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.

September 12, 2023
SGH Insight
Markets are still favoring a pause and are pricing a European Central Bank rate hike this week at less than even odds.

But we are switching our expectations for the ECB interest rate decision this Thursday from a pause to a 25-basis points hike.

The more we re-run in our minds what we have heard from ECB officials, wargame their tactical choices, and analyze the data and risk management dynamics that will be debated at the Governing Council meetings tomorrow and Thursday, the less comfortable we are with our briefly held, and highly unusual for us dovish call that they will pause at this meeting.

The forecasts, as characterized by ECB Vice President Luis de Guindos, are likely to show a lower growth trajectory than expected in June, and an inflation outlook that is “more or less” as expected in June.

Putting a finer point on that inflation outlook, analysts expect that is likely to translate into a slightly higher figure in the near term, and perhaps a small tweak lower to the 2.2% outlook for 2025 due to slower economic activity. But even a small revision to 2025 inflation, if it does show up in the numbers, will be insufficient progress for ECB hawks, and the leadership, to hang their collective hats on.
Market Validation
Bloomberg 9/13/23

Traders ramped up wagers that the European
Central Bank will deliver a quarter-point interest-rate hike
amid growing concerns that the region faces persistently high

Money markets now show a 70% chance that the central bank
will raise rates on Thursday, compared with a 20% probability
earlier this month.

The Times 9/14/2023
The European Central Bank (ECB) has increased interest rates for the tenth time in a row to the highest since the monetary authority was created more than two decades ago.
Rates in the eurozone were increased by 0.25 percentage points to 4 per cent in a move that surprised analysts, who thought the central bank would leave rates unchanged, although the call was tight heading into the meeting.
Read Full Report
August 14, 2023
SGH Insight
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting.

....If You Don’t Have Time This Morning
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting. That said, I suspect the Fed also worries that policy is getting too tight, and hence we get mixed messaging that “maybe we need another hike, but rate cuts will be on the table in 2024.” The Fed can’t let policy become too tight if it wants to stick the soft landing, but I don’t think it can change its reaction function without letting inflation expectations rise. I don’t think sticking the soft landing will be as easy as the consensus increasingly appears to suggest.
Market Validation
Bloomberg 8/15/2023
US retail sales rose in July by more than forecast, suggesting consumers still have the wherewithal to sustain the economic expansion.
The value of retail purchases increased 0.7% in July after upward revisions in the prior two months, Commerce Department data showed Tuesday. The upbeat figure reflected increases in a variety of sales categories, including sporting goods stores, clothing outlets and restaurants and bars.

...Bloomberg 8/16/2023
Federal Reserve officials at their last meeting largely remained concerned that inflation would fail to recede and suggested they may continue raising interest rates.
“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes of the US central bank’s July 25-26 policy meeting published Wednesday in Washington.
“Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate,” the Fed said.
“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening,” the minutes stated.

The latest data illustrate how American households — supported by a strong labor market and rising wages — are so far buttressing the economy against recession in the face of high interest rates. Too much strength, however, could force the Federal Reserve to pursue more aggressive policy should inflationary pressures prove sticky.
Read Full Report
July 24, 2023
SGH Insight
As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.

The State Council has solicited ideas from megacities such as Shanghai and Beijing. As both cities reported double-digit growth in real estate investment and new home sales in H1, the State Council will not adopt a national real estate stimulus policy, but will rather support first, second, and third tier city efforts to improve city-specific policies according to individual situations.

In order to support the real estate sector in super-large and mega cities, the State Council also just ordered all 21 of these cities to promote the construction of both “Emergency and Dual Use” facilities in H2 2023, recreational facilities that can be used also in case of pandemic and emergencies. The State Council also ordered all 21 super-large and mega cities with a population greater than 5 million to speed up the transformation of the lower income “cities within cities,” to ensure the stability of the national real estate industry in H2 2023...

...Going straight to the numbers, fiscal spending for H2 was bumped up from the original budget and is targeted to increase by just under 7%, 6.9% to be precise, from H1 spending.

In H1 2023 China’s fiscal spending rose 3.9% over the same period last year, to 13.39 trillion yuan. This 13.39 trillion-yuan figure, comprised of 1.67 trillion in central government spending and 11.72 in local government spending, represents 48.7% of the total 27.51 trillion yuan allocated for 2023, leaving 14.12 trillion yuan for H2 spending.

Thursday’s CFEAC meeting approved an additional allocation of 200 billion yuan to H2 2023 spending, to bring the total spending for H2 to 14.32 trillion yuan, about 7% higher than fiscal expenditures for H1. The extra 200 billion yuan also symbolically bumps year-on-year comps by more than 1 trillion above the 13.17 trillion that was spent in H2 of 2022, by 1.15 trillion to be precise.

The CFEAC predicts that these levels of spending will pull China’s H2 GDP growth into the 5.3-5.5% range.

The additional 200 billion yuan will be allocated as follows: 11.5 billion to subsidize targeted semiconductor and artificial intelligence enterprises, 52.5 billion to advance the “transformation of villages in super-large and mega cities,” essentially urban slums, 55 billion to spur the private economy, and 81 billion towards stimulating consumption. Local governments are urged to encourage more nongovernmental investments, including in integrated circuits, new materials, and next-generation information technology.

The CFEAC meeting stressed that fiscal policy should also be used to extend the duration of temporary policies such as value-added tax relief for micro and small-scale taxpayers.

Premier Li Qiang pledged an additional 46.5 billion yuan towards meeting the country’s “Made in China 2025” high tech objectives, of which 35 billion yuan will come from the secretive “Premier Fund.”

As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.

Market Validation
Bloomberg 7/28/23

China Vice Premier He Lifeng urged the country’s mega cities to actively advance the urban villages redevelopment in an effort to boost domestic demand, Xinhua News Agency reports citing a conference held in Beijing on Friday.

• He called for improving the living conditions of urban villages residents and to strengthen real estate structure
• He also noted the difficulties for urban villages redevelopment at the moment and urged to explore new ideas to solve complex issues like use of funds, land resumption and how to resettle people and industries

MT Newswires 7/25/23

Chinese Shares Rebound on Beijing's Pledge to Support Real

Chinese shares staged a recovery on Tuesday as Chinese top leaders pledged to provide further assistance to the property market, while also focusing on boosting consumer spending and tackling local government debt during a Politburo meeting.

The Shanghai Composite Index, the main gauge of Chinese stocks, rose 2.1%, or 67.36 points, to 3,231.52, marking an end to a three-day downturn. The Shenzhen Component Index climbed 1.4%, or 148.99 yuan, at 11,021.29, after enduring a seven-day rout.

The positive shift in sentiment followed the assurance from Chinese politicians to implement macroeconomic adjustments, strengthen domestic demand, and promptly optimize property policies.

During the meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee, emphasis was placed on maintaining a proactive fiscal policy and a prudent monetary policy. Additionally, measures were discussed to extend, optimize, and ensure the implementation of tax and fee reductions, Xinhua News Agency reported.

The leaders also underscored the importance of promoting stable and sustainable development in the real estate market through concrete efforts.
Read Full Report
July 14, 2023
SGH Insight
...Conditions are falling into place for the Bank of Japan (BOJ) to tweak Yield Curve Control (YCC) again as the central bank takes its first tangible steps toward exiting a quarter-of-a-century-old easy policy equilibrium.

Since he landed back at the Bank of Japan (BOJ) in April as governor, Kazuo Ueda has been dropping clues about conditions under which he would change Japan’s monetary policy settings.

While at its policy meeting last month, Ueda and his BOJ colleagues held fast to their position that preconditions for changing interest rates had not yet been met, they have been less clear about what might prompt the BOJ to again widen the control cap on 10-year Japanese government bonds (JGBs).

The Bank reiterated that rates would stay put until inflation is stably and sustainably at 2%, and accompanied by wage rises.

Its July 27-28 forecast round will likely raise the fiscal 2023 (Apr-Mar) inflation projection above 2% from 1.8% in the April round, yet continue to show inflation slowing from fiscal 2024.

On YCC, when BOJ Deputy Governor Shinichi Uchida was asked about the possibility of a tweak, he said an adjustment would seek to maintain “easy monetary conditions, while taking into account (the) impact on financial intermediation and market function.” By failing to rule out the prospect of a tweak, Uchida in fact fueled speculation it was in the offing this month.

We have been warning that the BOJ might look to tweak its YCC policy again this meeting before it abandons the program later this year(see SGH 6/13/23; “BOJ: Ueda Games Exit Timing”)...

...While at its policy meeting last month, Ueda and his BOJ colleagues held fast to their position that preconditions for changing interest rates had not yet been met, they have been less clear about what might prompt the BOJ to again widen the control cap on 10-year Japanese government bonds (JGBs).
The Bank reiterated that rates would stay put until inflation is stably and sustainably at 2%, and accompanied by wage rises.
Its July 27-28 forecast round will likely raise the fiscal 2023 (Apr-Mar) inflation projection above 2% from 1.8% in the April round, yet continue to show inflation slowing from fiscal 2024.
Market Validation
Bloomberg 7/28/23

The central bank kept the target for 10-year yields at 0.5%
but said it would actively buy bonds to maintain a 1% hard cap.
The central bank upgraded its overall assessment for the
economy, and signaled upside risks for prices for this fiscal
year, forecasting core inflation will be 2.5%
* However, the main price trend hasn’t reached the 2% target
(core CPI is forecast to drop to 1.9% next year and 1.6% the
year after), so there’s still a long way to go to raising the
negative interest rate, according to Ueda.

Bloomberg 7/24/2023

Bank of Japan officials meeting this week
will probably consider a sharp increase to their inflation
forecast for this fiscal year, while also discussing concerns
about whether the upward trajectory is sustainable, according to
people familiar with the matter.
The central bank’s policy board is likely to mull raising
the consumer inflation projection to around 2.5% for the year
ending in March, up from 1.8% in the April estimate, according
to the people. They expect projections for the following fiscal
years to be largely unchanged to reflect a lack of confidence
the bank can achieve its 2% inflation goal in a stable manner,
the people said.
Read Full Report
June 01, 2023
SGH Insight
At the latest State Council Executive Meeting, Premier Li Qiang stated that the guiding role of government investment policy and incentives should be to effectively stimulate private investment. He called for a raft of policies to boost the healthy development of the real estate sector to be implemented, while boosting big-ticket consumption like automobiles and home appliances. Supportive policies including tax and fee cuts are still needed to extend the services sector recovery.
Market Validation
Bloomberg 6/2/23

China is working on a new basket of measures
to support the property market after existing policies failed to
sustain a rebound in the ailing sector, according to people
familiar with the matter.
Regulators are considering reducing the down payment in
some non-core neighborhoods of major cities, lowering agent
commissions on transactions, and further relaxing restrictions
for residential purchases under the guidance of the State
Council, the people said, asking not to be named because the
matter is private.
The government may also refine and extend some policies
laid out in the sweeping 16-point rescue package it rolled out
last year, the people added. The plans have yet to be finalized
and may be subject to change, according to the people.
Read Full Report
April 18, 2023
SGH Insight
With Japan’s wages continuing to lag prices and core CPI likely to slow to 1.6% over the next year, newly minted Bank of Japan (BOJ) governor Kazuo Ueda will be looking beyond his first meeting on April 27-28 to change policy.

The upcoming forecast round by the BOJ will feature fresh quarterly growth and inflation forecasts extending through fiscal 2025.The update may plot a path back to the 2% goal in 2025.

The BOJ expects Japan’s current 3% inflation rate to slow to below its 2% target in the latter half of this coming fiscal year.

CPI data due out April 21 is expected to show core inflation around 3%, little changed from February and with global growth set to pick up after a period of slowdown, and Japan’s wages to continue to rise.

Against that backdrop Ueda is eying an appropriate time to make a move on exiting the BOJ’s yield curve operations.

The sequence will likely be a tweak to yield curve control (YCC) in June as the technocrats simultaneously work on a framework that allows them to review, and then exit YCC, altogether thereafter.

The BOJ’s rates outlook is an entirely different contemplation, and we don’t see the BOJ raising its official rate this year.
Market Validation
Bloomberg 4/28/23

The yen fell and government bond futures
reversed losses after the Bank of Japan said it would maintain
its ultra-loose monetary policy but announced a review, in its
first meeting under new governor Kazuo Ueda.
The yen weakened 0.7% against the dollar to 134.90, while
government bond futures reversed losses to trade higher.
Japanese bank shares fell. The central bank will keep its 0.5%
ceiling for 10-year government bond yields and maintain its
short-term policy rate at minus 0.1%, it said.
The BOJ will conduct a “broad-perspective review” of
policy, with a planned time frame of around one to one-and-a-
half years. It scrapped its guidance on future interest rate

Read Full Report
April 03, 2023
SGH Insight

Von der Leyen, who represents the 27-nation EU in all trade matters, will go a step further on this trip than repeating the West’s warnings to Beijing not to deliver weapons to Russia. She will say that how China positions itself regarding Russia’s invasion of Ukraine will determine EU-China relations in the future.

Intended to make clear that China will have to strike a balance between its drive to enhance its role as a global superpower on the back of an increasingly dependent Russia, while keeping key economic partners like Europe close, that message has been consulted at least with Paris and Berlin, if not more capitals, according to sources in Brussels.

With daily trade between the EU and China rising to 2.3 billion euros in 2022 from 1.9 billion in 2021, both sides stand to lose a lot if trade falls victim to political tensions.

The EU, reeling from its bad experience with excessive dependence on Russian fossil fuels, is already talking about “de-risking” in its relationship with China, while admitting a full “de-coupling” is simply not possible because of the level of integration between the two economies.

The “de-risking” is to take the form of diversification away from China in various sectors where Beijing has near monopoly in dealing with Europe, including solar panels, rare earths, magnesium, and lithium. Europe will be looking to find alternative suppliers lest it be left helplessly stranded in the future should China decide to cut it off to exert pressure, like it did with rare earths sales to Japan a decade ago over tensions in the East China Sea.
Market Validation
Bloomberg 4/4/2023
Ursula von der Leyen, president of the European Commission, is urging China to play a “constructive”
role in bringing peace to Ukraine, she says in an interview with the Financial Times.
*EU “concerned” by China’s position of friendship with Russia
** Beijing should use its ties with Moscow to rein in war
* “China is in a position to influence Russia in a constructive way, and therefore they have a responsibility”
* Stressed the importance of maintaining open diplomatic channels with Beijing
* When asked about von der Leyen’s remarks at a regular press briefing Tuesday in Beijing, Foreign Ministry spokeswoman Mao Ning said that “China is not a party to the Ukraine crisis.”
* She added that China hoped the EU “will display strategic independence and political wisdom, and take concrete steps towards lasting peace in Europe.”
Read Full Report
February 14, 2023
SGH Insight
We think the Fed will need to raise the terminal rate, and market participants increasingly think the same. Markets have priced in a roughly 50% chance of a June rate hike. This helps the Fed in that it puts upward pressure on long rates, but only if the Fed follows the markets. We remind readers that while the Fed acknowledges it could continue to hike rates, it has not yet concluded that it needs to guide the terminal rate higher. I think the Fed does not want to raise rates past 5.125%, it leans toward the idea that “longer for higher” will be good enough and sees the SEP inflation forecast as “aspirational” in that, although unsaid, it thinks it can settle for an optimal control-type outcome with ongoing elevated inflation (see our Monday 2/13/22 note). All that said, we think stronger growth will eventually force the Fed’s hand, and we look forward to this week’s numbers on housing and retail sales to see if they will fall in line with our expectations.

Market Validation
Bloomberg 2/15/ 23

US retail sales rose in January by the most in nearly two years, signaling robust consumer demand that could bolster the Federal Reserve’s resolve to keep raising interest rates in the face of persistent inflation.
The value of overall retail purchases increased 3% in a broad advance — the most since March 2021 — after a 1.1% drop in the prior month, Commerce Department data showed Wednesday. Excluding gasoline and autos, retail sales rose 2.6%, also the biggest increase in nearly two years. The figures aren’t adjusted for inflation.
The median estimate in a Bloomberg survey of economists called for a 2% advance in total retail sales.
All 13 retail categories rose last month, led by motor vehicles, furniture and restaurants. The report showed vehicle sales climbed 5.9% in January. The value of sales at gasoline stations were unchanged.
The report showed US consumers got off to a good start in 2023, rebounding from a spending slowdown at the end of last year. A resilient labor market marked by historically low unemployment and solid wage gains has allowed many Americans to keep spending on goods and services even as borrowing costs rise and inflation remains elevated.

Read Full Report
February 13, 2023
SGH Insight
Watching inflation breakevens rise this week primed me to think along these lines. For instance, the two-year breakeven is up about 70bp since January 19, with about 40bp of that coming after the January employment report:
If the Fed is really pursuing the 2.7% core-PCE number in 2025 estimated by the Cleveland Fed paper, breakevens have room to move higher after adjusting for the average difference of 30bp or so between PCE and CPI inflation, and even higher after adjusting for a lower path of unemployment. And remember the Fed now signals that it doesn’t need to see unemployment rise. Indeed, as noted above the Fed began looking for the pause in October 2022 when doves first identified 4.625% as the stopping point. Since then, unemployment has fallen from 3.7% to 3.4% and the Fed has yet to guide market expectations higher than they were in October. That’s what we call “revealed preference.” Regardless of this paper, I am watching to see if inflation breakevens generally climb higher in a stronger growth environment until the Fed meaningfully guides the terminal rate higher.

Market Validation
Bloomberg 2/21/23
Treasuries extended their slump Tuesday, with key benchmark yields pushing to new highs for the year amid growing sentiment that the Federal Reserve’s tightening is far from over.
Yields on both 5- and 10-year Treasury notes cracked new peaks for 2023, with the shorter tenor carving out fresh ground above the 4% mark. Across all maturities yields were up at least 10 basis points. Swaps showed firming conviction for higher Fed rates, with the market indicating three more 25-basis point hikes coming at each of the central bank’s policy gatherings through June.
The 10-year benchmark rate rose as much as 13 basis points to around 3.95%, spurred higher in US trading as purchasing managers index readings for services and manufacturing came in stronger than expected. Two-year breakeven rates — a gauge of inflation expectations — have advanced to the highest since November and are threatening to breach the psychological level of 3%.
Read Full Report
February 06, 2023
SGH Insight
We expect another 25bp rate hike in March and an upward revision to the SEP dots. The SEP dots will move up a minimum of 25bp, which means rate hikes in May and June and a minimum terminal rate of 5.375%. That said, if my take on this data is correct, the Fed will eventually need to compensate for downshifting to 25bp rate hikes with a meaningfully higher terminal rate to bring financial conditions to an appropriately tight level. I don’t think limping the terminal rate up 25bp at a time will tighten financial conditions sufficiently. I think the terminal rate needs to be revised up by 75bp for the Fed to get a handle on the evolving situation, but the Fed isn’t anywhere near there yet.

Markets participants still price in rate cuts beginning in July. That pricing feels very vulnerable after last week. If the economy is re-accelerating, the Fed will still be hiking in July, and rate cuts won’t happen until 2024. That said, I sympathize with market participants here. The Fed has a credibility problem after it tipped its hand last week. It’s making a run for the soft landing when the unemployment rate is still falling. Can we really believe it won’t turn course to protect jobs the instant the unemployment rate starts to rise?

Market Validation
Bloomberg - 2/6/23
German and Italian notes erased all their gains that followed last week’s European Central Bank and Federal Reserve decisions, when the market latched on to what appeared to be a dovish tilt. Treasuries also fell as traders ramped up their bets on future tightening, fully pricing the upper bound of the Fed Funds target rate reaching 5.25% for the first time since November. It currently sits at 4.75%.
Read Full Report
February 06, 2023
SGH Insight
As to Beijing’s immediate response, a senior government official takes the strident position that:

The Chinese side will not allow Blinken to visit China until the US side gives a reasonable and detailed explanation for the shooting down of the Chinese airship, compensates, and returns the airship debris to China. US Treasury Secretary Janet Yellen’s planned visit to China in April will [otherwise] also fall through.

Washington is clearly not going to return the pieces or compensate Beijing for shooting down a spy balloon, similar to a balloon which has been reportedly sighted over Latin America, and surveillance balloons which it appears have been sighted in the past over Japan as well.
Market Validation
Bloomberg 2/ 8/ 23

A prominent Chinese diplomat said the US should return debris from the balloon it shot down because it is the Asian nation’s property, putting the decision over the aircraft’s remains in Washington’s hands.
“If you pick up something on the street, you should return it to the owner, if you know who the owner is,” said Lu Shaye, China’s ambassador to France. Beijing maintains that the aircraft was a civilian climate research vehicle, though the US says it was for surveillance.

“If the Americans don’t want to return it, that’s their decision. This demonstrates their dishonesty,” Lu said in an interview with French news channel LCI on Monday, according to a transcript posted on the Chinese embassy’s official WeChat account on Wednesday.
Read Full Report
February 06, 2023
SGH Insight
We expect another 25bp rate hike in March and an upward revision to the SEP dots. The SEP dots will move up a minimum of 25bp, which means rate hikes in May and June and a minimum terminal rate of 5.375%. That said, if my take on this data is correct, the Fed will eventually need to compensate for downshifting to 25bp rate hikes with a meaningfully higher terminal rate to bring financial conditions to an appropriately tight level. I don’t think limping the terminal rate up 25bp at a time will tighten financial conditions sufficiently. I think the terminal rate needs to be revised up by 75bp for the Fed to get a handle on the evolving situation, but the Fed isn’t anywhere near there yet.

Market Validation
Bloomberg 2/16/23
Federal Reserve Bank of Cleveland President Loretta Mester said she saw a compelling case for rolling out another 50 basis point hike earlier this month and the US central bank has to be prepared to move interest rates higher if inflation remains stubbornly high.
“At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time,” Mester said Thursday in remarks prepared for an event organized by the Global Interdependence Center and the University of South Florida Sarasota-Manatee. “Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50 basis-point increase, which would have brought the top of the target range to 5%.”
Read Full Report
February 02, 2023
SGH Insight
Market Participants Moving Past the Fed

The Fed stepped down to 25bp rate hikes today as expected and signaled more to come. We think a March rate hike is a virtual lock and odds of a May hike underpriced by market participants. Still, we acknowledge that a May rate hike is a bet on a reacceleration of economic activity. As we expected, however, Powell did not try to guide the terminal rate higher, and if the Fed isn’t ready to move in that direction, it needs to just accept an easing of financial conditions.
Market Validation
Bloomberg 2/3/23

Treasuries Extend Slide After ISM Services Data Beats Estimate

Treasury yields peak at highest levels of the session across tenors after January ISM services beats estimate. Yields across the front end and belly of the curve rise as much as 17bp on the session, while the 2s10s and 5s30s spreads re-flatten, back to near the lows of the day.

US 10-year yields around 3.53% and cheaper by 13.5bp on the day with 2s10s, 5s30s spreads flatter by 2.5bp and 7bp versus Thursday’s close Fed-dated OIS is pricing in around 24bp of rate hikes at the March policy meeting and a combined 39bp over the next two meetings, up from the 32bp priced as of Thursday’s close

WSJ 2/3/23

Traders See Higher Rates After Booming Jobs Report

Bettors piled in to wager that the Federal Reserve would have to take interest rates higher than previously expected after January's jobs report showed a resiliently hot labor market.
Traders see the Fed taking the federal funds rate as high as 4.95% in July before cutting it to 4.59% by year-end.

Another quarter-point rate increase is now widely expected in March, while a further one in May is becoming more likely but remains split with the Fed pausing.

Ahead of Friday's data, traders expected the policy rate to touch just below 4.9%, followed by two rate cuts in the second half of the year. That would leave the benchmark rate below 4.5% at year-end.
Read Full Report
February 02, 2023
SGH Insight
Moving on to the May 4 meeting, by which point the ECB benchmark rate will be at 3%, Lagarde backed off from an explicit commitment to another 50 bp hike. That said, she was as clear as she could be that from this distance the ECB in all probability will hike rates again, by 25 or even 50, and that more may follow.
Does that mean we have reached the “pinnacle, peak” in rates after March, Lagarde asked rhetorically, to which she answered, “No, no, no, no,” and pointed to the ECB’s assessment that it will still have some ground to cover, even after the March hike, before it gets to the rate that is appropriately restrictive to bring inflation down to 2% in a timely manner.
Likewise, when Lagarde discussed the range of possibilities at the May meeting, she said it could be 25, it could be 50, but carefully steered clear of saying it could be zero, even if this is in theory always a possibility.
Indeed, while refusing to be drawn into comparison with the US, Lagarde, acknowledging the drop in energy and headline inflation (“inflationary pressures are more balanced”), said she would “certainly” not say the disinflationary process is in play in the eurozone.
In short, we believe fading the 3.25% priced at this time by markets for the ECB peak rate is in all likelihood a very good one-way bet
Market Validation
Bloomberg 2/7/23
Bundesbank President Joachim Nagel warned not to underestimate the euro region’s consumer-price challenge and said more “significant” interest-rate increases will be required, according to Boersen-Zeitung.

“If we let up too soon, there’s a great danger that inflation becomes sustained,” Nagel told the German newspaper in an interview published Tuesday. “From my perspective today, more significant rate increases will be needed.” Joachim Nagel

Since they began tightening, policymakers have often used the label “significant” as shorthand to describe half-point interest-rate shifts. The ECB delivered such an increase last week, taking the deposit rate to 2.5%, and President Christine Lagarde flagged another one for March.

She also said that the ECB will then evaluate the subsequent path of its monetary policy. Nagel offered a more forceful view, arguing that the intention to raise rates by 50 basis points next month is “a strong commitment to a consequent monetary policy” and that even so, “I don’t see that our work is done with this rate hike in March"

Bloomberg 2/2/2023

European Central Bank Executive Board member Isabel Schnabel said there’s been little effect to date from an unprecedented bout of monetary-policy tightening aimed at taming inflation
The growth in consumer prices still has momentum, with the level of underlying inflation extraordinarily high, Schnabel told a webcast on Tuesday. The recent slowdown in the headline number isn’t down to ECB policy, she said.

“You can’t say that monetary policy is having such an impact that we can hope for inflation to reach our 2% target in the medium term,” Schnabel said. “We’ll closely look at what’s happening on labor markets, what’s happening to investments, how the economy develops overall.”
Read Full Report
February 02, 2023
SGH Insight
The Reserve Bank of Australia (RBA) will hike another 25 basis points to 3.35% on Tuesday and resume tough talk on inflation after data in the final months of last year showed prices reversed direction and rose to 7.8%, the highest level since 1990.
The year-over-year consumer price index for the December quarter outcome, though still shy of the Bank’s projected 8% peak, follows a 7.3% rise in the prior quarter and was accompanied by 8.4% inflation in the relatively new monthly CPI index from 7.3% in the prior month.
Though the RBA board will likely entertain discussion of a 50bp move at the meeting with a view to seeing that represented in the minutes due February 21, the Bank is largely resigned to finishing out its hiking cycle in 25bp increments.
Its forward guidance in the accompanying press release will warn of further adjustment, though it will continue to counsel that it is not on a pre-set course and take account of lagged and full effects of what will then likely be 325bp of tightening since May 2022. With evidence that prices are still running hot, the Bank cannot afford to sit on its hands to wait for supply side pressures to ease.
Another 25bp hike to 3.6% is likely at its March 7 meeting which may represent a point to pause if the inflation data relent, but it still may not prove to be the terminal rate of this hiking cycle. The next set of inflation reads (January CPI due March 1 and Q1 CPI out April 24) will help inform the Bank whether prices have peaked.
Market Validation
Dow Jones 2/21/23

The board of the Reserve Bank of Australia debated
raising official interest rates by 50 basis points at its policy meeting on
Feb. 7, noting that recent wages and prices data have exceeded expectations.

In minutes of the policy meeting published Tuesday, the RBA said that the
final decision to deliver only a 25-basis-point increase was determined by the
fact that interest rates have been increased substantially since May 2022.

"With interest rates already having been adjusted substantially, there was
less need to move by 50 basis points at this meeting," the minutes said.

The argument for a 50-basis-point hike stemmed from the concern that there has
been a pattern of incoming prices and wages data exceeding expectations, the
minutes said.

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January 30, 2023
SGH Insight
Fed Speak and Discussion

The FOMC will hike rates 25bp this week and signal that this won’t be the last hike of the cycle.

The Fed will need to update the FOMC statement to address the deceleration in the pace of rate hikes. This line was already stale when the Fed repeated it in the December FOMC statement after slowing to a 50bp rate hike:

In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Left unanswered was the policy guidance of which of these elements justified slowing to 50bp. After stepping down again to 25bp, the Fed could in theory just drop this line entirely, but we think it more likely the Fed will update the language to explain that it is appropriate to proceed with a slower pace of rate hikes given the cumulative tightening in place and the softer, though still elevated, inflation numbers and indications of slower growth. Such language would be consistent with recent Fedspeak.

Similarly, the language regarding “ongoing increases” in the policy rate also feels stale, but I have lower conviction that it changes. This sentence indicates the rate hike cycle is still open-ended...

...Bottom Line
The Fed will hike rates 25bp this week and point to more rate hikes in the future. Powell will reiterate that the job isn’t done, inflation remains too high, the labor market remains too tight, and that the Fed will continue to hike rates as needed to restore price stability. I think this commentary will cover largely familiar ground and should sound unambiguously hawkish. Still, we can’t see that Powell will move expectations for the terminal rate higher. Policy rates now sit in restrictive territory, the Fed sees evidence of slower growth, inflation though high has softened and created more confidence the peak is behind us, and the Fed thinks the full impact of cumulative policy still lies ahead. The scope for large jumps in the terminal rate like last year are limited by the downshift to 25bp. There is limited room for the Fed to tighten financial conditions if it won’t raise the expected terminal rate. We are particularly attentive to Powell’s view of what needs to happen in the labor market to sustain disinflationary trends. Fed speakers have drifted toward a more dovish take on unemployment that we believe market participants will interpret as sharply reducing the odds of recession. We want to see if Powell accepts or rejects that line of thought.
Market Validation
Bloomberg 2/1/23

Immediate Key Takeaways From FOMC Decision

Here are the immediate key takeaways:

Federal Open Market Committee raises benchmark rate by 25 basis points, as expected, to target range of 4.5%-4.75%; marks a step down from December’s 50 basis-point hike and the four straight 75 basis-point moves before that
Statement repeats prior language that “ongoing increases” in main rate will be appropriate while saying Fed will consider “extent of future increases,” a slight change from the prior language on the “pace” of hikes
Language suggests Fed inclined toward quarter-point rate hikes at next two meetings in March and May, rather than toward a pause after March
Fed says “inflation has eased somewhat but remains elevated” and removes prior references to causes of inflation including the pandemic; also omits a prior reference to considering “public health” as a factor in decision-making Decision is unanimous

Chair Powell press conference 2/1/23

>> CHAIR JEROME POWELL: So, we raised rates 4.5% points and we are talking about a couple more rate hikes to get to the level we think is appropriately restrictive. Why do we think that is appropriately necessary? Because inflation is running hot. We are taking into account long and variable lags. We are thinking about that. Really, the story we are telling about inflation to ourselves and the way we understand it, basically the three things I have just gone through a couple times. Again, we don't see it effecting the services sector, ex-housing, yet. Our assessment is that we are not very far from that level. We don't know that, though. We don't know that. We are living in a world of significant uncertainty. I would look across the rate, the spectrum of rates and see that real rates are now operative. We are -- by an appropriate set of measures or positive across the yield curve. I think policy is restrictive. We are trying to make a fine judgment about how much is restrictive enough. That is all. That is why we are slowing down to 25 basis points. We will be occasionally watching the committee, inflation and the process of the disinflationary process.
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January 30, 2023
SGH Insight
The BOE wants to step back down to a pace of 25bp increments to give it more flexibility to either pause or continue if the data dictate it should but it needs credible reasoning to do so.

Though this week’s messaging will focus on the “primacy” of the 2% inflation goal the reality is the BOE only has one or two more 25bp moves left to do before it concludes its campaign.

Market Validation
Bloomberg 2/16/2023
Bank of England Chief Economist Huw Pill signaled policy makers are ready to reduce the speed of their interest rate increases, saying there’s a risk of “overtightening” if the pace over the past few months is maintained.
The official who sits on the nine-member Monetary Policy Committee also said the labor market has shown signs of loosening, a suggestion that upward pressure on inflation from pay rises may be easing.
The remarks in the text of a speech given at Warwick University are the clearest sign yet that the BOE may endorse a quarter point increase at its March meeting — or even a pause in the quickest cycle of rate rises in three decades.
“Continuing to raise rates at the pace and magnitude seen over the past year would eventually – and perhaps soon – imply that monetary policy had cumulatively been tightened too much,” Pill said, according to a text released by the BOE in London on Thursday.

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January 17, 2023
SGH Insight
Late last week an article came out flagging the possibility that after a 50 bp hike at the next ECB meeting on February 2, and another 50 bps on March 16, lifting the benchmark deposit rate from 2.0% to 3.0%, the “doves” within the ECB’s Governing Council might push to slow the pace of rate hikes to 25 bp increments at the following meeting on May 4.

Whether there is a stepdown or not in May, when policy rates are at 3%, is an entirely reasonable question to ask, and it may not even have to result from a Manichean struggle between doves and hawks as analysts like to frame such stories. The more debatable question to us is where the landing zone will be once the ECB crosses the 3% threshold, a zone which we continue to expect will end up in the 3.5% to 4% region.

Today, markets were jolted by a Bloomberg news article saying the ECB may consider a 25 bp hike -- not in May -- but as early as at the March meeting, when rates will be at 2.5%.

Filled with caveats (“the prospect for 50 remains likely”), that article does not capture the dynamics that matter at the ECB, and only serves to needlessly shake some positions out on the back of what has been a powerful, and very cyclically different, downdraft in US rates.

A 25 bp hike in March flies entirely in the face of the eurozone’s inflation dynamics, rate position, and explicit guidance from ECB President Christine Lagarde and a host of her colleagues after what was in fact a seminal, hawkish meeting on December 15. Unless there is a truly dramatic and completely unforeseen change in the world, it is simply not going to happen.
Market Validation

Monetary policy decisions

The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further. In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

Bloomberg 1/18/23

Villeroy Says Lagarde’s Half-Point ECB Guidance Still Valid
French official won’t speculate on size of March rate increase
Moderating inflation has prompted talk of smaller hikes

Guidance from European Central Bank President Christine Lagarde that borrowing costs will continue to be lifted in half-point steps for some time still holds, according to Governing Council member Francois Villeroy de Galhau.
Speaking to Bloomberg TV at the World Economic Forum in Davos, the Bank of France chief said it’s too soon to talk about the size of the likely interest-rate increase in March, after people familiar with officials’ thinking told Bloomberg that moderating inflation and declining energy prices may warrant a smaller hike.
“We said very clearly we still decide meeting by meeting, we are data driven, so it’s much too early to speculate about what we will do in March,” Villeroy said. “Let me remind you of the words of President Lagarde at her last press conference in December: We should expect to raise rates at a pace of 50 basis points for a period of time. Well, these words are still valid today.”
Lagarde on Dec. 15:
“So we will continue that at a steady pace. Based on the information that we have available today, that predicates another 50-basis-point rate hike at our next meeting, and possibly at the one after that, and possibly thereafter, but everything will also be determined by the review of data. So don’t assume that it’s a one-shot 50; it’s more than that.”
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January 13, 2023
SGH Insight
The Bank of Japan (BOJ) will tilt guidance toward an April exit of ultra easy policy at next week’s meeting as Prime Minister Fumio Kishida prepares to hand over the reins to a new Governor ahead of Haruhiko Kuroda’s departure before April 8.
A breach of the BOJ’s upper limit on 10-year government bond yields (JGB) Friday, forced a round of central bank bond buying and has increased pressure on the nine-member board to move again after it raised the upper limit on the 10-year yield to 0.5% from 0.25% in December.
Whether the BOJ opts to tweak the limit again at this or at the March 9-10 meeting, we expect the BOJ to eliminate yield curve control (YCC) during April, once Kuroda’s successor takes office.
At his December post meeting press conference, Kuroda stridently characterized the move as a technical tweak to improve market functioning. Since 2016 the BOJ has operated the YCC limits to achieve its 2% inflation target. The policy is a band set around the 0% target to allow long-term rates to move up or down by 0.50bp.
The January 17-18 meeting has been billed as a “technical” discussion to prepare the market for the BOJ to end its curve control policy (YCC) before April, once Kuroda’s successor takes office.
In particular the BOJ is uncomfortable with the kink in the curve, an inversion that shows a gap between seven- to nine-year yields and 10-year yields. In addition to how to correct ongoing market distortions from YCC, the meeting agenda will include an upward revision to the outlook for consumer prices and support further bond purchases.
Market Validation
MT Newswire 1/18/23

Bank of Japan Defies Market Speculators, But Pressure to End YCC
(MT Newswires)
The Bank of Japan defied market pressure and kept its ultra-low interest rate policy firmly in place after a two-day monetary policy meeting that ended today.

The yen fell and yields on Japan's government bonds plunged on the news, while stocks surged on the prospect of continued low rates.

But with current BoJ Governor Haruhiko Kuroda only in office until April, speculation of imminent change to the bank’s policy regime is unlikely to go away.
Read Full Report
January 09, 2023
SGH Insight
The employment report sent mixed messages between solid job growth, a low unemployment rate, and weaker wage growth. While this may appear to be a “Goldilocks” outcome, that’s only the case if it encourages the Fed to back down from its current policy direction. That’s not going to happen just yet. The Fed can’t really back down without revising downward the 2023 dots, which is not crazy if the then high but now lower wage growth drove December’s 50bp increase in the SEP policy rate forecast, but that is not something Powell wants to do anytime soon. That would be as good as a rate cut from the market’s perspective.

Fedspeak will not yet retreat from the December SEP. Once the Fed digs itself in on a position, it takes a great deal of time and evidence to dig it out. One report isn’t going to do it. More likely it would take the totality of the data between now and the March meeting to convince the Fed it went too far with the December SEP, but even then, that view creates a potentially disastrous communications challenge for the Fed as I will explain below.
Market Validation
Bloomberg 1/9/23

Daly Sees Fed Raising Rates Above 5% But How Far Is Unclear
Federal Reserve Bank of San Francisco President Mary Daly said she expects the central bank to raise interest rates to somewhere above 5% before pausing, though the ultimate level is unclear and will depend on incoming data on inflation.
As for the Fed’s next meeting at the end of the month, the central bank could either raise rates by 50 basis points for a second straight time or slow down to a quarter-point hike, Daly said Monday in a live-streamed interview with the Wall Street Journal.
Mary Daly
“Doing it in more gradual steps does give you the ability to respond to incoming information,” said Daly, who doesn’t vote on rates this year. She stressed that it’s too early to “declare victory” over persistent inflation.

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