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
February 14, 2024
SGH Insight
Bottom Line: Given the hawkish bias in recent data, we can’t assign a high probability to a May cut at this point. It’s just difficult to see that Fed hawks will come to a consensus on a rate cut if jobs continue growing more than 300k per month, for example. And even if we could assign a high probability to May, that case depends on data that might not become available until after the March meeting, meaning strategically there remains a hawkish risk for market pricing for the next month. Something needs to give to provide a clearer path to a May cut.
Market Validation
Bloomberg 2/16/24

The Treasury market extended a slide Friday after US producer prices rose faster than forecast in January, dimming the chances the Federal Reserve will begin reducing interest rates before July and trimming expectations for cuts over the whole of 2024.

Yields of all maturities rose in the wake of a fresh dose of concern over inflation proving more sticky than some expected, with shorter tenors leading the march. This comes after a reading earlier this week showed consumer prices rose more than forecast.

The two-year yield, the most sensitive to changes in the outlook for US monetary policy, rose as much as 14 basis points to 4.72%. That came as short-term interest-rate swaps contracts trimmed odds of the Fed’s first rate cut coming in June down to only about 80%. For all of 2024, traders now see only about 85 basis points of easing, pushing the market as close as ever to three quarter-point hikes, which the median of Fed officials’ forecasts — known as the dot plot — signaled in the last quarterly update in December.

Read Full Report
February 12, 2024
SGH Insight
The data flow steps back up this week with fresh readings on both inflation and consumer spending. On Tuesday, Wall Street expects to see that core-CPI was 0.3% in January although we remind readers to look through the CPI numbers to the implications for PCE inflation; for a more complete picture of the latter, we need to wait until Friday to get the latest PPI numbers. There has been heightened concern that inflation ran a bit hotter in January, and if so, market participants will reduce pricing for rate cuts this year as the Fed has been pretty clear that it sees this outcome as the primary threat to its expectation that it will be appropriate to cut rates later this year.

Market Validation
Bloomberg 2/13/2024
*FED SWAPS ASSIGN LOWER ODDS TO MAY, JUNE RATE CUTS
*US 2- TO 5-YEAR YIELDS RISE AT LEAST 15 BASIS POINTS ON DAY
*FED SWAPS PRICE IN LESS THAN 100 BASIS POINTS OF EASING IN 2024
*FED SWAPS SHIFT FULL PRICING OF RATE CUT TO JULY FROM JUNE
Read Full Report
February 05, 2024
SGH Insight
Monday Morning Notes, 2/5/24

A lighter week for data that might begin with a bang. Monday morning, we get the January services sector PMIs for S&P Global and ISM. Given the recent run of data, it seems like we should be looking for an upside surprise. The ISM number should get a boost from the reversal of the shockingly low employment number in December. We don’t know how to explain another weak number in the context of the employment report. Upside surprise for the ISM measure could be the catalyst that forces market participants to undo the move in rates since last November.
Market Validation
Bloomberg 2/5/24

Treasury yields extended Friday’s surge, pushing the two-year note’s toward its highest level this year, as strong economic data reinforced the message of Federal Reserve officials including Chair Jerome Powell that interest-rate cuts are unlikely to begin before May.

Yields across the maturity spectrum climbed as much as 10 basis points on the day, reaching session highs after the ISM gauge of service-sector activity for January exceeded economist estimates. Friday was the US bond market’s worst day in nearly a year after stronger-than-anticipated January employment data dashed hopes for a speedy pivot toward easier monetary policy.

The chance of a quarter-point cut in March dwindled to almost 10% after Powell said in an interview with CBS’s 60 Minutes which aired Sunday that Americans may have to wait beyond the Fed’s next meeting to cut interest rates. Minneapolis Fed President Neel Kashkari made similar comments Monday, and nine other central bank officials are slated to speak this week.
Read Full Report
January 30, 2024
SGH Insight
Rate cuts are coming this year, but the timing and magnitude of cuts depend on both the inflation and growth/jobs data. The Fed will provide additional guidance on the policy path at the conclusion of this week’s FOMC meeting. We remind readers that a March rate cut remains very possible, only that the Fed likely needs a push from the real data to be confident that inflation will remain on the path to price stability. That could come from the jobs data, but not likely with the current consensus expectations for the January employment report. In other words, while we are confident that the inflation data clears the way for a rate cut, the growth outcomes are an impediment to a March cut and we are less confident the data on that front will turn in time for a March cut. If that report reveals job growth less than 100k or an uptick in unemployment, the odds of a March cut will rise.
Market Validation
Federal Reserve Board Press Conference 1/31/2024
The current context, we will be data-dependent. We will be looking at this meeting by meeting. Based on the meeting today, I would tell you that I don't think it is likely that the Committee will reach a level of confidence by the time of the March meeting to identify March at as the time to do that, but that is to be seen. So, I wouldn't call it, you know -- when you ask me about in the near term, I am hearing that as March. I would say, I don't think that is -- it is probably not the most likely case, or what we would call the base case.
Read Full Report
January 29, 2024
SGH Insight
If You Don’t Have Time This Morning
As for this week’s FOMC meeting, we think the statement and press conference will fall short of endorsing imminent rate cuts. The reality that the Fed needed to see the upcoming CPI revisions before cutting rates already made it impossible to conclusively clear the way for a rate cut at this meeting, and the GDP number reinforces the case for waiting until the Fed has clear visibility on the first quarter growth, which would push a rate cut back to May.

We expect the statement will shift to reflect the pivot to talking about the timing of rate cuts but not entirely to an easing bias. This argues in favor of replacing “any additional policy firming” with more neutral language like “future policy adjustments.”
Market Validation
Federal Reserve issues FOMC statement 1/31/2024
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any 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 does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
Read Full Report
January 24, 2024
SGH Insight

The European Union is grappling with how to secure 50 billion euros in financing for Ukraine for the next four years, without which Kyiv will not have enough money to keep the country, and war, running.
EU leaders tried to agree on the cash in December but failed after Hungary, keen under Prime Minister Viktor Orban always to maintain good relations with Moscow, blocked the agreement that would have required unanimous approval of all 27 EU governments.
EU leaders will have another go at it on February 1 and it appears they are likely to succeed, probably at the cost of yielding to Hungary’s demands that the disbursements be reviewed annually.

Market Validation
Bloomberg 2/1/2024
European Union leaders struck a deal as Hungarian Prime Minister Viktor Orban yielded to their demands to lift his veto on a €50 billion ($54 billion) financial aid package for Ukraine. The forint reversed an earlier drop on the news.
“This locks in steadfast, long-term, predictable funding for Ukraine,” European Council President Charles Michel said in announcing the deal in a post on social media platform X Thursday.
As part of the accord, the member states agreed to debate the implementation of the Ukraine aid package every year and, “if needed,” the European Commission, the bloc’s executive body, could be asked to propose a review in two years, according to a draft document seen by Bloomberg News. The Hungarian leader’s demand for a veto was dropped.

Read Full Report
January 22, 2024
SGH Insight

Powell will be threading a needle at the FOMC meeting. The Fed looks prepared to move to a balanced risk assessment and will want to maintain flexibility going forward as it eyes its next move. Powell can’t cut off March given inflation and the possibility that labor markets surprise on the downside, but at the same time won’t endorse March.
Bottom Line
Having pushed the inflation story as far as it can go, the focus is back on the real economy. On that side, a run of better-than-expected data reduces the urgency for rate cuts, leaving the timing of the first cut dependent on softer employment data between now and the March meeting. We currently assess the odds of a March cut at 30%.
Market Validation
Bloomberg 1/31/2024
*FED SWAPS CUT ODDS OF MARCH RATE CUT TO CONTRACT LOW NEAR 30%
The Federal Reserve held interest rates steady for a fourth straight meeting and signaled an openness to cutting them, though Fed Chair Jerome Powell threw cold water on investors’ hopes that reductions would begin in March.
The central bank’s policy-making Federal Open Market Committee showed it is in no rush to reduce rates, noting in a statement Wednesday that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Powell reinforced this message by saying, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting.”

Read Full Report
January 12, 2024
SGH Insight
Some private sector inflation forecasters are tipping that falling energy prices will push down UK inflation to 2% by April, halving the current rate.
The Bank in November said it expected inflation would return to the 2% target by the end of 2025. Inflation would then fall below target, it said, as “an increasing degree of economic slack reduces domestic inflationary pressures.”
At that meeting, the Monetary Policy Committee (MPC) voted 6–3 to hold Bank Rate steady, with three members preferring to raise rates again by 25bps.
Later that month Bailey said in an interview that rates would not be cut for “the foreseeable future” at the same time as he expressed concern about sagging growth.
Now, the upcoming February meeting’s vote is likely to reflect that shift in concern with most members favoring a hold.
In November, the Bank’s now outdated projected inflation path back to target was based on an implied path for Bank Rate to remain at 5.25% until the third quarter this year before it declined “gradually to 4.25%” through end 2026.
Its February 1 update could show it now expects inflation to return to target this year, far sooner than it expected in November when senior members of the MPC including Bailey, stressed the need to keep Bank Rate at its 15-year high until the path back to target was in sight.
Market Validation
Bloomberg 2/1/2024
The Bank of England opened the door to interest-rate cuts for the first time since the pandemic struck — affirming predictions that inflation will fall to target this spring — while warning that price pressures could reemerge.
The UK central bank removed key guidance that borrowing costs may have to rise again, with Governor Andrew Bailey acknowledging that keeping rates unchanged would push inflation “significantly” below the target of 2%. The nine-member Monetary Policy Committee split three ways on how to act, with a majority of six opting to leave the key rate unchanged at 5.25%.
Still, MPC member Swati Dhingra pushed to cut rates, the first vote for a reduction in almost four years. Catherine Mann and Jonathan Haskel stuck with their previous position to raise rates to 5.5%.
Traders held bets that the BOE will deliver at least four quarter-point interest-rate cuts this year, with the first coming in June. The chance of an earlier move in May remains at around 50%.

Read Full Report
January 10, 2024
SGH Insight
As to the timing of cuts, the data and outlook will of course drive the ultimate decisions, but from where we sit today we continue to rule out a cut at the March 7 meeting barring a shock on the growth side (Banco de Portugal Governor Mario Centeno has been the dovish outlier advocating for a March cut).
Furthermore, while we had thought the March forecast round could set the stage for a cut at the April 11 meeting, if inflation bounces around above 2% as expected, and with little data between the March and April meetings, this also appears unlikely, even though it is possible.
We expect the most likely base case for a first rate cut by the ECB to be at the June 6 forecast round meeting.
The argument for June over April is partly about waiting for the results in May of the all-important national wage data. The ECB will have some sense even by March of tracking wage data (see below), and April could be live depending on the totality of the data, but the preference will be to see the hard data and not rely too much on tracking data with little history. And while it is not written in stone that the first cut has to come at a quarterly forecast round meeting, that is far cleaner for both internal consensus and external communication. Perhaps most interestingly, waiting until June has a lot to do with tactics around managing the pace and destination of cuts as well.

Market Validation
Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Federico Fubini
January 13, 2024

What is it that the market is getting so wrong by expecting ECB rate cuts by March or April, and for these to then continue rather aggressively in 2024? Do you believe the market discounts euro area recession, due in part to a more restrictive German budget, that were not included in the more recent ECB staff projections?
The inflation release for December was broadly in line with our projections – I’m not seeing some major downside surprise. It was in line with our signal that there would be a jump. And the continued progress on the easing of core inflation is welcome. But we do see some headwinds to services inflation this year and, for the time being, wages are still growing well above any kind of long-run equilibrium rate. We don’t expect energy prices to continue falling at the same rate as last year.
Our baseline staff projections include a significant recovery in the European economy this year due to stronger demand in Europe which is, on its own terms, inflationary. But we flagged in December that there are downside risks to our forecast. And that is one of the big data questions we have for these weeks: will we see a recovery or a continuation of the kind of stagnation we had for much of 2023? We remain very data dependent.
The ECB needs to assess wage settlements before getting an orientation on monetary policy in 2024. Many wage deals will happen this month and during the spring. Do you think you will have a clear enough idea by the governing council on April 11th?
I have a range of data I want to see. We do receive the data on the latest wage settlements every week. We have a wage tracker measure that we use as an early indication of the wage dynamics. We also look at market data on wages. But the most complete dataset is in the Eurostat national accounts data. The data for the first quarter will not be available until the end of April. By our June meeting, we will have those important data. But let me emphasise, we do have other data that we will be looking at every week, because, as you say, a lot happens every month and we look at all of the data available to us.
It will take time to have a good understanding of whether the wage settlements are decelerating. We expect that 2024 will still have high wage increases, and it is important for people to recover the losses from high inflation. But the scale of that will determine the timing and the scale of rate adjustment this year.

Bloomberg 1/23/2024
European Central Bank officials who until
recently had been wary of even discussing interest-rate cuts now
look increasingly open to commencing them in June.
Read Full Report
January 04, 2024
SGH Insight
The Reserve Bank of Australia (RBA) will likely hold rates steady at its first meeting of the year when it meets next month, with prospective easing likely to lag other developed economies this year as officials try to hold the line on higher for longer rates.
With Australian inflation slowing but still well above the Bank’s 2-3% medium term target band and estimates of neutral somewhere below 4%, the cash rate is restrictive as long as the RBA holds policy at the current 4.35% rate.
There is some local excitement around the prospect that prices (mostly as a result of energy price declines) could slow to as much as 2.9% by the end of this year. That would be a full year ahead of the RBA’s own projections.
We view the Bank as unlikely to suddenly relent on its hawkish policy stance, as December’s meeting debate over holding or hiking the cash rate illustrates. It is not so hawkish that it will hike again in February as some market participants think but it remains wary enough to try to push off pricing of rate of cuts for some months yet.
Market Validation
Dow Jones 4/6/2024

The Reserve Bank of Australia moved to a more neutral
stance on interest rates Tuesday but pointedly reminded markets not to rule
out the prospect of a further interest rate increase if inflation remains
sticky.

The RBA kept the official cash rate on hold at 4.35% at the conclusion of its
first policy meeting for this year. While it said rates may rise more, the
central bank separately announced downward revisions to its inflation and
growth forecasts.

"The path of interest rates that will best ensure that inflation returns to
target in a reasonable timeframe will depend upon the data and the evolving
assessment of risks, and a further increase in interest rates cannot be ruled
out," the RBA board said in a statement.

In a press conference following the announcement, RBA Governor Michele Bullock
added that "the signs are good" about inflation but added "we've got to be
very vigilant."

The comments suggest the RBA is likely to lag the Federal Reserve and other
major central banks like the European Central Bank in moving to cut interest
rates.
Read Full Report
January 02, 2024
SGH Insight
Monday Morning Notes, 1/2/24
The Fed releases the minutes of the December FOMC meeting on Wednesday. The directionality for the Fed is clear as falling inflation is pushing it toward a rate cut. The minutes are unlikely to directly point to a March cut, but I suspect they will reveal the Fed becoming increasingly confident that inflation is on a path to price stability.
Market Validation
Bloomberg -1/3/2024
Federal Reserve policymakers agreed last month that it would be appropriate to maintain a restrictive stance “for some time,” while acknowledging they were probably at the peak rate and would begin cutting in 2024.
“Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” according to the minutes of the Dec. 12-13 Federal Open Market Committee meeting released Wednesday.
The minutes indicated increased optimism among participants about the path of inflation, noting “clear progress.” The committee expressed a willingness to cut the benchmark lending rate in 2024 should that trend continue, though they gave no indication easing could begin as soon as March, as futures traders expect.
Read Full Report
2023
December 21, 2023
SGH Insight
Naturally, the multi-year spending path agreed between the Commission and a country might be overshot from time to time. To keep track of this, the Commission will set up a “control account” for each country where it will record how much the agreed expenditure was exceeded. If the agreed path is breached by 0.3% of GDP in a single year, or 0.6% of accumulated breaches over several years, the Commission will start disciplinary steps against the country, forcing it to cut the deficit by 0.5% of GDP a year. The control account will be reset at the end of each four- or seven-year period.
This deal now goes to the European Parliament where negotiations over it will start in January. Some tweaks are possible, but the main thrust of the reforms is unlikely to be changed.
Market Validation
Bloomberg 2/12/2024
The European Union hashed out a preliminary agreement on fiscal reform that will aim to reduce debt and protect investment in key areas such as defense and the green
transition.
The political deal will introduce a gradual fiscal adjustment path for nations whose government debt exceeds 60% of gross domestic product or whose deficit is above 3% of GDP. The agreement struck in Brussels late Friday between representatives of the European Commission, the European Parliament and member states in the EU Council still needs formal approval by national.
governments and the EU assembly to become law.
Read Full Report
December 20, 2023
SGH Insight
Though the BOJ will keep its options open for the March 18-19 and April 25-26 meetings, we suspect it continues to favor the latter meeting to make its move.
In the leadup to April, look for the BOJ to use its published meeting materials to recast its language on overshooting the inflation goal and to tilt its risks assessment from focusing on downside risks to a more balanced risk outlook.

(2) The Bank of Japan (BOJ) is targeting an April 2024 exit from negative interest rates, with a risk that the decision is brought forward to March.
A January move is off the table. Instead, the Bank will use its January 22-23 forecast round meeting to signal via updated forecasts that its inflation goal is in better view and that it is closer to a live meeting.

Market Validation
Reuters 12/22/23

Bank of Japan board members were divided on how to communicate a tweak to yield curve control, with some showing tolerance for explaining the move as laying the groundwork for an exit from ultra-loose policy, minutes of their October meeting showed.

One member said it was necessary to clearly indicate that the measure was not intended as preparing for a future end to YCC and negative interest rate policy, the minutes showed on Friday.

But another member said the BOJ should not strongly deny the chance that the tweak to YCC could lead to an end to the current stimulus programme, according to the minutes.

"With a future exit in mind, it was important for the BOJ to provide communication to markets that prepare them" for when Japanese interest rates turn positive, one member was quoted as saying.

The debate highlights a growing awareness within the BOJ of the chance of phasing out its complex framework consisting of YCC, huge asset buying and a negative short-term rate target.

(2) Bloomberg 1/4/2024
Bank of Japan board members discussed the
potential timing of the nation’s first interest rate hike since
2007 during their meeting last week, with several members
indicating they see no rush to make the move.
“It would not be too late even if the bank makes a decision
after it sees developments in labor-management wage negotiations
next spring,” one of nine board members said at the December
18-19 gathering. There is only a small risk of underlying
inflation overshooting its 2% target by a significant degree,
the same member said.
Another voiced the opinion that there is now “sufficient
leeway” to determine whether a virtuous wage-inflation cycle has
been achieved after the bank enhanced the flexibility of its
yield curve control mechanism in October.
Those opinions may help cool market speculation as to
whether policymakers will end the world’s last negative rate
regime at their January meeting.
The yen weakened and yields fell after the release of the
summary, an indication that investors’ initial impression was to
nudge back their expectations of an imminent rate hike


Read Full Report
December 18, 2023
SGH Insight
Monday Morning Notes, 12/18/23
Reconsider the growth numbers as the immediate consequence of a disinflationary shock. With inflation collapsing, growth receives a mechanical boost, and this appears to have begun in the third quarter. Inflation effectively returned to a 2% annualized rate in June on a monthly basis and has held there, and we were so busy looking at three-, six-, and twelve-month averages it just slipped right past us. Inflation has simply collapsed:
Market Validation
Forbes 12/22
Inflation has officially fallen to the critical 2% level, according to a measure released Friday morning by the Bureau of Economic Analysis, adding fuel to the historic equity market rally heading into year’s end.
The core personal consumption expenditures price index fell to 1.9% in November on a six-month annualized basis.
The core PCE index is the Federal Reserve’s favored inflation metric as it directly tracks how much Americans spend on less volatile goods and services.
Read Full Report
December 13, 2023
SGH Insight
Quick Note on CPI
Core CPI inflation came in as expected at 0.3% for November:

There is less momentum here than it appears if we strip out shelter and used vehicles:

But CPI inflation is not the Fed’s target, PCE inflation is the Fed’s target. It’s the read-through from CPI to PCE that is important, and forecasts for November core-PCE inflation are coming in below 0.2%, and in some cases below 0.1%, post-CPI but albeit ahead of tomorrow’s PPI release.
Carefully consider the implications of soft core-PCE numbers. If, as seems reasonable, the next two core-PCE inflation readings average 0.15%, this will be the picture at the time of the January FOMC meeting:

By January, it is very possible, if not very likely, that inflation would have been effectively at target in six of the past seven months.
Market Validation
Wall Street Journal 13/13/2023
During a talk at Spelman College earlier this month, Fed Chair Jerome Powell was asked what he does for fun. "For me, a really big party--this is as fun as it gets--is a really good inflation report," he replied.
Hire the band. It's time for a party.
The Fed's preferred inflation measure likely slowed considerably in November, putting inflation on track to hit the central bank's target over the past six months.
The Labor Department on Tuesday reported that consumer prices rose 0.3% in November from October. The Fed, however, uses a separate inflation gauge--the personal-consumption-expenditures price index, produced by the Commerce Department--to measure progress against its 2% inflation target. Because of differences in how the gauges are constructed, there's often a so-called wedge between the PCE price index and the Labor Department's consumer-price index.
While the November PCE inflation reading won't be released until later this month, inflation forecasters can come up with reliable estimates for where it's likely to go based on the relevant inputs from the CPI and the PPI.
Data released Wednesday suggest that core prices, which excludes volatile food and energy items, are likely to have increased by just 0.06% in November in the PCE index, according to economists at UBS. (Omair Sharif, of the firm Inflation Insights, and economists at JPMorgan Chase estimate core PCE inflation was 0.08% in November).
Moreover, downward revisions to prior months could lower 12-month core inflation in November to 3.1%, according to UBS. Core inflation was 3.5% for the 12 months ending October.
Most of the improvement in inflation has occurred since May. As a result, core inflation in November likely was 1.9% at a six-month annualized rate. The upshot, per UBS, is that Fed Chair Jerome Powell likely learned during this morning's Fed meeting that inflation is now on track to have fallen slightly below the Fed's target over the last six months.
Read Full Report
December 11, 2023
SGH Insight
Monday Morning Notes, 12/11/23
If You Don’t Have Time This Morning
In the beginning of November we took an aggressive position is establishing a baseline scenario that the Fed would begin cutting rates in March 2024 for a total of 100bp in 2024. The logic of that scenario followed directly from Fed signaling, including from Chair Powell, that low inflation alone was enough to cut rates because the Fed needed to adjust policy to prevent the real policy rate from rising and overtightening monetary conditions. With inflation falling faster than expected, the Fed would pull forward the timing of rate cuts to ensure a soft-landing for the economy, in practice turning its attention to the employment mandate to prevent an unnecessary rise in unemployment. Given policy lags, if Powell was going to make a play for the soft-landing, which we believe he will attempt, the Fed would need to cut rates ahead of any significant slowing in the labor market. The longer rates stay high, the higher the chance of a hard landing, and the Fed would then need to cut rates more aggressively. A soft path for the labor markets or growth is not necessary for a rate cut but increases the probability that the Fed cuts rates in March and for a total of more than 100bp cuts in 2024.
This remains our baseline scenario.

Market Validation:
FOMC Press Conference 12/13/2023
>> STEVE LIESMAN: Steve Liesman, CNBC. Happy holidays, Chairman. Fed governor Chris Waller said if inflation continues to fall, then the Fed in the next several months could be cutting interest rates. I wonder if you could comment on whether you agree with Fed Governor Waller on that, that the Fed would become more restrictive if it didn't cut rates if inflation fell? Thank you, sir. >> JEROME POWELL: Of course, I don't comment on any other officials, even those who work at the Fed. But I'll try to answer your question more broadly. So, the way we're looking at it is really this. When we started out, right, we said, the first question is how fast to move -- and we moved very fast. The second question is, you know, really how high to raise the policy rate. And that's really the question that we're still on here. We're very focused on that, as I mentioned. People generally think that we're at or near that and think it's not likely that we will hike, although they don't take that possibility off the table. When you get to that question, and that's your answer, there's a natural -- naturally, it begins to be the next question, which is when it will become appropriate to begin dialing back the amount of policy restraint that's in place. So, that's really the next question. And that's what people are thinking about and talking about. And I would just say this. We are seeing strong growth that appears to be moderating. We're seeing a labor market that is coming back into balance by so many measures. And we're seeing inflation making real progress. These are the things we've been wanting to see. We can't know -- we still have a ways to go. No one is declaring victory. That would be premature. And we can't be guaranteed of this progress. So, we're moving carefully in making that assessment of whether we need to do more or not. And that's really the question that we're on. But of course, the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.

SGH Insight
Monday Morning Notes, 12/11/23

We believe the dots will show the median FOMC participant expects the Fed will cut rates 75bp in 2024. In anticipation of client questions, we attached probabilities to three different scenarios for the 2024 dots:

Market Validation
Bloomberg 12/13/2023
The Treasury market rallied and swaps traders dialed up bets on interest-rate cuts after the Federal Reserve opted to hold rates steady at the conclusion of its policy meeting Wednesday but surprised markets with a more aggressive forecast for monetary easing in 2024.
Yields tumbled, with the policy-sensitive two-year note’s plunging as much as 23 basis points to just under 4.50%. The yield on the 10-year note fell more than 14 basis points to a low of 4.06%. Fed swaps show about 133 basis points of reductions next year, up from 113 basis points prior to the central bank’s decision.
“The Fed is definitely more in easing mode than people were projecting. This is definitely not hawkish,” said Andrew Brenner, head of international fixed income at Natalliance Securities LLC. “They upped the number of rate cuts in 2024 to three — a lot of people were thinking two,” said Brenner, adding that Fed Chair Jay Powell might look to portray the Fed’s decision-making as more hawkish during his upcoming press conference.

SGH Insight
Monday Morning Notes, 12/11/23

At the press conference, Powell will continue to move the ball forward toward declaring the risk to the outlook as balanced but fall short of the mark. Given the normalization in the labor market, the increased confidence that third quarter growth was a fluke, and the general trend of inflation, the risks are clearly more balanced. The dovish risk here, and in the statement, is that Powell acknowledges that rates have been sufficiently restrictive since July and given that the SEP will show the Fed expects the next move will be a rate cut, that the risks are now balanced.

Market Validation
>> MIKE McKEE: Bloomberg Television Radio. Mr. Chairman, you were behind the curve in raising rates to fight inflation, and you said earlier, the full effects of our tightening cycle have not yet been felt. How will you decide when to cut rates, and how will you ensure you're not behind the curve there? >> JEROME POWELL: So, we're aware of the risk that we would hang on too long, you know. We know that that's a risk, and we're very focused on not making that mistake. And we do regard the two -- you know, we've come back into a better balance between the risk of overdoing it and the risk of underdoing it. Not only that, we were able to focus hard on the price stability mandate, and we're getting back to the point where -- which is what you do when you're very far from one of them, one of the two mandates -- you're getting now back to the point where both mandates are important, and they're more in balance, too. So, I think we'll be very much keeping that in mind as we make policy going forward.



Read Full Report
December 07, 2023
SGH Insight
On a final note, there is a good deal of interest as always on the GDP target for 2024 that will be set at the upcoming Central Economic Work Conference later this month. Our expectation is that Beijing will aim for an “appropriate” economic growth target of around 5% for next year.

(2) Looking ahead at economic releases next week, officials in Beijing appear to be generally in line with market expectations for a 5.7%, or perhaps even higher, year-on-year increase in industrial production in November from last month’s 4.6%. But we suspect the consensus forecasts as published by Bloomberg of a 12.5% year-on-year increase in November retail sales may be on the optimistic side.
Market Validation
Bloomberg 12/12/2023
China’s leaders started the annual closed-door Central Economic Work Conference on Monday to discuss economic targets and map out stimulus plans for 2024, Reuters reports, citing four people familiar with the matter.
• Meeting likely to end on Tuesday, Reuters adds
• Government advisers told Reuters they would recommend economic growth targets for 2024 ranging from 4.5% to 5.5%, with the majority favoring a target of around 5%

MT Newswires 12/15/2023
The value of China’s retail sales, the main barometer of consumption, rose 10.1% year over year in November to 4.25 trillion yuan, faster than the 7.6% jump in October, according to data from the National Bureau of Statistics on Friday.

The latest rate of expansion, however, fell short of the market’s forecast for a 12.5% increase, according to a Reuters poll.


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December 05, 2023
SGH Insight
With Governor Tiff Macklem having all but declared the peak in the Bank of Canada’s (BOC) hiking cycle, this week’s meeting will hold rates at 5% and likely pivot to conditional dovish language that suggests the central bank will ease rates early next year.
The Bank’s efforts now are focused on trying to maintain a “higher for longer” policy strategy that extends through the turn of the year before it shifts to signaling rate cuts.
For this week’s meeting, BOC staff have likely crafted language options for the post meeting statement that acknowledge the aggressive campaign of higher rates are working even as the central bank reiterates its resolve to seeing inflation back to target.
Though this meeting’s message will continue to reiterate the central bank’s willingness to raise rates again “if high inflation persists,” the Bank will note that it is patient in looking for additional confirmation that tells it the inflation job is done.
Market Validation
Bloomberg 12/6/23
The Bank of Canada held interest rates steady for a third consecutive meeting, acknowledging a stalled economy while keeping the door open to further hikes as they watch for more progress on slowing inflation.
Policymakers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at 5% on Wednesday, the highest level in 22 years. The pause was expected by markets and by economists in a Bloomberg survey.
Officials say recent data suggest the economy is no longer in “excess demand” and their hiking campaign is dampening spending and price pressures. They eliminated a line from the October decision that said inflationary risks have increased, but said they’re prepared to raise borrowing costs again if necessary.
“Governing council is still concerned about the risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the bank said, adding that they want to see “further and sustained easing in core inflation.”
The more neutral language in the statement suggests policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, officials will want to see more progress on core inflation, which strips out the effect of more volatile items, before declaring victory.
Read Full Report
December 04, 2023
SGH Insight
Monday Morning Notes, 12/4/23
If You Don’t Have Time This Morning
The Fed is on a path to a March rate cut. All the pieces are there, the Fed just needs to put them together. It’s a long way off, and I have high confidence the data will unfold in a way that allows for the Fed to cut by then. I don’t know easing at the March meeting will be sufficient to stave off a hard landing; real rates are very high if, as it appears, inflation has come down faster than the Fed expected. I am beginning to suspect that the anecdotal labor market reports tell us that a soft-landing requires the Fed to cut rates by January, but for now I think the Fed needs to see some hard-landing type of data to pull the cut into January.
Recent Data and Events
The PCE inflation numbers were last week’s data highlight.

For all intents and purposes, the Fed has restored price stability. There may be some bumps in the road over the next few months, but they won’t change the underlying story now that it looks like the third quarter growth surge didn’t have legs. If inflation is tracking close to 2% in the last half of 2023, it will be below 2% in the last half of 2024 if the Fed holds policy rates at current levels much longer.

Market Validation
WSJ -12/13/2023

By: Nick Timiraos

@NickTimiraos

Based on the Nov CPI and PPI, headline PCE inflation likely declined last month. Core PCE inflation is projected to have been a very mild 0.06% in Nov. This could lower the 12-month core PCE index to 3.1%. The 6-month annualized rate would fall to 1.9%, below the Fed's target.


Bloomberg 12/13/2023

By: Matthew B

@boes_

This turned out to be the story of Q4. All of the categories in today's PPI data that flow into the Fed's preferred PCE metric came in really soft. Per
@fcastofthemonth
, after today's report, "Q4/Q4 core PCE will likely print 3.3% versus the Fed's September projection of 3.7%"
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November 27, 2023
SGH Insight
Upcoming Data and Events

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

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

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

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



Market Validation
Bloomberg 11/29/23
• Forecast range 680k-773k from 50 estimates, median 721k
• New home sales fell 40k in Oct. from prior month, the Census Bureau said

...Governor Christopher J. Waller 11/27/23
At the American Enterprise Institute, Washington, D.C.
I am encouraged by what we have learned in the past few weeks—something appears to be giving, and it's the pace of the economy. Data for October indicated an easing in economic activity, and forecasts for the fourth quarter show the kind of moderation that is more in keeping with progress on lowering inflation. In addition, after watching core PCE inflation increase in September from its summer lows, the latest data showed inflation moving in the right direction in October, albeit gradually.
While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained. But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability. Hopefully, the data we receive over the next couple of months will help answer that question.

...Governor Christopher J. Waller 11/27/23
At the American Enterprise Institute, Washington, D.C.

There has also been a lot of discussion about the overall easing of financial conditions this month, as reflected in market interest rates and the prices of other assets. To put this easing into perspective, from July to the end of October, the yield on the ten-year Treasury increased about 1 percentage point. Since the FOMC's last meeting, which ended November 1, the ten-year rate has fallen six tenths of a percentage point. Long-term interest rates are still higher than they were before the middle of the year, and overall financial conditions are tighter, which should be putting downward pressure on household and business spending. But the recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job.

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