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.

2020
September 21, 2020
SGH Insight
First and foremost, the primary intended messaging takeaway likely to run through testimony and speeches alike will be a lofty emphasis on how forcefully committed the Fed will be to an extremely dovish reaction function going forward. A key objective of the Committee was to enshrine the new consensus “flexible average inflation targeting” and redefined “maximum employment” of the longer run statement into the September post-meeting policy statement, and on that they mostly succeeded. Even the rate dot plots, in being mostly flat right through 2023, were supportive this time that a long period of essentially negative real rates are on the near horizon, even as the economic rebound gathers momentum...

...But as we wrote previously (SGH, 9/3/20, “Fed: On September’s Guidance and QE”), our sense was that the FOMC would not be ready, or able, to commit to changes in its balance sheet policies at the September meeting. Short term fixes could come through liquidity operations if financial conditions tighten prematurely. But we understand that before going to the “next stage” of the pivot to monetary policy. the Fed is seeking a clearer sense of fiscal policy and the outlook, but more fundamentally, it is reviewing the efficacy of asset purchases and looking into all the potential channels of balance sheet transmission, their potential effects on bank lending constraints, as well as possible effects on financial stability...
Market Validation
Policy Validation

(WSJ 9/23/20)

The Fed last week said it was committed to holding rates near zero until the labor market is strong, inflation reaches 2%, and Fed officials believe inflation will run slightly above 2% for some interval. Mr. Clarida said the Fed would need to reach all three conditions before considering any move to raise rates. Simply reaching 2% inflation wouldn’t on its own satisfy the central bank’s new criteria, he said.

Projections released after last week’s rate-setting committee meeting showed most officials expect it will take three years for inflation and employment indicators to return to levels seen earlier this year, before the pandemic disrupted the U.S. economy.

Mr. Clarida said that would represent a stronger rebound than the one that unfolded over the decade following the 2008 financial crisis. Nevertheless, the Fed’s three-year projection window isn’t long enough for Fed officials to project an overshoot of their 2% inflation target given the severity of the current downturn, he said.

(Bloomberg 9/23/20)

Powell: Fed Studying Treasury Market Performance During Crisis
“What we’re doing is, we’re going back now, as we did after the financial crisis, and we’re looking at where were the stress points, how did all the work we did for the last 10 years, how did it hold up?” says Fed Chair Jerome Powell.
“What happened that was new? And we’re going to be doing a lot of work on that”
“We are doing a lot of work on that and a central part of that will be the Treasury market and what changes do we need to make in and around the Treasury market so that we don’t have this happen again”
Powell answers questions Wednesday before House select sub committee on the coronavirus pandemic.

Read full report
September 14, 2020
SGH Insight
** First, so we don’t bury the lede, we do not believe there will be any adjustments in the amount or maturities of the current $80 billion a month in treasury purchases this week. A Committee majority seem perfectly happy with the current policy guidance, and we would take at their word the half dozen or more Committee members who went out of their way in the week before the pre-meeting blackout to lower expectations for a burst of new accommodation this week, none of which saw any pushback or correction from Chairman Jerome Powell in his closing remarks to the week in his lengthy NPR interview.

** Instead, we think the September meeting will mark the first of what is likely to be at least a two-step transition from “stabilization to monetary policy.” This week will largely revolve around aligning the post-meeting statement with the language of the “Statement on Longer-Run Strategy and Monetary Policy,” namely replacing the current symmetric inflation language with the new “average” 2% inflation “over time,” as well as putting inflation expectations at the center of the new inflation ambitions; likewise the FOMC is likely to note how “maximum employment” has been redefined, perhaps by clarifying the dovish distinction between “shortfalls” versus “deviations’ in the unemployment mandate.

** Some of that, as well as a potential reinforcement to the current policy guidance may become apparent in the quarterly Summary of Economic Projections and the rate dot plots, especially in their being extended out to 2023. For one, the rate dot projections are all but certain to remain flat as a pancake, validating the market pricing for a highly accommodative, lagged Fed reaction function for what is highly likely to be years to come.

** Otherwise, the 2020 growth forecasts are all but certain to be improved from June’s -6.5% year-end projection, with some momentum carrying over into 2021, while the median headline unemployment will likewise be lower and healthier looking than June’s 9.3% median estimate. Indeed, that better than expected labor market rebound brings to mind the Fed’s labor market projections were similarly underestimating the gains during the 2015-2018 policy normalization period. And there is still an upside surprise the staff projections will have to incorporate into their forecasts – an early vaccine for instance would undoubtedly trigger a swell of spending.
Market Validation
Policy Validation

(Washington AP 9/16/20)

Federal Reserve Sees Rates Near Zero At Least Through 2023

The Federal Reserve expects to keep its benchmark interest rate pegged near zero at least through 2023 as it strives to accelerate economic growth and drive down the unemployment rate.
The central bank also said Wednesday that it will seek to push inflation above 2% annually. The Fed left its benchmark short-term rate unchanged at nearly zero, where it has been since the pandemic intensified in March.
The Fed's statement formalized a change in its policy toward inflation. Fed chair Jerome Powell first said last month that the Fed would seek inflation above 2% over time, rather than just keeping it as a static goal.
The Fed also said Wednesday that it will continue purchasing about $120 billion in Treasurys and mortgage-backed securities a month, in an effort to keep longer-term interest rates low.
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September 08, 2020
SGH Insight
** This Thursday’s Governing Council meeting will include quarterly forecast revisions that would typically help pave the way for policy action, but the changes from last quarter’s baseline forecasts will not be enough to warrant even more monetary stimulus from the ECB -- at least not yet.

** Indeed, while the ECB will continue to flag downside risks, the growth numbers for 2020, while brutal, are not quite as bad as initially feared, and will be tweaked up.

** The mere mention of the impact of the rising euro on inflation forecasts by ECB Chief Economist Philip Lane nevertheless caught the market’s attention, if anything for the timing of the comments as the currency approached 1.2000 US dollars. But that comment was more a verbal “speedbump” in an attempt to throw a little two-way pricing into the currency markets after a bout of dollar weakness fueled by an increasingly dovish message from the US Federal Reserve, rather than anything even remotely resembling a line in the sand.

** Furthermore, while there is little question about the disinflationary impact of a strong or strengthening euro, the run up in July and August from 1.1200 to 1.2000 is seen as not just about Fed policy, but also as a reflection of a relatively more positive outlook from investors, at least at that time, on Europe’s management of the pandemic and its prospects for a return to more “normal” economic activity.

Market Validation
(MarketWatch 9/10/20)

European stocks edge lower, euro rises as ECB lifts forecasts without talking down currency

European stocks edged lower and the euro rose on Thursday, as the European Central Bank kept interest rates unchanged and offered a slightly more optimistic view of the economy.
Up 1.6% on Wednesday, the Stoxx Europe 600 declined 0.3%.
The ECB lifted its estimate for the eurozone economy this year, now seeing a contraction of 8% versus its previous estimate of an 8.7% drop, as it left 2021 and 2022 forecasts mostly unchanged.
During her introductory comments, ECB President Christine Lagarde did not mention the recent strength in the euro as a matter for concern.
Asked by a reporter, Lagarde said the ECB's governing council discussed the euro appreciation but said it doesn't "target the exchange rate." Lagarde said the ECB will have to "monitor carefully" the rate since it impacts inflation.
The euro traded at $1.1891, vs. $1.1804 on Wednesday.
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August 31, 2020
SGH Insight
The LDP will meet tomorrow Tokyo time (tonight Eastern time) to determine one of two possible procedures to elect their new leader, and that will have a significant bearing on the odds of a total continuity successor, who is shaping up to be Chief Cabinet Secretary Suga himself, or a “change candidate,” embodied in former Defense Minister Shigeru Ishiba.

** In other words, tonight’s meeting may mean more for markets than the LDP election itself, and despite reports that the general polling favors Ishiba over all the other candidates, the LDP is suspected to be leaning towards a selection process that heavily favors greater continuity in Suga, at least for the remainder of Abe’s term.

** But whichever election process the LDP chooses, Ishiba, it is just being reported in Tokyo, has said he will not bow out, contrary to earlier rumors, a clever political move that in effect puts additional heat on the LDP establishment, and on tonight’s decision.

** As things stand, we believe Suga appears most likely to take over as Japan’s next prime minister, with the solid support of LDP Diet members, although Ishiba is still refusing to bow out. That is especially the case if the General Council of the LDP determines to elect the new leader via a “Joint Plenary Meeting of Party Members of Both Houses of the Diet.”
Market Validation
Policy Validation
(Bloomberg 9/14/20)

Japan’s Suga Wins Ruling Party Race to Replace Premier Abe

Japanese Chief Cabinet Secretary Yoshihide
Suga was elected leader of the ruling Liberal Democratic Party
by an overwhelming majority, ushering in the country’s first
change of prime minister in almost eight years.

(Bloomberg 9/1/20)

Japan’s Suga Favorite to Succeed Abe After Party Limits Vote

Japan’s ruling Liberal Democratic Party adopted a structure for a vote to
replace outgoing Prime Minister Shinzo Abe that could help the premier’s
right-hand man, Yoshihide Suga, take over. Party officials decided on a
system Tuesday that would give more weight to lawmakers in the party
over rank and file members, LDP General Council Chairman Shunichi Suzuki
told reporters.

The move comes as Suga appears to be picking up enough
support among powerful factions of lawmakers, which put him far
ahead of any contender. The system decreases the influence of
regional voters, who have previously shown support for a top
rival, former Defense Minister Shigeru Ishiba, who on Tuesday
officially declared his candidacy.
Read full report
August 26, 2020
SGH Insight
** While we are unsure how detailed Chairman Powell will get in previewing the revamp to the framework and the revisions to the longer run statement, we do expect him to confirm the widely expected revisions to the 2% inflation target, formally in place since 2012, with new language that the central bank will seek an “average” of the 2% target “over time” or some such phrasing that will affirm the Fed is tolerating, if not seeking to engineer, an overshoot of the 2% target to ensure it is truly symmetrical rather than a ceiling.

** Equally important, we believe Chairman Powell will go into some length to note the Fed’s changing definition of its employment mandate, namely in expanding on its definition of “maximum” employment to make it clear the Fed is willing to tolerate a headline employment rate below the estimated longer run unemployment level. Indeed, we would be impressed if the Chairman goes some way to acknowledging monetary policy does have an impact on employment levels, especially in expanding its definition to include participation rates or unemployment levels among minorities and other groups.



Market Validation
(Bloomberg 8/27/20)

Treasuries Extend Gains After Fed Unveils New Inflation Approach

Treasury futures rise to session highs after Fed Chair Powell confirms a new approach to policy that takes a more relaxed stance on inflation and on its view of how low U.S. unemployment can go.
Gains are led by long-end of the curve, pushing 5s30s onto lowest levels of the session; yields richer by 1bp to 3bp across the curve
Move is accompanied by sliding inflation breakevens with 10-year tenor dropping around 4bp from near highs of the day
S&P 500 E-mini futures jump to session highs, advancing 0.2% on the day.


Read full report
August 17, 2020
SGH Insight
*** We are less certain, however, whether the Minutes will provide all that much clarity on the timing to a new policy guidance and changes to asset purchases. The July meeting three weeks ago was certainly far too early for a decision on policy guidance changes still two months away. At most, the Minutes may lay out the trade-offs in unveiling a strategic framework and a tactical guidance shift at the same meeting. In any case, guidance changes in the upcoming post-meeting statement will be largely data-driven, and are likely to be signaled only as the September 17-18 meeting draws nearer. ***

Market Validation
(Bloomberg 8/19/20)
Treasuries Fall After FOMC Minutes Are Silent on Asset Purchases
By Elizabeth Stanton
-- Treasuries erased gains and fell to session lows after minutes of the FOMC’s July 29 meeting were largely silent on the prospect of changes to the size or composition of the central bank’s purchases of Treasury securities.
Yields across the curve reached session highs, led by the long end, steepening the curve; 10-year yield erased what remained of an earlier decline of as much as 2.4bp and climbed as much as 1.8bp on the day to reach 0.687% before stabilizing
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August 10, 2020
SGH Insight
China’s Vice-Premier Liu He and US Trade Representative Robert Lighthizer are scheduled to review the implementation of the Phase One trade agreement between the US and China by videoconference this coming Saturday, August 15.

** On the heels of the recent escalation in tensions between Washington and Beijing, highly placed sources in Beijing suggested over the weekend that a “temporary cancellation or postponement” of the high-level virtual meeting “cannot be completely ruled out.”

** Such a decision, which would mean the trade deal is being pulled, even if gently, into broader bilateral disputes, would be highly disruptive to markets who to date have operated on the assumption that Phase One, for both sides, is on an independent track from all other disputes. But, warn sources who are vested in continued economic dialogue with the United States, if the administration of President Donald Trump were to “continue” to provoke China over these next few days, the talks will have to be temporarily canceled or postponed.
Market Validation
Policy Validation

(Bloomberg 8/14/20)

U.S.- China Six-Month Trade Agreement Review Delayed: Reuters

The six-month review of the trade agreement
between U.S. and China slated for Saturday has been delayed due
to scheduling issues, Reuters reports, citing sources familiar
with the plans.
* A new date has not been agreed to: Reuters
* NOTE: U.S. Trade Rep. Robert Lighthizer, Treasury Sec. Steven
Mnuchin and Chinese Vice Premier Liu He had been expected to
meet via videoconference on Aug. 15, the six-month anniversary
of the agreement entering into force
Read full report
July 21, 2020
SGH Insight
The leaders also agreed that the Commission borrowing, unprecedented in size, will be repaid by 2058, and assigned new revenue streams to the EU to raise money for eventual repayment, but with much still to be determined.

Beginning next year, EU countries will levy a 0.8 euro per kilogram tax on un-recycled plastic, and those funds will be passed on to the EU. More controversially, starting in 2023, the EU will introduce a tax on goods imported into the bloc from countries that have lower emissions standards than the EU (see also SGH 6/19/2020, “EU: A Slipping Negotiating Box”).
Market Validation
Policy Validation

(Reuters 9/17/20)

European Parliament votes for new taxes in EU to repay recovery borrowing

The European Parliament voted on Wednesday in favour of assigning new tax revenues to the European Union to repay the bloc’s intended joint borrowing of 750 billion euros ($888 billion) for economic recovery after the COVID-19 pandemic.
Lawmakers voted 455 votes in favour and 146 against, with 88 abstentions, to introduce new sources of revenue - so called “own resources” - to the EU budget that should at least cover the costs related to the recovery plan.
They could include a tax on unrecycled plastic and on goods imported into the EU from countries with less ambitious climate-change fighting standards. Also under consideration is taxing digital giants and extending an EU CO2 emissions trading scheme into the maritime and aviation sectors.
Read full report
July 20, 2020
SGH Insight
The Senate Banking Committee will almost certainly vote tomorrow along a 13-12 party line to recommend that President Trump’s nominations of Judy Shelton and Chris Waller go forward to the Senate floor for confirmation to serve on the Federal Reserve Board of Governors.

** If both are confirmed in a Senate floor vote that now seems likely, both Waller, currently the head of research at the Federal Reserve Bank of St. Louis, and Shelton, a more controversial economic advisor to President Trump who served as the US representative to the European Bank for Reconstruction and Development, will begin their terms on the Fed’s Board of Governors later this summer, with their first meeting as voting Governors of the Federal Open Market Committee coming in September.
Market Validation
(Bloomberg 7/21/20)

Policy Validation

Judy Shelton, President Donald Trump’s contentious pick for the Federal Reserve’s Board of Governors, cleared a key hurdle to confirmation by winning the approval of a majority on the Senate Banking Committee.
She was backed in a party-line vote Tuesday, 13-12. The committee also voted in favor of Fed nominee Christopher Waller, currently director of research at the St. Louis Fed. His nomination passed 18-7.
Read full report
July 10, 2020
SGH Insight
*** But the challenges in coming to an agreement by then were already clear after a June 19 summit produced little progress in EU negotiations with the “Frugal Four” holdouts of the Netherlands, Sweden, Denmark, and Austria. More importantly, it appears there is still broad support from all sides to show concrete progress at the upcoming meeting to keep negotiations on track for a final agreement, perhaps even as widely hoped for by the end of July.

Market Validation
(Bloomberg 7/20/20)

The euro climbed to a four-month high, European bond spreads narrowed and stocks rose as leaders made progress in negotiating a historic stimulus package. U.S. equity futures were mixed with the S&P 500 coming off a three-week rally.
Italy’s 10-year bond yield spread over Germany, a key gauge of risk in the region, fell to the lowest level since March.
In Europe, leaders appeared close to reaching an agreement on a rescue package. The four governments that have been holding up negotiations are ready to agree on a key plank of the deal, two officials said. The Netherlands, Austria, Denmark and Sweden are satisfied with 390 billion euros ($450 billion) of the fund being made available as grants with the rest coming as low-interest loans, the officials said, asking not be named discussing private conversations.
Read full report
July 01, 2020
SGH Insight
*** Despite the relatively high expectations the FOMC may soon adopt some form of yield curve control, we have no sense of any movement towards a Committee consensus that would put a decision on yield curve caps on the table at the July meeting or even by September. The Minutes later today are instead likely to show how preliminary these discussions are, and while YCC may become part of the monetary policy toolkit at some point, we don’t think a clear Committee majority will turn to YCC unless or until there are clearer signs of sustained economic recovery, which is likely to push their consideration into next year. ***
Market Validation
(Bloomberg 7/6/20)

Short-End of Yield Curve Climbing
Yields are heading higher at the front end of the Treasury curve on
hints of skepticism about the usefulness of yield curve control. The two-year is at a session high of 0.16%.

Policy Validation

(Bloomberg 7/1/20)

Fed Officials Were Unconvinced on Need for Yield-Curve Control
By Christopher Condon

Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.

“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.

U.S. central bankers left interest rates near zero at the session, which was conducted via video conference. They also agreed to keep purchasing Treasury and mortgage-backed bonds at a pace of about $120 billion a month.

In a press conference that followed, Fed Chair Jerome Powell said officials were “not even thinking about thinking about raising rates.”
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June 24, 2020
SGH Insight
** As the matter remains, from a jurisdictional perspective, a strictly German affair, ECB Governing Council member Jens Weidmann will present a set of documents to Berlin in his capacity as President of the Deutsche Bundesbank. It will demonstrate that the ECB structured and balanced its Public Sector Purchase Program in a manner that fully satisfies the question of “proportionality” that was raised by the GCC in its early May ruling.

** From what we understand, Weidmann’s explanation will be discussed in the late afternoon session of the ECB Governing Council’s non-monetary policy meeting today and is very likely to be “approved.” But with great sensitivity over jurisdictional boundaries and precedent – the ECB reports to the European Parliament and legally answers solely to the Court of Justice of the European Union (CJEU) – a formal ECB decision on any aspect of the GCC challenge is unlikely to ever be taken or published.

** With full cooperation nevertheless of the ECB, Weidmann will present a set of documents to the German Bundestag that will comprise preparatory papers for ECB council meetings, and that may even include older documents dating to the period before January 2015 when the ECB began the practice of publicly releasing its meeting accounts.
Market Validation
Policy Validation

(Reuters 6/24/20)

The European Central Bank agreed to give vital documents to German authorities to prove the proportionality of ECB policies, two sources said, in a step to defuse a challenge threatening to undermine its powers to keep the euro zone together.

In a compromise deal, the ECB agreed on Wednesday to give unpublished documents underpinning its policy decisions to Bundesbank chief Jens Weidmann, who can then present them to the German parliament and government, as demanded by the court ruling.

The sources added that while the documents are unpublished, many were already provided to the European Court of Justice when it discussed and cleared the disputed asset purchase programme, the sources said.
Read full report
June 08, 2020
SGH Insight
The market rally will put renewed pressure on the Fed to bring forward its transition from the current “market function” credit and liquidity policies to a newly prescribed accommodative monetary policy and, in particular, to provide a greater guidance on its intentions with balance sheet policy. A sequencing in monetary policy to eventual yield curve caps may be on the agenda this week, but a consensus is still some way down the road. Indeed, we still think it will be September at the earliest before the FOMC will have enough of a sense of the underlying economic trends and for any formal roll-out of the revised monetary policy playbook at the Zero Lower Bound.

That said, we would put better than even odds on either or both the statement and Chairman Powell’s remarks to the press mapping out a middle path of flexibility to scale up on the “as needed” pace of treasury purchases to ensure “market function” that is more broadly defined as deterring a premature steepening of the curve. We still doubt the Committee will want to put a number on that yet, as we think the Committee will want to protect maximum policy space for later in the year when the new playbook is formally unveiled. A steady state of $80 billion a month, keyed off Friday’s nudge down in the daily purchases to $4 billion, would be the likely figure if they do go that route now.

Ironically, for what it is worth, the guidance craved by the market, at least on rates, is likely to come through the backdoor of the quarterly Summary of Economic Projections and the rate dot plot. For all the previous hand wringing over the rate dots – and Powell will again stress to take them with a huge grain of salt due to the inevitably huge confidence bands – this meeting’s rate dot plot will almost certainly be flatlined across the three year forecasting horizon, even if there is a likely smattering of rate increases showing up in the full ranges for 2022. The estimates for the longer run neutral may also drop, further accenting an implicit lower for longer rate guidance.
Market Validation
(Bloomberg 6/10/20)

Treasuries Surge Led by Belly as Fed Puts Floor Under Bond Buys

Treasuries ended sharply higher after receiving a boost during U.S. afternoon from FOMC decision to maintain the pace of asset purchases at “at least at the current pace” of around $80 billion a month and projection that interest rates will remain near zero through 2022. Intermediate sector led the post-FOMC advance, richening the 2s10s30s fly. Long end lagged, however yields across the curve finished the U.S. session near daily lows.
Yields ended richer by 3bp to 9bp across the curve, pivoting around the 7- to 10-year sector; 10-year yields shed ~8bp to 0.744%, flattening 2s10s by more than 5bp; long-end yields fell 5bp-6bp on the day, leaving 5s30s steeper by 1.6bp after erasing 2.6bp of flattening that occurred before the FOMC actions

Policy Validation

(Bloomberg 6/10/20)

The Federal Reserve put a floor under its large-scale asset purchases and projected interest rates will remain near zero through at least 2022 as policy makers seek to speed the economy’s recovery from the coronavirus recession.
“To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” the Federal Open Market Committee said in a statement Wednesday following two-day policy meeting.
A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.
The Fed’s quarterly projections -- updated for the first time since December, after officials skipped their March release amid the burgeoning pandemic -- showed all policy makers expect the federal funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.


Read full report
June 01, 2020
SGH Insight
[T]he central bank could decide to wait until its July meeting before hiking the PEPP in order to more fully assess the impact of the existing stimulus injections, the exact need for additional bond purchases, and the damage to the Eurozone economy.

It could, but it won’t…

With no inflation in sight, a risk/reward consensus that favors doing more, and not less, and monetary and fiscal authorities around the world still pledged to do “everything it takes” to fight the COVID-19 recession, a pause now against expectations would unnecessarily shock and jeopardize the hard-won stability and compression in rates the ECB has already achieved across the Euro-system.

So while there is always the option to wait, ECB officials have continued to communicate they are ready to deliver on the additional stimulus that is obvious to all will be needed to counteract the deepest contraction ever in the Eurozone economy, and sooner, rather than later.
Market Validation
(Bloomberg 6/4/20)

Europe’s Stoxx 600 turns slightly positive, paring a drop of as much as 0.8% after ECB boosts its stimulus program.
Banks almost wipe out drop of as much as 2.2%
ECB adds EU600b to its pandemic purchase program and extends it to at least June 2021, says will reinvest PEPP holdings until at least end of 2022

(Bloomberg) -- Italian bonds and the euro reversed losses after the European Central Bank boosted its emergency bond-buying program by more than expected.
The yield on Italy’s 10-year bonds fell 16 basis points to 1.39% and the euro extended its rally to the longest since 2011 after the ECB topped up its pandemic stimulus by 600 billion euros ($674 billion), beating estimates by 100 billion euros.

*Euro Rises to $1.1243 After ECB Decision From $1.1203 Beforehand
Read full report
May 29, 2020
SGH Insight
** But whether all today, in one shot, or over time, we believe President Trump is likely to pull the trigger on measures against China that will include sanctions, visa restrictions, including on students, restrictions perhaps on certain financial transactions, and even the possible freezing of assets of targeted individuals and institutions in China.

** We also believe there is a very high likelihood that the special treatment afforded to Hong Kong including its separate customs treaty status will be either partially or fully revoked – meaning the region would fall under the same tariff regime that is being applied by the US to mainland China. Despite hints and warnings from Washington, taking this tougher economic response seems not yet to be fully anticipated by markets.
Market Validation
Policy Validation

(Bloomberg 5/29/20)

China “unilaterally imposed control over Hong Kong’s security,” President Trump says at White House news conference.

Trump says he’s directed his administration to eliminate policies that give Hong Kong special treatment, incl. extradition treaties, export controls

Trump says investment firms should not expose clients to China risk

U.S. to sanction Chinese officials involved in smothering Hong Kong autonomy, Trump says

Says he’s establishing working group to study Chinese companies listed in the U.S.
Read full report
May 21, 2020
SGH Insight
** Rumors in the Hong Kong press this morning that the mainland could take matters into its own hands had already unnerved local markets. But the decision to draft new legislation in Beijing that would be inserted into the city’s legislation through an “Annex III” provision of Hong Kong’s Basic Law was the most hardline among the various options at Beijing’s disposal.

** On May 6, U.S. Secretary of State Mike Pompeo announced a delay in the annual certification now required by Congress of whether Hong Kong still enjoys a level of autonomy from Beijing that can “justify continued special treatment by the U.S. for bilateral agreements and programs.” The reason for the delay was, precisely, “to account for any additional actions that Beijing may be contemplating [at] the May 22 National People’s Congress that would further undermine the people of Hong Kong’s autonomy” (see SGH 5/15/20, “China: This is Not 2019”).

** Today’s actions will make that certification tough, if not near impossible politically, which could result in the removal by Congress of some special business and trading privileges granted to the Hong Kong Special Administrative Region. But an equally plausible, and perhaps more targeted, response from the Trump administration and Congress would be sanctions or actions aimed at individuals in Beijing, the Communist Party of China, or at the People’s Republic of China itself.

Market Validation
(Dow Jones 5/22/20)

Investors' concerns over escalating U.S.-Chinese tensions that re-emerged Thursday -- are spilling over into the Friday trading session as the three-day Memorial Day weekend approaches.
Dow Jones Industrial Average futures are off 0.4%, S&P 500 futures have fallen 0.3% and futures on the Nasdaq Composite declined 0.5%.
Overseas stocks are lower as well, led by a drop of 5.6% in Hong Kong, where stocks plunged in response to a Chinese plan to impose new national-security laws. The U.K.'s FTSE 100 Index is off 1%, while Japan's Nikkei 225 Index fell 0.8%.
Oil is also down in early Friday trading, ending a 6-day hot streak with a thud. Benchmark crude-oil futures are down almost 7%.

(Policy Validation - Dow Jones 5/22/20)

WASHINGTON -- U.S. senators are introducing a bipartisan bill that would sanction Chinese party officials and entities who enforce the new national-security laws in Hong Kong, and the legislation also would penalize banks that do business with the entities.
Sen. Chris Van Hollen (D., Md.) and Sen. Pat Toomey (R., Pa) said they had been working on the bill already but Thursday's developments made the legislation more urgent. They said they will urge Senate leaders to take up the matter quickly.
Earlier Thursday, China signaled it will impose new national-security laws on Hong Kong, dealing a blow to the territory's autonomy as Beijing moves to stop widespread pro-democracy protests that have challenged leader Xi Jinping.
"We would impose penalties on individuals who are complicit in China's illegal crackdown in Hong Kong," Mr. Van Hollen said. He called the move by Beijing "a gross violation" of China's agreement with the U.K. to preserve more freedom and autonomy in the territory.
Mr. Toomey called the move by China "very, very deeply disturbing."
Last year, President Trump signed a bill designed to show solidarity with pro-democracy protesters in Hong Kong, despite expressing concerns it could complicate U.S.-China trade talks.
Read full report
May 19, 2020
SGH Insight
*** Second, it feels unlikely to us the Federal Open Market Committee will be unveiling its revised Monetary Policy Framework Review at the June meeting as previously intended. They still could, and the FOMC had largely reached agreement on an aggressive “lower for longer” forward guidance, framed by thresholds on employment and inflation, before the “monkey wrench” of the COVID-19 crisis. But, on balance, we do not have a sense of a Committee consensus yet on the balance sheet policy when rates are likely to be pressed for so long at the ZLB and, which we suspect, is moving towards an eventual embrace of some form of yield curve management. ***

*** Third, we suspect Fed officials are debating whether an “intermediate phase” may be necessary before a new framework can be mapped out. That may entail an extended “steady state” period of, say, $5 billion a day in treasury purchases to ensure market function, but which could be flexibly adjusted up or down if US Treasury debt issuance excessively steepens the curve. In that sense, the slowing pace in treasury purchases to a “mere” $6 billion a day is a cautious probing to find the right balance, drawing on the lessons from last year when the reduction in reserve balances overshot an optimal equilibrium level. ***
Market Validation
Minutes of the Federal Open Market Committee
April 28–29, 2020
Excerpt:
While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions. Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit. For example, the Committee could adopt outcome-based forward guidance that would specify macroeconomic outcomes—such as a certain level of the unemployment rate or of the inflation rate—that must be achieved before the Committee would consider raising the target range for the federal funds rate. The Committee could also consider date-based forward guidance that would indicate that the target range could be raised only after a specified amount of time had elapsed. These participants noted that such explicit forms of forward guidance could help ensure that the public's expectations regarding the future conduct of monetary policy continued to reflect the Committee's intentions. Several participants observed that the completion, most likely later this year, of the monetary policy framework review, together with the announcement of the conclusions arising from the review, would help further clarify the Committee's intentions with respect to its future monetary policy actions. Several participants also remarked that the Committee may need to provide further clarity regarding its intentions for purchases of Treasury securities and agency MBS; these participants noted that, without further communication on this matter, uncertainty about the evolution of the Federal Reserve's asset purchases could increase over time. Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee's forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time.
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May 15, 2020
SGH Insight
Markets like to superimpose the framework of yesterday to handicap the uncertainties of tomorrow. When it comes to trading the reemergence of tensions between the Trump administration and Beijing, they should take note of two major shifts underway this year:

First, as opposed to the halcyon days of 2018 and 2019 when the pressure on China was largely focused on tariffs and technology, there are now well over a dozen measures in the pipeline between the executive branch and the U.S. Congress aimed at China.
Many of these were extensively laid out and handicapped in SGH 5/5/20, “China: U.S. Preparing Retaliatory Measures”, and two of them have already since come to pass, and roiled markets in the process — a forced “delay” engineered by the White House of the federal government pension Thrift Savings Plan equity allocation to China investments in the MSCI All World Index, and the roll-out by U.S. Senator Lindsey Graham of a “COVID-19 Accountability Act” against China.

Second, the market’s assumed correlation in 2018 and 2019 between a strong economy and tariff pressure on China, where President Trump, even in his own words, would use “house money” as it came available to pressure China, no longer exists; if anything, that relationship could now even be reversed.

The White House is, of course, single-mindedly focused on bringing the shattered U.S. economy back to its feet. But the recognition now even by the President himself that the economy may not have its “strong rebound” until the fourth quarter of this year at best is of enormous significance: the lower the odds of riding the economy through the November elections to win a second term, the higher the odds that Trump will press on his “America First” calling card that has been a consistent policy theme since becoming president.
Market Validation
(Politico 5/20/20)

In another sign of worsening relations, the Senate on Wednesday passed a bill that threatens to delist Chinese companies from American stock exchanges unless they submit to U.S. auditing requirements. Some of the biggest Chinese companies have refused to conform to those requirements with little consequence.

"It says to all the companies out there in the world, including, but not limited to China: You want to list on an American exchange, you have to submit an audit, and the SEC has the right to look at that audit, and audit the audit," said Sen. John Kennedy (R-La.) in a floor speech describing the legislation, which he co-sponsored with Sen. Chris Van Hollen (D-Md.).

Only the latest China cut: The bill was the second piece of bipartisan legislation targeting China the Senate passed in two weeks. Last Thursday, the upper chamber passed the Uyghur Human Rights Policy Act of 2020, which would sanction Chinese officials who played a role in the mass detention of Muslims and other minority groups in China’s Xinjiang province.

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May 08, 2020
SGH Insight
To further blunt any unintended policy signal that negative rates are indeed a near term policy option, we expect Fed officials, either Chairman Powell himself or perhaps Federal Reserve Bank of New York President John Williams, to soon issue a statement or find a virtual forum to reaffirm the Fed’s low priority on negative rates among the policy tools it is reviewing for when it transits from the current liquidity crisis management measures to ensure market function to a revamped monetary policy strategy at the Zero Lower Bound.
Market Validation
(ITC Capital Markets 5/8/20)

Summary: US Front End Rates: Negative Interest Rate hype fades:report downplays; Powell Wed 9am ET

-We saw another surge in front-end futures Friday as the negative rate ‘hysteria’ continued through the early part of the session

-Front-end came “off the boil” in the afternoon with some focus on a consultancy piece (SGH Macro) that poured cold water on the potential for NIRP, speculating Fed leadership (including potentially Powell) may be out next week to actively signal they have no intention of pursuing negative rates

(Bloomberg 5/12/20)
Fed Funds Futures Continue to Price Out Odds of Negative Rates

Traders continue pricing out the chances of negative policy rates as Federal Reserve officials pushed back on deploying them.
July 2021 contract pricing a negative implied rate as of May 11; negative rates were priced as early as the March 2021 contract on May 8
Fed Presidents Evans, Bostic, Harker, Barkin and Bullard have said they don’t see negative rates being used in the U.S.
Wrightson ICAP expects Chairman Powell will “try to tamp down speculation that the Fed will take its policy rate below zero” during Wednesday’s webcast


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May 05, 2020
SGH Insight
...there is also advancing political movement, most likely again through executive order, to preclude the U.S. government pension fund, the Thrift Savings Plan, from investing about $50 billion in an MSCI Index that includes Chinese shares.
Market Validation
(Bloomberg 5/12/20)
Trade Friction Over Virus Blame Saps Risk Appetite
Risk sentiment suffers a setback following President Trump’s decision to pull federal money out of Chinese equities and Beijing’s move to suspend meat imports from four Australian abattoirs. S&P futures fall as much as 1% and Asian indexes retreat; Hang Seng drops 1.8% and ASX 200 loses 1.3%; Kospi 0.8% lower. Shanghai Composite slips 0.6%, H shares 1.7% weaker. 10-year Treasuries hover near 0.69%; JGB futures edge higher on strong bond auction and Kuroda’s pledge to ease more if needed. The dollar strengthens against all G-10 majors except yen; Aussie underperforms. WTI July futures hold near $25.20; gold returns above $1,700/oz.
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