed almost certain given the need to monitor the impact of July’s rate increase and to avoid spooking markets again with a surprise. Standing pat also kept the bank out of the spotlight as Japan’s Liberal Democratic Party chooses a new leader to take on the role of prime minister.

The bank raised its assessment of consumer spending, a key engine of economic growth, and cited the need to monitor financial markets. Following another uptick in the inflation rate, it also reiterated that it expects price growth to continue in line with its goal in the latter half of its projection period.

“The BOJ is indicating it’s on track for another rate hike,” said Jin Kenzaki, head of Japan research at Societe Generale SA.
Read Full Report
September 15, 2024
SGH Insight
This week’s FOMC meeting

We expect that the Fed will cut rates 50bp this week. The Fed could have let sleeping dogs lie last Thursday and left market pricing decaying toward a 25bp cut, but it allowed for a repositioning of expectations toward 50bp. There hasn’t been an effort to push back on that pricing. Note that it may be a struggle to move market pricing to 80% or higher odds of 50bp. The Fed would need more direct communications now given Waller’s hard signals before blackout. We know many clients and analysts will have a hard time letting that go, which we understand. If pricing holds near 60-40 in favor of 50bp, the Fed has an opportunity for a dovish surprise, which would be a helpful push in counteracting a weakening labor market.

The FOMC statement will be reset to match policy. The Fed has let the FOMC statement languish in its role as a policy guide.

If the Fed cuts rates to protect the employment mandate, and expects further rate cuts, it can’t say the risks are in balance anymore. It was already silly to retain this language in July when participants effectively decided on a September rate cut. The subsequent paragraph will change to reflect the rate cut and the expectation of additional cuts at subsequent meetings. We expect there will be a reference to preventing further “unwelcome” softening in the labor markets.

We anticipate limited if any dissents. If the Fed can arrive at the conclusion that the labor market is deteriorating or at the verge of deterioration, there will be universal agreement that the Fed is embarking on a series of rate cuts, and at that point participants really shouldn’t have high conviction that pulling one of those cuts forward is a major policy error. Generally, a participant needs to have real conviction to dissent.

We believe the SEP will reveal a total of 100bp of rate cuts for 2024.

We also believe that Powell is the driving force behind a last-minute shift to a 50bp cut. Prior to the employment report, we believed that Powell made a strong argument for a 50bp cut on the totality of the data at the time of Jackson Hole. We didn’t see his assertion that the Fed will do everything it can to support a strong labor market as consistent with leading with 25bp given the currently very restrictive policy stance. Perhaps this was not his intention at the time, but we argued that data from the Conference Board, regional Fed surveys, the Beige Book, and JOLTs all indicated that the labor market had deteriorated since Jackson Hole and had already suffered the “unwelcome further weakening” that Powell sought to avoid. We didn’t believe the employment report should have such a prominent role in the decision to cut 50bp as it was only one part of the totality of data that Powell claims is important. And we said that only a very strong report could derail a 50bp cut. The report was not strong, but again Waller seemed to think it was strong enough, thus apparently undermining our position.
Market Validation
Washington Post 9/18/24
The Federal Reserve cut interest rates Wednesday by a half-point, turning the page on an era of dangerously high inflation and marking a major shift at the central bank that could bring relief for households and businesses alike.
The rate cut, announced at the end of the Fed's two-day policy meeting, marks the first time officials trimmed borrowing costs since the pandemic's early days. And while officials were practically guaranteed to cut rates this week, it was unclear how aggressively they were going to move.

FOMC Statement



The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

Bloomberg 9/18/24
Michelle Bowman cast the first dissenting vote by a Federal Reserve governor since 2005, preferring to cut rates by a smaller amount at Wednesday’s policy meeting.

BBG 9/18/24
*FED SEES RATES AT 4.4% AT END OF 2024, 3.4% IN 2025
*TEN OFFICIALS PENCILED IN 100 BPS OR MORE OF CUTS FOR 2024

9/18/24 Powell: A lot of questions there. Let me jump in. So since the last meeting, okay, the last meeting we have had a lot of data come in. We had the two employment reports, July and August. We also had two inflation reports including one that came in during blackout. We had the QCEW report that surges that maybe -- not maybe but suggests the payroll report numbers that we're getting maybe artificially high and will be revised down. You know that. We have also seen anecdotal data like the beige book. We took all of those and we went into blackout and we thought about what to do and we concluded this was a right thing for the economy for the people that we serve and that's how we made our decision.
Read Full Report
September 12, 2024
SGH Insight
Stalled UK growth and slowing wages are setting the stage for Bank of England Governor Andrew Bailey to push for more easing this year. If upcoming inflation data improve, he could hint at a series of rate cuts extending through next year.

While our base case remains that the majority on the monetary policy committee (MPC) will coalesce around November for another 25 basis point cut in Bank Rate to 4.75%

Skipping a September cut gives the BOE a clear path to announce and explain a decision to further reduce its gilt sales over the next 12 months by as much as 100 billion sterling ($130 billion).

The MPC next week will vote on a target for a reduction in the stock of UK government bonds for the period beginning in October and running through September next year.
Market Validation
BBG 9/19/24
The Monetary Policy Committee voted 8-1 to keep rates
steady at 5%, an outcome whose caution contrasts with the half-
point reduction delivered in the US on the eve of the UK
announcement on Thursday. That was in line with the expectations
of economists and markets.
“We should be able to reduce rates gradually over time,”
Governor Andrew Bailey said in a statement, stressing that such
a path would depend on price pressures continuing to ease. “It’s
vital that inflation stays low, so we need to be careful not to
cut too fast or by too much.”
The panel also maintained the £100 billion ($132 billion) a
year pace of its balance sheet run-off, in a unanimous decision
on quantitative tightening.
Read Full Report
September 12, 2024
SGH Insight
We would describe these dynamics as keeping an open mind to the October meeting, but far from a base case, and more as insurance against unlikely and exogenous risks that could materialize over the coming month, or a failure of growth to pick up as expected.
Market Validation
Lagarde Signals ECB Open to October Cut But December More Likely (9/13/24)

The European Central Bank is open to
considering an interest-rate cut in October if the economy
suffers a major setback — though the next comprehensive set of
information will only be available at the following meeting,
President Christine Lagarde said.
Her remarks, less than a day after the ECB delivered its
second quarter-point reduction in the deposit rate since June,
offer the clearest signal yet that policymakers are leaning
toward waiting until December for their next move.
But they’ve vowed to be data dependent and decline to rule
out acting already next months. People familiar with their
thinking have said it would take a more significant
deterioration in the growth outlook or aggressive easing by the
Federal Reserve to depart from the quarterly pace of rate-
cutting.
Read Full Report
September 12, 2024
SGH Insight
We Need To Be Nimble

While we couldn’t ignore the pre-blackout messaging, we were hesitant to underweight the odds of a 50bp cut next week. Despite complacency about the labor market from Fed officials, the data supported a 50bp cut, and we remain convinced that Chair Powell’s Jackson Hole speech signaled that he wanted a 50bp cut. Indeed, Powell drew a line in the sand by declaring the Fed did not “seek or welcome” further labor market deterioration, but the data since Jackson Hole tells us the labor market has already crossed that line.

The messaging from New York Fed President John Williams and Governor Chris Waller, however, clearly signaled an intention to slow walk rates cuts. The gap between Powell and other FOMC participants was inexplicable in our view, but Waller in particular has never hard guided the markets in the wrong direction ahead of an FOMC meeting.

We perhaps should have taken that sense of hesitancy a little more to heart, because the Fed will most likely lead the cutting cycle with a 50bp cut at next week’s FOMC meeting.
Market Validation
Federal Reserve delivers super-sized half-point rate cut
Axios 9/18/24
The Federal Reserve cut its target interest rate Wednesday by an extra-large half percentage point, and projected more rate cuts this year and next, as its period of trying to put brakes on the economy to fight inflation comes to a close.
The rate cut reflects the U.S. entering a new phase where the softening job market is the predominant economic risk rather than elevated inflation.
By going with an aggressive half-point cut instead of its more traditional quarter-point adjustment, the Fed moved to get ahead of some evident faltering in the job market.
Read Full Report
September 10, 2024
SGH Insight
As the European Central Bank delivers the second 25-basis-point rate cut of this cycle on Thursday, we expect the communication included in the policy statement and press conference will maintain all options open ahead of future meetings. At this juncture, the Governing Council does not gain anything from adamantly ruling out another 25bp cut on October 17. To be clear, we continue to think a solid majority of GC members favors a gradual normalization process, and projection meetings are the best opportunities to lower rates. But this strategy does not require it to explicitly signal October is off the table just now.
Market Validation
Monetary policy decisions (12 September 2024)

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.

ECB press conference response
we can all count, it is six weeks before October 17, which is a relatively short period of time compared to other intervals that we've had in the past. I would simply repeat what I have said. We are going to be data dependent. We are going to decide meeting by meeting. I'm not giving you any commitment of any kind as far as that particular date is concerned. And our part is not predetermined at all
Read Full Report
September 05, 2024
SGH Insight
The Waiting is the Hard Part
We have extensively detailed our view in favor of a 50bp cut in multiple notes and in conversations with clients over the past two weeks. Powell’s speech was more dovish than needed to simply signal a series of 25bp rate cuts, and his “whatever it takes” paragraph was a call for a 50bp rate cut as insurance against adverse labor market outcomes. Otherwise, the Fed is not doing “everything it can do” to support strong labor market outcomes given the gap between current policy and neutral. Moreover, Powell’s assessment of the strength of the labor market relative to 2019 and the risks to the employment mandate should be resilient to the outcome of the August employment report.
Market Validation
The Fed's Rate-Cut Dilemma: Start Big or Small? -- WSJ
By Nick Timiraos
Federal Reserve Chair Jerome Powell faces a difficult decision as the central bank prepares to cut interest rates next week: Start small or begin big?
The central bank is set to reduce rates for the first time since 2020 at its meeting on Sept. 17-18. Because officials have signaled greater confidence that they can make multiple rate cuts over the next several months, they are confronting questions over whether to cut by a traditional 0.25 percentage point or by a larger 0.5 point.
Powell kept all his options on the table in a speech last month in Jackson Hole, Wyo., that surprised some of his colleagues with its unambiguous call to turn attention to incipient risks in the jobs market. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks," he said then.
Officials last year raised their benchmark rate to around 5.3%, a two-decade high, and will have held it at that level for the last 14 months to combat inflation, which has declined notably.
They are nervous about keeping interest rates too high for too long amid evidence that higher borrowing costs are working as intended to slow inflation by cooling spending, investment and hiring. They don't want to let slip through their grasp a soft landing, in which inflation falls without a serious jump in joblessness.
Read Full Report
September 04, 2024
SGH Insight
Bottom Line: We get more jobs data tomorrow, but so far this week, the data flow indicates the labor market has already and will continue to experience the further weakening that we have been expecting and that Powell said was “unwelcome.” The totality of the data suggests that this will be the case even if the August employment report firms relative to July. Future reports are likely to be weaker. In theory, that should reduce the importance of this week’s employment report. The totality of the data suggests that we should look through strength, but Fed presidents have placed a heavy weight on the outcome of this next read on the labor market. We think that Powell is leading his colleagues toward a 50bp rate cut in September as insurance against adverse outcomes and that his position is resilient to the outcomes of the labor report, but it is not yet clear the consensus will join.
Market Validation
Wall Street Journal 9/18/24
The Federal Reserve voted to lower interest rates by a half percentage point, opting for a bolder start in making its first reduction since 2020. The long-anticipated pivot followed an all-out fight against inflation the central bank launched two years ago.
Eleven of 12 Fed voters backed the cut, which will bring the benchmark federal-funds rate to a range between 4.75% and 5%. Quarterly projections released Wednesday showed a narrow majority of officials penciled in cuts that would lower rates by at least a quarter point each at meetings in November and December.
Read Full Report
August 30, 2024
SGH Insight
With little time or additional data to be gleaned between the September and October meetings, there is little we believe in price and inflation developments that would trigger an October cut.

The more hawkish ECB officials are coalescing over the big picture, “bumpy road” message that the disinflation trend certainly looks good, but the 2.2% headline inflation registered today, driven by a huge negative base effect from energy prices, is likely to drift back up later this year and into 2025.

They will keep a focus on the still enormously sticky domestic and services inflation pressures that we have been expecting and which has been borne out in the data over these last few months and look to calibrate the pace of rate cuts accordingly.

The more dovish officials will put greater emphasis on still anemic growth, and the risks of potentially overly restrictive monetary policy to that outlook.

But we do not think that argument will be enough to deliver an October cut, barring additional pressure on growth to the downside, in which case the three-month gap between the September and December meetings may understandably, suddenly look unnecessarily long.
Market Validation
FRANKFURT Reuters 9/2/24
European Central Bank policymakers are increasingly at odds on the outlook for growth, a rift that could shape the rate cut debate for months with some fearing a recession and others focusing on lingering inflation pressures, sources

Policy doves, who remain in the minority, argue the economy is weaker than thought, recession risks are on the rise and firms that have hoarded labour are starting to cut vacancies, leaving the jobs market softer.

Once employment declines, so does disposable income, quickly eroding consumption and leaving a self-reinforcing downturn.

"This would weaken price pressures quicker than we now forecast, so I think the risk of returning to below-target inflation is real," one of the sources, who asked not to be named, said.

This would suggest the central bank is behind the curve in cutting interest rates and buffering the economy, supporting the case for quicker interest rate cuts, they say.

Inflation, down to 2.2% in August, is now forecast to rise again towards the end of the year and coming back to 2% only in late 2025.

RECESSION?

Conservatives, or hawks in central banking parlance, who have dominated the policy debate since the start of rapid rate hikes in 2022, argue that actual growth figures persistently outperform weak survey results and the economy is holding up.

Consumption is robust, the bloc just enjoyed a superb tourism season and construction is finally rebounding, so growth remains respectable.

Moreover, wage growth remains far above levels consistent with a 2% inflation target, so real incomes are rebounding quickly and should continue to insulate the economy.

While industry is in a deep downturn and could drag Germany into a recession, this is more a structural issue that could take years to resolve, so monetary policy has little role, many of the sources said.

All this builds the case for slow rate cuts, perhaps one every quarter, until the ECB is certain inflation is heading back to 2%.

Hawks are also likely to fight any policy easing that would push into 2026 the date the inflation target is met, since that could jeopardize the ECB's credibility, the sources said.

ECB board member Isabel Schnabel, a prominent policy conservative, argues that inflation concerns should trump growth.

"Monetary policy should remain focused on bringing inflation back to our target in a timely manner," she said in a speech on Friday. "While risks to growth have increased, a soft landing still looks more likely than a recession."

OCTOBER

The rift is unlikely to impact September's policy decision since there is already widespread consensus to cut rates, the sources said.

But it could affect how ECB President Christine Lagarde communicates the decision, shifting expectations for the October meeting.

The bank is unlikely to discard its "meeting by meeting" approach to setting policy so there will be no commitment about October, but doves want Lagarde to highlight growth risks and signal that back-to-back cuts are not excluded.

Hawks fear such a message would heighten market expectations too much, putting the ECB in a bind. Investors already see a 40% to 50% chance of an October cut and such a dovish message would only firm up those bets.

"I think quarterly cuts serve us well and the data just don't support picking up this pace," a third source said.
Read Full Report
August 29, 2024
SGH Insight
The Japanese economy is cooperating with the Bank of Japan’s (BOJ) plans to continue to raise interest rates and while we continue to expect an October hike to 50 bps, we recognize Japan’s political calendar poses a tricky tactical curveball for the central bank’s rate plans.

For the first time in 15 months, Japan’s government upgraded its monthly economic assessment, noting the long hoped-for recovery in consumption is starting to materialize. The yen’s appreciation since the July policy meeting is directionally supportive of the BOJ’s aspirations.

Relative to July when the Cabinet Office reported the momentum in consumption had “paused,” the August report importantly raises expectations for consumer spending and revised higher housing construction estimates for the first time in more than two years.
Market Validation
Bloomberg 9/3/24
Bank of Japan Governor Kazuo Ueda reiterated
Tuesday that the central bank will continue to raise interest
rates if the economy and prices perform as expected by the BOJ,
a comment that supported further gains in the yen.
Ueda made the remark in a document submitted to a
government panel chaired by outgoing Prime Minister Fumio
Kishida in which he explained the BOJ’s July policy decision.
The yen firmed against the dollar following the release of
the comment, adding to gains for the day as Japan’s currency
bucked a weakening trend among G-10 currencies. The yen
continued to gain ground to briefly reach 145.61 at around 5:36
p.m. in Tokyo.
The comments served to remind market players that despite
the meltdown in global markets that was partly triggered by the
BOJ’s July rate hike, Ueda remains committed to raising
borrowing costs provided the bank’s forecasts materialize.
Read Full Report
August 20, 2024
SGH Insight
Regional Fed Indexes

We have had many interactions with clients on the topic of PMI indexes over the past year and how the soft data doesn’t match the hard data. That observation has led to a general trend toward downplaying PMI-type measures in recent months. With that caveat in mind, the August numbers are beginning to be released, and we learned today that the Philly Fed services sector employment measure fell to a fresh post-pandemic low. Any one number can be an outlier, but given the concerns about the slowing labor market and the Fed’s growing attention to the employment mandate, we are watching to see if the regional PMIs more broadly signal a weakening labor market in August:
Market Validation
Bloomberg 8/29/24
Employment gauges in a fresh batch of
regional Federal Reserve bank surveys are emblematic of the
risks to the US job market prompting the central bank’s turn
toward interest-rate reductions.
August indexes in each of the five recently released
regional manufacturing reports show shrinking payrolls at
factories, and gauges of employment at service providers are
settling back. Measures of hours worked are also slipping.
The surveys are more a measure of industry sentiment rather
than actual changes in employment. Still, in the wake of
disappointing July job growth and separate data showing a huge
downward revision in the level of March payrolls, they offer
anecdotes of a moderation in the labor market that Fed Chair
Jerome Powell indicated is front and center for policymakers.
Read Full Report
August 19, 2024
SGH Insight
Political messaging aside, Premier Li said that service consumption should be improved in terms of both “scale and quality,” and differentiated support policies should be developed to suit the needs of different groups to fully unleash consumption potential.

To that effect, our understanding is that Li has ordered the NDRC (National Development and Reform Commission) and the Ministry of Finance to study the feasibility of issuing 1 trillion yuan to stimulate consumption.

More specifically, if the economy does not perform as expected in the third quarter, especially in August and September, the central government may issue 1 trillion yuan mainly for low- and middle-income earners to stimulate domestic demand.
Market Validation
Bloomberg 9/26/24
China plans to issue special sovereign bonds worth about 2
trillion yuan this year, Reuters reports, citing two people
familiar with the matter.
* The Ministry of Finance plans to issue 1 trillion yuan of
special sovereign debt issued primarily to stimulate consumption
** Proceeds to help increase subsidies for the trade-in and
renewal of consumer goods and to upgrade large-scale business
equipment
** Will also give a monthly allowance of about 800 yuan ($114)
per child to all households with two or more children, excluding
the first child, one person said
* The other 1 trillion yuan, via a separate special sovereign
debt issuance, to be used to help local governments tackle debt
* Some of the measures could be unveiled as soon as this week
Read Full Report
August 18, 2024
SGH Insight
Fed Speak and Discussion

We anticipate that Powell will express confidence that inflation is on a sustainable path to price stability. Last week’s inflation data cleared the way for the Fed to begin cutting rates in September as was all but foretold by Powell at the July press conference. Speakers are already falling in line with that message. The particularly abrupt shift of Atlanta Federal Reserve President Raphael Bostic, for example, reveals that the Fed effectively made the decision to cut in September at the July meeting and it was just waiting for an expected soft CPI report to hard signal that cut.

Powell will likely use Jackson Hole to begin transitioning the Fed’s policy focus to the employment mandate. Although the Fed has appeared nonplussed by recent trends in the labor market, FOMC participants were simply waiting for that final bit of confidence in the inflation outlook to express their attention to a softening labor market. It’s not that the labor market is coming apart at the seams yet, but from a risk management perspective, the trends suggest additional weakness in hiring and upward pressure on the unemployment rate if policy remains restrictive.

The Fed likely won’t characterize policy as “normalizing” as that implies a particular destination. We think Fed officials will be more comfortable describing the policy path as becoming “less restrictive.” That doesn’t commit the Fed to a particular destination or timeframe.

Powell will not validate any particular path for rate cuts. The Fed doesn’t need to commit to the size or number of anticipated rate cuts yet. That would be front running the September SEP, and FOMC participants are nowhere close to completing their next set of projections. We anticipate Powell will say the totality of the data will determine the policy path, and that the Fed has room to respond if the labor outlook deteriorates more quickly than expected. Market participants will likely interpret that as the Fed anticipating a string of 25bp cuts and that it needs another push from the data to get to 50bp. As noted earlier, the data has not yet delivered that push.
Market Validation
Bloomberg 8/23/24
Chair Jerome Powell said the time has come
for the Federal Reserve to cut its key policy rate, affirming
expectations that officials will begin lowering borrowing costs
next month and making clear his intention to prevent further
cooling in the labor market.
“The time has come for policy to adjust,” Powell said
Friday in the text of a speech at the Kansas City’s Fed’s annual
conference in Jackson Hole, Wyoming. “The direction of travel is
clear, and the timing and pace of rate cuts will depend on
incoming data, the evolving outlook and the balance of risks.”
The Fed chief also acknowledged recent progress on
inflation, which has resumed moderating in recent months after
stalling earlier in the year: “My confidence has grown that
inflation is on a sustainable path back to 2%,” he said,
referring to the central bank’s inflation target.
While those remarks provided some clarity for financial
markets in the near term, they offered few clues as to how the
Fed might proceed after its September gathering.

Yet just as inflation has neared its target, cracks have
appeared on the employment front, prompting several Fed
officials to worry that high rates now pose a threat to the
economy’s continued strength. Warning signals included a
disappointing July jobs report that rattled financial markets.
“We do not seek or welcome further cooling in labor market
conditions.” Powell said, adding that the slowdown in the labor
market was “unmistakable.”
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July 31, 2024
SGH Insight
Fed Sets Up September Cut
Still, Powell gave enough for market participants to extend current pricing. Powell repeated that growth remains solid (he repeatedly pointed to the recent 2.6% private domestic demand growth) and the labor market has normalized, but he also made clear that the Fed doesn’t want to see further weakening of the labor market. That was enough for market participants to run harder toward additional rate cuts.

Until disrupted by contradictory data, the direction of travel in market pricing remains toward expectations of additional rate cuts. With Powell effectively confirming a September cut, the Fed will deliver a minimum of 50bp of rate cuts, and with the economy softening, the risks are in favor of a third rate cut. Market participants have almost entirely priced in that third cut.

Until disrupted by contradictory data, the direction of travel in market pricing remains toward expectations of additional rate cuts. With Powell effectively confirming a September cut, the Fed will deliver a minimum of 50bp of rate cuts, and with the economy softening, the risks are in favor of a third rate cut. Market participants have almost entirely priced in that third cut.

Although we think that pricing is well ahead of the Fed, it is also not without reason:

· Relative to the Fed, the current conventional wisdom views the labor market as on more precarious footing.

· Consequently, market participants see the risk that the Fed is behind the curve.

· Powell today confirmed that the Fed has a conversation that is may be behind the curve and with his addition that a strong majority supported not cutting rates today he admits it was not a unanimous position among FOMC participants.

· If the Fed is behind the curve, it will need to cut rates more aggressively than we think it currently envisions.

· Traditionally the Fed cuts faster on the way down than on the way up. While that seems unlikely in this case given the pace on the way up, even loosely following that model means cutting rates in at least 50bp increments at some point.

Altogether, this leaves market participants focused on the downside risks to the economy and positioned to take pricing closer to the recession outcomes we discussed Monday (see Tim Duy’s Fed Watch 7/29/24). Of course, as we noted, market pricing can drift between recession and more benign outcomes as the data dictates.
Market Validation
"The Fed's Next Steps"
Bloomberg 8/1/2024
Treasuries are rallying, with some tenors trading at the lowest yields in months, as investors see economic data cementing the case for three Federal Reserve interest-rate cuts this year.
The 10-year note’s yield fell below 4% for the first time since February on Thursday after manufacturing and jobless claims data reinforced the idea that the US labor market is cooling.
Swaps traders fully priced in 75 basis points worth of easing by the Fed this year — anticipating a quarter-point reduction at each of its three remaining policy meetings.

Bloomberg 8/2/2024
Treasuries jump to fresh highs of the day after a softer-than-expected July employment report. Yields on the day tumble by almost 30bp across the front-end of the curve, while 2s10s and 5s30s spreads jump to session wides as front and belly outperform vs. long-end.
Fed-dated OIS sees dovish shift post-data, now pricing in 44bp of rate cuts for the September meeting, while further out around 117bp of cuts are priced into the December FOMC
US 10-year yields lower by around 19bp on the day, dropping to around 3.80%
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July 30, 2024
SGH Insight
With expectations pared back to a line ball bet that the Bank of England (BOE) will cut rates this week following sticky June inflation data, we remain all in for a 25 bps move to 5% in the first such reduction since the pandemic.
We continue to see the Bank delivering two cuts this year – one on August 1 and another to 4.75% on November 7, (see 7/8/24; “BOE: On Track For August Cut”).
Market Validation
Bloomberg 8/1/2024
*BANK OF ENGLAND CUTS KEY INTEREST RATE A QUARTER-POINT TO 5%
Traders bet on 24bps of further cuts by November and 38bps by year-end, compared with 16bps and 31bps ahead of the the BOE’s decision Thursday.
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July 28, 2024
SGH Insight
Monday Morning Notes, 7/29/24
Backed by softer inflation and a more balanced labor market, the Fed will move closer to a rate cut this week. We anticipate that at the conclusion of the July 30-31 FOMC meeting, the Fed will signal an expectation of a September rate cut assuming the inflation data continues to cooperate between now and then.

The Fed does not anticipate a rapid pace of rate cuts, nor does it see the need for a supersized rate cut in September.

While market participants correctly note that the Fed typically cuts rates more quickly than it hikes rates, that pattern emerges because in most cutting cycles the Fed is behind the curve and facing a recession. The current data flow, however, remains consistent with a normalization of economic activity rather than a recessionary dynamic. That means rate cuts are still preemptive like those in the 1995-1998 and 2019 periods. That situation could change and support a more traditional rate cutting cycle, but for now we retain our baseline expectation of a mid-cycle adjustment.
Market Validation
Benzinga Newswire 7/31/2024
Fed's Powell Says Asked About September Cut Again, Says If Inflation Moves Down In Line With Expectations, Growth Remains Reasonably Strong, Labor Market Remains As It Is, Rate Cut In September Would Be On Table

BBG 7/31/2024
*POWELL: 50 BPS CUT NOT SOMETHING WE'RE THINKING ABOUT NOW

Benzinga Newswire 7/31/2024
Fed's Powell Says Chances Of Hard Landing Are Now; Economy Is Neither Overheating Nor Sharply Weakening; We Must Be Humble About Giving Forward Guidance; Nobody Has Great Vision Deep Into The Future
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