Highlights

SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

2022
September 20, 2022
SGH Insight
...Asked and Answered

Final thoughts heading in the FOMC meeting, in Q&A format.

Why not just pull the trigger on a 100bp rate hike?

Great question, if you know you are still some distance from where you are going, why not just step up the pace? And wouldn’t a surprise hike be the best way to send a hawkish message? And doesn’t the Fed keep falling behind the curve, so isn’t this a chance to finally make some real progress on catching up to the curve? All these points are accurate, and it’s why we can’t say there is no risk of 100bp this week.

Perhaps the best argument for a 100bp is that this meeting mirrors the choices the Fed faced in November 1994 when then-Chair Alan Greenspan pushed the option of 75bp over 50bp to surprise on the hawkish side.

But Greenspan didn’t have the Summary of Economic Projections to bolster the Fed’s messaging with forward guidance. The communications structure is much more sophisticated now and will be unmitigatedly hawkish. So we still think the Fed opts for 75bp because it already passed on the bigger hike once in July, the last CPI number only tells us that inflation is not decelerating, and a number of FOMC participants were leaning toward 50bp ahead of Federal Reserve Chair Jerome Powell’s Jackson Hole speech which suggests it might be difficult to get a consensus on 100bp. A 100bp hike also aggravates the problem of the step down, the Fed doesn’t like to surprise the markets and induce additional volatility, it really doesn’t know where it’s going despite the SEP, and the Fed probably believes it needs some space to keep hiking until inflation softens...

...Will the Fed really raise the terminal rates 100bp in the SEP?

As we wrote this week, we think a sizeable increase in the terminal dot is the logical conclusion of normalizing 75bp rate hikes, but this is an aggressively hawkish view and would be a big lift for FOMC participants to pencil in. Repeating what we said yesterday, we think the risk for the dots is on the upside of the 50bp minimum increase in the terminal rate that we could expect. It’s probably too hawkish to expect more than a 75bp increase in the terminal rate even if anything less indicates the Fed anticipates the cycle is almost over...

...Will the Fed raise the estimate of the longer-run policy rate?

We heard this question frequently from clients last week. The general view, like we have written, is that the Fed’s estimate of the longer-run rate is an anchor on the long end of the yield curve, and rates can really move higher if the Fed was to cut ties with that anchor.

With the 10-year treasury yield now well above 2.5% and the economy still chugging along, there appears to be some reason to think an upward revision should be considered:



That said, we have yet to hear a Fed speaker say they are revising up their estimate of the long-run real neutral rate. I think the sense is that the factors that grind out an approximately 0.5% real neutral rate have not changed since the pandemic, and consequently it would be premature to raise the estimates.

In my opinion, the potential to raise this estimate is an upside risk for yields, but I am not seeing it just yet. We will keep shaking this tree. Personally, I would very much like to see what happens if they stopped trying to make this estimate...

...What is the terminal rate in this cycle?

I have no defined sense yet of the terminal rate, although I think the odds favor more than 5% and not less than 4.5%. Traditional rules say the Fed is still behind the curve. This is true with even generous interpretations of traditional rules. St. Louis Federal Reserve President James Bullard presented a minimalist Taylor rule in May, concluding the appropriate policy rate at the time was 3.63%. The same calculation now yields 4.5%. But this is an extremely generous rule. It assumes the real neutral rate is -0.5%, compared to the SEP estimate of 0.5%. Making that change alone pushes the appropriate policy rate to 5.5%, and that still might not be enough given that Bullard assigns no impact from unemployment lower than its natural rate. We could be a long, long way from the appropriate policy rate which means that policy remains accommodative and thus the lagged impact of policy is still stimulative. Let that sink in...

Market Validation
Bloomberg 9/21/22

Fed Delivers Third-Straight Big Hike, Sees More Increases Ahead
Federal Reserve officials raised interest rates by 75 basis points for the third consecutive time and forecast they would reach 4.6% in 2023, stepping up their fight to curb inflation that’s persisted near the highest levels since the 1980s.
In a statement Wednesday following a two-day meeting in Washington, the Federal Open Market Committee repeated that it “is highly attentive to inflation risks.” The central bank also reiterated it “anticipates that ongoing increases in the target range will be appropriate,” and “is strongly committed to returning inflation to its 2% objective.”
Chair Jerome Powell will hold a press conference at 2:30 p.m.
The decision, which was unanimous, takes the target range for the benchmark federal funds rate to 3% to 3.25% -- the highest level since before the 2008 financial crisis, and up from near zero at the start of this year.

FOMC Sees Longer-Run Median Fed Funds Rate at 2.5%

Fed Longer-Run Median Fed Funds Rate at 2.5%; prior median longer-run Federal funds rate 2.5%
Longer run Fed funds median at 2.5% compares to previous forecast of 2.5%
2022 median Fed funds 4.4% vs 3.4%
2023 median Fed funds 4.6% vs 3.8%
2024 median Fed funds 3.9% vs 3.4%
2025 median Fed funds 2.9%
Read Full Report
September 19, 2022
SGH Insight
...Regardless of the dots, Powell will attempt to maintain a hawkish tone at this press conference. Now that we are past the peak recession story, and there is no convincing evidence of any sustained slowing of inflation, Powell should be free to take on a tone more like Sintra and Jackson Hole and less like the July press conference. I think Powell will want to follow Waller and emphasize the uncertainty about the path of policy:
I expect that getting inflation to fall meaningfully and persistently toward our 2 percent target will require increases in the target range for the federal funds rate until at least early next year. But don’t ask me about the policy path because I truly don’t know—it will depend on the data...
Market Validation
9/21/22

From the FOMC press conference
>> Hi, thank you for taking our questions, I'm from the New York Times. Can you give us detail around how you'll know when the slow down the rate increases and when to stop?

Chair Powell >> My main message has not changed at all since Jackson Hall. The FOMC is resolved to bring inflation down and we will keep at it until the job is done. So, the way we're thinking about this is the overarching focus of the committee is getting inflation back down to 2%. To accomplish that, we'll need to do two things in particular to achieve a period of growth below trend and softening in labor market conditions to foster a better balance. So, on the first, the committee's forecast and those of most outside forecasters show growth running below its longer-run potential this year and next year. So far there is only modest evidence that labor market is cooling off. Job openings are down a bit. Quits are off their all-time highs. There's signs that wage measures may be flattening out. Payroll gains have moderated, but not much. In light of the high inflation we're seeing, we think we'll -- in light of what I just said -- we'll need to bring our funds rate to a restrictive level and to keep it there for some time. What will we be looking at, is your question. We'll be looking at a few things. First, we'll want to see growth continuing to run below trend, to see movements in the labor market showing a return to a better balance between supply and demand, and clear evidence that inflation is moving back down to 2%. That's what we'll be looking for. In terms of reducing rates, we'd want to be very confident that inflation is moving back down to 2% before we would consider that.
Read Full Report
September 06, 2022
SGH Insight
Fed on Path for Another 0.75-Point Interest-Rate Lift After Powell’s Inflation Pledge
Fed officials face questions over how high to lift rates by year’s end and how fast to get there
By Nick Timiraos
Updated Sept. 7, 2022 10:29 am ET
In a speech Aug. 26 in Jackson Hole, Wyo., Mr. Powell underscored the central bank’s commitment to boosting interest rates enough to lower inflation from 40-year highs. “We will keep at it until we are confident the job is done,” he said.
His remarks and tone placed him among the Fed officials who favor a more aggressive pace of rate increases than others, said Tim Duy, chief U.S. economist at research firm SGH Macro Advisors. Raising rates by 0.75 percentage point would fit that approach, he said.
Mr. Powell’s speech showed he “very much did not want to leave the impression that the Fed would fall short on fighting inflation,” Mr. Duy said.

Several officials have signaled a desire to raise the fed-funds rate closer to 4% by year’s end—or about 1.5 percentage point higher than its current level. That could be accomplished in rate increases of various sizes at each of the three remaining Fed meetings this year.
The hawkish approach would point to a 0.75-point rate rise at the coming meeting, followed by smaller increases at the next two, analysts said.
“The argument is you’re going to have to go much further than where policy rates are now, and the risk of overshooting is still fairly low,” said Mr. Duy. “And you would rather try to get a little bit more ahead of the curve rather than risk falling behind further.”

Market Validation
Bloomberg 9/7/22

Fed-Dated OIS Bid After WSJ Report Hints at 75bp Sept. Rate Hike

Fed hike premium jumps following WSJ report from Nick Timiraos that the Fed’s inflation fighting pledge could tee up another 75bp rate hike rather than a 50bp move for this month’s meeting.
September Fed OIS jumps around 4bp following the report, tops at 3.046% and current cycle highs before paring move slightly to price in around 70bp rate hike for the September meeting, up from 67bp priced Tuesday close
Front-end of the Treasuries curve underperforms into the weakness, flattening 2s10s by around 2bp and dropping to -16.5bp, spread remains inside session range
Further out, Fed dated OIS prices in around 149bp of additional hikes into the December meeting vs. 145bp priced Tuesday close
Read Full Report
September 06, 2022
SGH Insight
A 75bp move on September 7 to 3.25% would position the bank to calibrate the next phase of its policy cycle -– an enviable position that most other central banks have yet to achieve -– where it can begin to guide rates via smaller increments to a restrictive terminal rate that truly will be guided by incoming data.
Still chasing inflation but no longer chasing a neutral rates setting, the BOC then will deliberate whether it needs 50bp or 75bp in tightening over its two remaining meetings this year to finish 2022 around 3.75% or 4%.
With no accompanying press conference this week, the central bank may drop the “frontloading” reference in the statement once rates are at neutral. That change would denote the largest hikes are behind the BOC. Its July statement described the 100bp move as frontloading “the path to higher interest rates.”
We do, however, expect the bank to retain statement language indicating that rates will need to rise further, particularly given inflation still remains too high for Macklem to declare a stopping point.
Market Validation
Bloomberg 9/7/22

The Bank of Canada delivered a fourth consecutive outsized interest-rate hike in a bid to slow the nation’s economy and drag inflation down from four-decade highs.
Policy makers led by Governor Tiff Macklem raised the benchmark overnight rate by 75 basis points to 3.25% on Wednesday, giving Canada’s central bank the highest policy rate among major advanced economies. Officials said they expect to continue raising rates, keeping the door open for more hikes in coming months.
“Given the outlook for inflation, Governing council still judges that the policy interest rate will need to rise further,” officials said in the statement.
The jumbo hike into the restrictive range points to a central bank still uncomfortable with sticky inflation, but sets the stage for policy makers to start fine-tuning borrowing costs as price pressures are brought to heel.
While dropping any references to “front-loading,” the statement suggests the Bank of Canada has shifted to thinking about smaller adjustments to policy, and is looking at where officials can start winding down the tightening campaign.
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” the bank said.
Read Full Report
September 05, 2022
SGH Insight
The Reserve Bank of Australia (RBA) is likely to deliver its fourth consecutive 50bp rate hike this week, taking the cash rate to 2.35%, as it seeks to push rates into more restrictive territory to get inflation under control despite a torrent of protest over a housing market downturn.
Market Validation
Bloomberg 9/6/22

Australia’s central bank delivered its
fourth consecutive half-percentage point interest-rate increase
and reinforced that it’s not on a “pre-set path” in its drive to
rein in inflation.
The Reserve Bank raised the cash rate to 2.35%, the highest
level since 2015, from 1.85% at Tuesday’s meeting.
Read Full Report
August 22, 2022
SGH Insight
...I think we can already see the points that represent the central messaging at this week’s upcoming Jackson Hole conference. I anticipate that sideline discussions will emphasize the hawkish points of agreement discussed above: rates need to be in restrictive territory and stay there for an extended period, restoration of price stability is the number one job, and don’t believe we won’t accomplish that goal. There is less unanimity here than it appears, at least as far as the terminal rate is concerned, and financial journalists can press to find divisions should they choose to do so, but that basic messaging should be uniform across speakers...


...Bottom Line
FOMC participants might share a common objective in restoring price stability, but with rates now in the range of long-term neutral, there is no consensus among members of the ultimate level of policy rates necessary to meet that objective. We think that the consensus will eventually emerge on the higher end of the estimates, but that remains to be seen. That said, there is a very unified theme in the messaging, and Powell can reinforce that theme. Market participants are hawked up going into this week, and that sets up the risk they will be disappointed by anything that feels less than a total repudiation of the July meeting and minutes. That said, I also get the sense the market participants would like to take on a solid, one direction trade as they return from summer breaks, and if they want to focus on the hawkish messaging, they can take short term rates higher.

Market Validation
Bloomberg 9/19/22

US 10-Year Yield Rises to 3.5% for First Time Since 2011

The 10-year Treasury yield briefly rose above 3.50% for the first time since 2011 on Monday, with the bond market extending its bearish run ahead of another jumbo rate hike expected this week by the Federal Reserve to bring down inflation.
The 10-year yield jumped as much as 6.6 basis points to 3.516%, breaking above a psychological level that held in mid-June. Still the main selling pressure in the Treasury market remained focused on the policy sensitive two-year note with the benchmark rising as much as 9 basis points to 3.96%, marking a fresh high since October 2007.

Bloomberg 8/26/22

Federal Reserve Chair Jerome Powell issued a
fresh warning to investors doubting his resolve to fight
inflation: interest rates are heading higher and will stay there
“for some time.”
The message from Jackson Hole -- hammered home by Powell in
a terse five-page speech Friday and endlessly repeated by his
colleagues -- is that the central bank will not blink in the
fight to cool prices.
“Restoring price stability will likely require maintaining
a restrictive policy stance for some time,” Powell told the
audience at the Fed’s annual retreat in Wyoming’s Grand Teton
National Park. “The historical record cautions strongly against
prematurely loosening policy.”
“Higher for longer is the new watchword,” said Peter
Hooper, global head of economic research for Deutsche Bank AG.


Read Full Report
August 18, 2022
SGH Insight
With all the focus on rate hikes, there was one additional comment in today’s interview that did not get much coverage, but which we found intriguing. That was to float the possibility that the size of the ECB’s balance sheet and the reinvestment of the bonds held under the Asset Purchase Program may be a matter of discussion by the Governing Council soon.
We have, truth be told, assumed that reinvestments would be on autopilot for a while, so any material discussion, if it were to happen, would be newsworthy.
Market Validation
Bloomberg 8/26/22

Some European Central Bank officials want to begin a debate by year-end on when and how to shrink the almost 5 trillion euros ($5 trillion) of bonds accumulated during recent crises.
Deciding how to go about the process -- known as quantitative tightening -- is the logical next step after the ECB raised interest rates for the first time since 2011 in July, people familiar with the plans said, asking not to be identified as the deliberations aren’t public.
The Governing Council hasn’t discussed the issue yet, and it’s unclear when the best moment would be to start reducing the balance sheet, given the increasing likelihood of a recession in the 19-member euro zone, according to the people.
ECB staff are currently studying how the Federal Reserve and the Bank of England are managing QT, one person said.
Read Full Report
August 15, 2022
SGH Insight
...Stimulus, as in the first half, will come largely from the fiscal side.

There, the CFEAC stressed that governments at all levels should continue to accelerate fiscal expenditure and shore up domestic consumption in the second half of 2022. It approved fiscal expenditures of 13.821 trillion yuan for the second half, an increase of 2.9% from the same period last year, and an increase of 7.2% from the 12.888 trillion yuan in H1 2022. It called for China’s fiscal expenditure to grow by double digits year over year in H2 to achieve Beijing’s full-year 2022 fiscal spending target of 8.4% growth.

The 12.888 trillion-yuan H1 fiscal expenditure figure represents a 5.9% increase from the same period in 2021 and makes up 48.25% of the 26.71 trillion yuan full-year 2022 fiscal spending target. China’s local governments, encouraged by Beijing, issued 3.41 trillion yuan worth of new special bonds in the first half of 2022, a 93% frontloading of the 3.65 trillion-yuan annual quota for new special bonds this year, and leaving little room for additional new issuance this year under the current quota.

To help steady economic growth from Q4 2022 to H1 2023, local governments will therefore pull issuance of new special bonds from the 2023 quota into October and November of this year. About 1.8 trillion yuan of special bonds are expected to be issued in advance...
Market Validation
Bloomberg 8/26/22

China stepped up its economic stimulus with
a further 1 trillion yuan ($146 billion) of funding largely
focused on infrastructure spending, support that likely won’t go
far enough to counter the damage from repeated Covid lockdowns
and a property market slump.
The State Council, China’s Cabinet, outlined a 19-point
policy package on Wednesday, including another 300 billion yuan
that state policy banks can invest in infrastructure projects,
on top of 300 billion yuan already announced at the end of June.
Local governments will be allocated 500 billion yuan of special
bonds from previously unused quotas.

Bloomberg 8/16/22

China’s embattled developers surged in the
stock and bond markets Tuesday on news that authorities are
planning to help some raise fresh financing, adding to signs of
official support for an industry grappling with a debt crisis
and slumping home sales.
Notes from Country Garden Holdings Co., CIFI Holdings Group
Co. and Longfor Group Holdings Ltd. soared at least 11 cents on
the dollar Tuesday, according to Bloomberg-compiled prices, set
for the biggest gains since March. Their shares surged more than
9% in Hong Kong and a Bloomberg Intelligence gauge of the sector
gained 2.4%, the most in three weeks.
Chinese authorities have told several property developers
that state-owned credit support provider China Bond Insurance
Co. will give full guarantees for some of their upcoming onshore
bond offerings, according to people familiar with the matter.
The first batch of private developers to be included in the plan
include Longfor, Seazen Group Ltd., CIFI, Country Garden and
Gemdale Corp., the people said, asking not to be identified
because the matter is private.
Read Full Report
August 10, 2022
SGH Insight
Bottom Line: The CPI report is on net good news, but not good enough to deter the Fed from ongoing rate hikes. It leans the odds back toward 50bp at the next meeting, but not decisively so. While there is a heavy focus on the next meeting, this report alone doesn’t suggest we should expect a lower rate path even if the Fed opts for 50bp. That choice actually argues for a higher path of rates assuming elevated inflation remains persistent. If the Fed concludes that it can’t restore price stability without a recession, then 50bp would only be delaying the inevitable and 75bp becomes a more obvious option.
Market Validation
Bloomberg 8/16/22

Heightened activity seen in SOFR spreads Tuesday including a large Mar23/Sep23 steepener, blocked mid-morning. Front-end spreads are starting to indicate Fed rate cut pricing shifting out of early next year and deeper into 2023 and 2024.
At 10:28am ET 15,000 SOFR Mar23/Sep23 spread was bought via block at -28.5bp; DV01 on the trade is $375k
Read Full Report
August 03, 2022
SGH Insight
Now Bailey, concerned about so-called second round effects feeding into inflation, looks set to cross over to recommend 50bp, and with the support of at least his chief economist Huw Pill, that vote should carry the day. Both supported only 25bp in June.
MPC members are fretting that price and wage setting behavior could entrench inflation at a higher level. In the most recent comments by a BOE official on July 7, Pill noted that the BOE’s guidance reflects “a willingness – should circumstances require – to adopt a faster pace of tightening than we have seen implemented in this interest rate cycle so far.”
Three of the four external board members – Jonathan Haskel, Michael Saunders, and Catherine Mann – already wanted 50bp in June. Of the four remaining votes, at least one, if not two other members, might also vote for 50bp.
Even as the Bank most likely opts for the bigger increment tomorrow, it will be careful not to suggest a string of 50bp moves will follow, nor even that it won’t sit out moves later this year. Additional guidance Thursday will, however, shape expectations about how quickly the Bank intends to get to a neutral rate around 2.25%.
Market Validation
Bloomberg 8/4/22

The pound reversed gains against the US dollar and UK bonds rallied after the Bank of England warned of a long recession and said its monetary policy path was not pre-set.
That took the shine off a widely expected 50 basis-point interest-rate hike for pound investors. The currency fell as much as 0.5% to $1.2084, having gained by that much before policy makers raised interest rates to 1.75%. Ten-year gilt yields dropped as much as eight basis points and part of the yield curve briefly inverted to reflect fears of an economic slowdown.
While delivering its biggest rate rise in nearly 30 years, the BOE suggested it could be less forceful in raising rates in the coming months. It warned the UK is heading for more than a year of recession under the weight of soaring inflation, leading traders to pile into gilts as a haven.

Read Full Report
August 03, 2022
SGH Insight
...Economic and trade sanctions are under consideration. Two measures will definitely be implemented. One, China will continue to reduce its holdings of US treasuries and other USD assets. The scale of the reduction must be larger than before. Two, China will strictly limit the export of rare resources such as rare earths to the US. To ensure that it is more difficult for the US to obtain scarce resources from China, the restriction would likely be extended to the UK, Japan, and Australia...

...Separately, from a hardline National Security official:
On the surface, Pelosi’s visit to Taiwan is a victory for the US, especially Pelosi. In essence, Pelosi’s visit has [however] broken the Cross-Strait status quo and created conditions for us to turn on a new status quo for the Taiwan situation. From now on, the PLA will more freely conduct military activities around the island. Without Pelosi’s visit, the status quo of the Taiwan Strait would not have been changed so quickly by the PLA...

...In the words of a leadership level official in Beijing:
Pelosi’s visit officially marks a shift in China-US relations from cooperation to all-round confrontation, and also marks the complete breaking of the status quo on both sides of the Taiwan Strait. Future US-China relations will continue to deteriorate.
The order not to directly block Pelosi’s plane from landing in Taiwan was made by President Xi himself [note – we believed this type of direct confrontation with the US was not likely to happen anyway]. President Xi said that Pelosi’s visit to Taiwan can clearly show the world that the US is directly provoking China’s core interests. It is the US and Taiwan separatist forces, not Mainland China, that first changed the status quo of the Taiwan Strait. When Pelosi arrived on the island it was the beginning of our definition of the new Taiwan Strait status quo...



Market Validation
Reuters 8/15/22

China slashed holdings of U.S. Treasuries for a seventh consecutive month in June, Treasury department data released on Monday showed, with investors closely tracking this measure in the wake of tensions between the world's two largest economies involving Taiwan.
China's stash of U.S. government debt dropped to $967.8 billion in June, the lowest since May 2010 when it held $843.7 billion. In May, the world's second biggest economy had $980.8 billion in Treasuries, data showed. China's hoard of U.S. debt has seen multiple 12-year lows the last few months.

Bloomberg 8/5/22

US Secretary of State Antony Blinken accused
China of seeking to change the status quo in the Taiwan Strait
with missile tests and military drills following House Speaker
Nancy Pelosi’s visit to the island.
Blinken made the remarks at a regional summit in Cambodia
on Friday that was also attended by Chinese Foreign Minister
Wang Yi and Russian counterpart Sergei Lavrov.

The Washington Post 8/4/22

China launches military exercises around Taiwan after Pelosi visit

The Global Times, a state-run nationalist tabloid, quoted an anonymous Chinese military expert describing the drills as a “new beginning” for PLA activities around Taiwan, which would not be limited to their previous areas and would instead “regularly take place on Taiwan’s doorstep.”
Read Full Report
August 02, 2022
SGH Insight
Bottom Line: Expect more of this rhetoric from Fed speakers. The Fed remains committed to ongoing rate hikes until the inflation data rolls over for a sustained period. That basic messaging hasn’t changed even though the Fed looks forward to stepping down from 75bp rate hikes. It has simply been a challenge for the Fed to communicate its hawkish intentions when market participants have been looking for a dovish pivot. We expected this communications challenge, as well as a divergence between market pricing and the Fed’s intentions as economic growth eased. At some point, the Fed and markets will be realigned, and the data will decide whether the Fed needs to move to the markets or vice-versa. Today’s round of speakers indicates the Fed thinks the market will be the one that needs to move.
Market Validation
Bloomberg 8/3/22

*DALY: MARKETS ARE AHEAD OF THEMSELVES ON FED CUTTING RATES
*DALY: 3.4% IS A REALLY REASONABLE PLACE TO GET TO BY YEAR END
*DALY: JUNE SEP REMAINS A `REASONABLE GUIDE'
*DALY: ESTIMATE OF NEUTRAL RATE IS LITTLE OVER 3%, MAYBE 3.1%
*DALY: WE'RE NOT EVEN UP TO NEUTRAL RIGHT NOW
*DALY: OPTIMISTIC TO GET INFLATION DOWN WITHOUT A DEEP RECESSION
*DALY: WON'T BRING RATES DOWN IN JUST A FEW MONTHS
*DALY: BRING RATES UP TO LONGER THAN 6 MONTHS, MAYBE A YEAR
*DALY: 3% INFLATION STILL TOO HIGH, WHY WE HAVE A 2% AVG GOAL
*DALY: WE'RE DELIVERING ON 2% HOPEFULLY BY LATE '23, EARLY '24


“We’re going to have to see convincing evidence across the board of headline and other measures of core inflation all coming down convincingly before we’ll be able to feel like we’re doing enough,” St. Louis Fed President James Bullard says.
“We’ve still got some ways to go here to get to restrictive monetary policy,” he says in interview on CNBC. “We should get to 3.75 to 4% this year.”
“We’re going follow the data very carefully here and I think we will get it right,” he says
“I’ve liked front-loading. I think it enhances our inflation fighting credentials, keeps inflation expectations under control,” Bullard says
US economy “is not in a recession,” he says. “It’s hard to say that there was a recession with a flat unemployment rate at 3.6%. It’s hard to say there’s a recession”
Second-quarter slowdown was “more concerning,” first-quarter contraction “probably a fluke”
“We’ll get positive GDP growth in the second half”
“We’ll have a reasonably good third quarter here and so I think jobs will also hold up over the second half of the year job growth is slowing, but it’s slowing to a trend pace”

Swap markets indicate that the likely outcome of the September Federal Reserve policy meeting is now a coin toss between a 50-basis-point hike and a bigger increase of 75 basis points.
The rate on swap contracts tied to the date of the September Fed meeting on Wednesday rose as high as 2.958%, some 62.8 basis points above the current effective fed funds rate of 2.33%. That implies a hike of at least 50 basis points is seen as definite and a more than one-in-two chance that it could be three-quarters of a percentage point.
Traders have ramped up their expectations in recent days for the amount of Fed tightening at the next meeting in the wake of comments from various central bank policy makers indicating that they are firmly focused on combating inflation even as risks to growth loom over the horizon.



Read Full Report
August 01, 2022
SGH Insight
...Cleveland Federal Reserve President Loretta Mester will talk about the economy and policy. Mester has been a reliable standard-bearer for the Fed in recent months, and I expect her to push back on the market’s dovish interpretation of the FOMC meeting...

...Bottom Line

We always expected communication challenges around stepping down from 75bp. I think that much of the Fedspeak perceived as dovish reflects those challenges. The Fed is super-hawkish, but we went into last week saying that market participants would see any story around slowing growth as dovish even if couched in the hawkish story of rates continuing to rise until the Fed sees compelling evidence of a path to price stability. So far, that’s how this is playing out. Despite my caveats above, I still think the Fed is more hawkish than it appears, and more hawkish than implied by market pricing, and this creates the potential for a clash with the markets if the Fed stays resolute and inflation remains elevated as I expect.

That said, in the near term, market participants may continue to focus on the slow growth story until either they see evidence the economy is firming in Q3, something which if true is likely to take couple of months to emerge in the data, or the Fed starts walking back Powell’s performance and pushes the inflation story hard. I don’t think the Fed wants markets to take on a risk-on posture, and if so, we will see more pushback soon. Mester is the voice on the schedule this week that might make it stick. Still, I wonder if we will need to see this message come from the Board, and specifically from Powell. But this might now be an “actions speak louder than words” situation. I am thinking we should be wary about the Fed ditching this “no guidance” story and locking in 75bp for September. The risk certainly falls on that side of 50bp; even if the Fed is looking for an off-ramp to 50bp, it may have already lost the opportunity.
Market Validation
Bloomberg 8/8/22

Fed’s Bowman Backs More Large Rate Hikes Until Inflation Eases

The Federal Reserve should keep considering
large hikes similar to the 75 basis-point increase approved last
month until inflation meaningfully declines, Governor Michelle
Bowman said.
“My view is that similarly-sized increases should be on the
table until we see inflation declining in a consistent,
meaningful, and lasting way,” Bowman said Saturday in remarks
prepared for an event organized by the Kansas Bankers
Association.

Bloomberg 8/2/22

Bonds Fall as Fed’s Daly Revives the Outlook for Higher Rates

The bears are taking leadership in the bond market again.

Two-year yields are up around 10 bps after Fed Bank of San Francisco President Mary Daly said the central bank’s work on inflation is “nowhere near” being almost done. The comments echo remarks from Minneapolis Fed Bank President Neel Kashkari, who said central bank is “a long way away” from its inflation goal. If other Fed officials strike the same tone, July’s bond rally will turn into an August selloff.

*EVANS: SEES 3.75%-4% FUNDS RATE BY 2Q 2023 AS SUFFICIENTLY HIGH
*EVANS: HOPEFUL 3.25%-3.5% FUNDS RATE BY YR-END STILL REASONABLE
*EVANS: 50 BPS AT SEPT MEETING REASONABLE, BUT 75BPS COULD BE OK
*EVANS: SEES JOBLESS RATE STAYING BELOW 4% THIS YEAR
*EVANS: HOPEFUL 25 BPS HIKES AFTER SEPT FOMC STILL REASONABLE
*US TREASURY 3-YEAR YIELD RISES 15 BASIS POINTS TO 2.95%

The Federal Reserve is committed to bringing inflation under control, because it’s “a foundational piece of a healthy economy,” Cleveland Fed President Loretta Mester says.
“That’s what we’re about, what we’ve been about this year and will continue to be about until we get inflation under control,” Mester, who is a voter this year on the rate-setting Federal Open Market Committee, says in virtual interview with the Washington Post
Mester forecasts that US economy will grow below trend in 2022, which is necessary to slow price increases
Cleveland Fed chief would want to see “very compelling evidence” month-to-month changes in inflation are moving down in determining when the tightening cycle has accomplished its goal on prices
“We’re very focused on making sure that we bring inflation down, because that is the bedrock of making sure that we will have sustainable healthy labor markets over the medium and the longer run”

Read Full Report
July 29, 2022
SGH Insight
...The most important topic in the conversation was only one — China-US relations, especially the ‘Taiwan Question,’ which is the top priority of Sino-US relations. The topic of China-US relations accounted for more than 100 minutes of the 130-minute conversation.
President Xi told President Biden, “You always say that the China-US bilateral relationship needs a “guardrail.” Where is the bilateral guardrail now? The Three China-US Joint Communiqués are the most reliable guardrails for the two countries. Viewing China as the primary rival and the most serious long-term challenge would be misperceiving China-US relations and misreading China’s development. The US should keep its promise of not supporting Taiwan secessionism. If the US does not keep the China-US relations away from the edge but instead, insists on crashing against the guardrails, the consequence will be a deadly disaster.”
Regarding Pelosi’s possible visit to Taiwan, he continues, the President [Xi] said loudly and clearly that [the position of the] Chinese government and people on the Taiwan question is consistent, and resolutely safeguarding China’s national sovereignty and territorial integrity is the firm will of the more than 1.4 billion Chinese people. China firmly opposes separatist moves toward Taiwan independence and interference by external forces, including the US House Speaker’s visit to Taiwan, and never allows any room for Taiwan independence forces in whatever form. The will of the people cannot be defied, and those who play with fire will perish by it. If the US eventually lets its partisan struggle and internal politics hijack its strategic decision-making, it will surely bring new crises to the Taiwan Strait. It is hoped that the US will be clear-eyed about Taiwan.
Biden reiterated that the one-China policy of the US has not changed and will not change, and that the US does not support Taiwan independence but is opposed to unilateral changes to the status quo by either side. Biden stressed that he and his national security team have been and will continue to persuade Pelosi to abandon her visit to Taiwan.
In the conversation, Biden hoped to discuss the Ukraine crisis in depth with Xi. Xi declined to discuss it in depth but briefly stated China’s position.
This official believes the probability of Pelosi’s visit to Taiwan is low, as Xi’s tough position on Taiwan will push President Biden to put more pressure on Pelosi to bypass Taiwan on this trip. We are not so certain...

Market Validation
Washington Post 8/22/22

Just days before House Speaker Nancy Pelosi was expected
to visit Taiwan, Chinese President Xi Jinping had a request of President
Biden: Find a way to keep Pelosi from visiting.

Xi's request in a July 28 call with Biden, described by a senior White House
official who spoke on the condition of anonymity to discuss a sensitive
conversation, followed myriad warnings Chinese officials made to U.S.
counterparts of what China might do in retaliation for Pelosi's visit to the
self-governing island that Beijing considers part of its territory.

But Biden told Xi he could not oblige, explaining that Congress was an
independent branch of government and that Pelosi (D-Calif.), as with other
members of Congress, would make her own decisions about foreign trips, the
official said. Biden also warned Xi against taking provocative and coercive
actions if the House speaker were to travel to Taiwan, the official said.

Bloomberg 8/22/22

Taiwan’s export orders unexpectedly
contracted in July as demand from Chinese customers plunged, and
officials are now warning of further declines to come.
Orders slumped 1.9% in July compared to the same month last
year, according to a Monday statement from Taiwan’s Ministry of
Economic Affairs. That was worse than even the most bearish
forecast in a Bloomberg survey of economists. The median
estimate was for a 6.2% increase.
A 22.6% decline in orders from China and Hong Kong --
which, combined, are the second-largest source of demand after
the US -- was the main driver of the surprise fall, ministry
data show. A 6.9% increase in orders from the US was
insufficient to offset the difference.
Read Full Report
July 29, 2022
SGH Insight
The Reserve Bank of Australia (RBA) will likely deliver the third in a series of 50bp moves in the cash rate to 1.85% August 2 and signal more tightening to come in the months ahead, tacking a more aggressive charge toward a restrictive policy setting beyond its 2.5% neutral estimate by year’s end...

...The pickup in the annual trimmed mean measure of core inflation, closely monitored by the Bank, could keep the prospect of at least one additional 50bp move at the September 6 or October 4 meetings alive, but probably not at both, at least not before the RBA sees another inflation report.
The next quarterly inflation reading is due October 26 and will give the Bank an opportunity to calibrate whether to move ahead with 25bp hikes at the November 1 and December 6 meetings...


Market Validation
Dow Jones 8/2/22

Trending: RBA Raises Cash Rate for Fourth Straight Month

Australia's central bank is the most mentioned entity over the past 12 hours, according to Factiva data, after it raised its benchmark cash rate target by 50 basis points to 1.85%. This marks the fourth time the Reserve Bank of Australia has raised the rate in as many months. Prior to May, the RBA hadn't raised the rate since November 2010.

Bloomberg 8/2/22

Australia’s central bank gave itself wriggle
room to adjust the pace of interest-rate increases if the
economic outlook deteriorates after delivering the sharpest
policy tightening in a generation.
“The board expects to take further steps in the process of
normalizing monetary conditions over the months ahead, but it is
not on a pre-set path,” Governor Philip Lowe said after hiking
by 50 basis-points for a third straight month to 1.85%.

Read Full Report
July 27, 2022
SGH Insight
I suspect that the Fed will be unhappy with the new market pricing and the implied easing of financial conditions, and we will see speakers push a hawkish story in coming days. Still, it may be hard to convince market participants that the Fed remains focused on inflation until the Fed hikes after the unemployment rate ticks higher. In other words, actions speak louder than words.
Market Validation
Bloomberg 7/29/22

Treasury Yields Bounce as Traders Reminded of Inflation Risks

A combination of data showing an ongoing acceleration in US inflationary pressures and commentary from a Federal Reserve official helped draw a line, for now, under the recent plunge in Treasury yields.
The yield on two-year Treasury notes climbed as much as 9 basis points to 2.95%, before moving back to around 2.91%.
Already up on the day, the rate climbed to a session high after data from the US personal income and spending report showed the PCE deflator -- a gauge that the Fed watches -- climbing 1% month-on-month, more than the 0.9% median estimate of economists. Earlier, Atlanta Fed President Raphael Bostic said the US economy was “a ways” from entering a recession and the central bank had further to go in raising interest rates to get inflation under control.
Read Full Report
July 26, 2022
SGH Insight
I believe that Federal Reserve Chair Jerome Powell is not likely to give hard guidance about the outcome of the September meeting but will keep 75bp on the table.
Market Validation
FOMC Statement

We anticipate that ongoing increases in target range increases for the federal funds rate will be appropriate. The pace of those increases will continue to depend on the incoming data and evolving outlook for the economy. Today's increases in the target range is the second 75 basis point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting. That is a decision that will depend on the data we get between now and then.
Read Full Report
July 25, 2022
SGH Insight
The last of the Fed’s 75bp rate hikes will be viewed by market participants as a “dovish” pivot. There will be a sense that the “worst of the cycle” has passed, and now we can look forward to the eventual rate cuts while downplaying the additional rate hikes between now and then. I suspect that a sense of relief will even be true among many FOMC participants who will believe the Fed is no longer deeply behind the curve on inflation, but they will have to be careful about how they express this relief...

...The Fed will not see the transition away from 75bp as a dovish pivot. The Fed remains fully focused on the inflation fight. In fact, no pure “doves” currently remain at the Fed. The Fed intends to bring rates to a restrictive setting and hold them there until inflation is clearly no longer a problem. Moving to 50bp rate hikes does not mean the Fed is any less committed to restoring price stability. The plan has been to get rates to neutral quickly and then begin reducing the pace of rate hikes to glide to the terminal rate. This week’s meeting only concludes the first part of that plan...

Market Validation
Bloomberg 7/27/22

Stocks Surge, Bond Yields Sink on Powell’s Remarks: Markets Wrap
Powell says unusually large hike to be data-dependent
Fed to offer less ‘clear guidance’ on rate moves

Stocks rallied and bond yields tumbled after Jerome Powell said the Fed will offer less “clear guidance” on rate moves and that it will likely be appropriate to slow rate hikes at some point.
The Federal Reserve’s boss said the central bank is moving “expeditiously” when it comes to dealing with price pressures and reassured it has the tools to do the job. Powell also noted that another unusually large boost in rates would depend on data after officials raised rates by 75 basis points for the second straight month.
Expectations for the pace of Fed rate increases eased back -- with swap markets showing around 58 basis points of tightening priced in for the next meeting in September and the expected peak for the cycle dropping to around 3.3% -- with that kind of level seen toward the end of this year or early in 2023.

Chair Powell press conference

There's so much uncertainty. These aren't normal times. There's significantly more uncertainty about the path ahead and ordinarily it's quite high. The only data point I have for you is the June SEP, which, I think, is just the most-recent thing the economy's done. Since then, inflation is coming higher at economic activity, coming in weaker than expected, but at the same time, I'd say that's probably the best estimate of where the committee's thinking, which is still that we'd get to a moderately restrictive level by the end of this year. Somewhere between 3 and 3.5% and where the committee sees further rate increases in 2023. We'll update that at the September meeting, but that's really the best I can do on that.



Read Full Report
July 21, 2022
SGH Insight
Regarding September, markets seem confused by Lagarde’s comments today that essentially dropped the ECB’s guidance from its June Amsterdam meeting entirely, while expressing that today’s larger-than-communicated rate hike does not represent a change in the ECB’s probable rate hike destination, at least in this early, more visible part of the cycle.
The conclusion some seem to have taken from those comments, as implied by one reporter’s line of questioning, is that if the previous guidance was for a combined 75 bp of hikes between the July and September meetings (25 and 50), then ‘does 50bp today with an unchanged destination mean 25 in September’?
The answer, unmitigatedly, is no. As we wrote on July 13:
Our understanding is that there is strong and broad consensus across the Governing Council on the need to, at a minimum, get rates above the lower end of the ECB’s roughly 1-2% estimate for nominal neutral rates for the euro zone — in an expeditious fashion.
And importantly for markets:
…for all the market concerns over recession and the specter of a severe energy squeeze from Russia over the winter, having come late to the hiking cycle, and with some ground to be made up before rates are “normalized,” the default mode for the ECB in the early part of the cycle will be towards 50 bp hikes
While shying away from a discussion of where exactly “neutral” might lie, Lagarde today did indeed emphasize that the ECB’s goal to “progressively” raise interest rates until it gets to a broadly neutral position has not changed. Furthermore, the TPI is not just about opening the 50bp option for today, but its mere existence in the background will allow the ECB to “walk the journey.”
Beyond the clear economic rationale to start the process of “frontloading” rates now – an important term that Lagarde also used repeatedly today — this linkage between the roll-out of TPI and the decision to hike by 50bp was explicitly laid out in both the formal communique and multiple times in President Lagarde’s press conference.
So, while we believe the Governing Council has gotten out of the business of providing explicit guidance for its next meetings, at least for now, we think that is simply to acknowledge that the old 25+50 consensus has been tossed out, and to avoid putting the Council in an awkward situation again in the future if it needs to “surprise” from expectations.
We do not see that in any way lessening the odds of 50 in September.
Market Validation
Bloomberg 8/18/22

Schnabel Flags Big ECB Hike Ahead Amid Strong Inflation
Several indicators suggest ‘elevated risk of de-anchoring’
Markets are betting on 50 basis-point hike in September

The inflation outlook hasn’t improved since the European Central Bank raised rates by half a point in July, Executive Board member Isabel Schnabel said in a Reuters interview, suggesting that another hike of similar magnitude may be coming next month.
Price pressures won’t vanish quickly and might in fact accelerate further in the short run, Schnabel said. While most gauges of inflation expectations remain anchored, she warned that “a number of indicators are pointing toward an elevated risk of de-anchoring.”
In September, “any decision is going to be taken on the basis of incoming data,” she said. “If I look at the most recent data, I would say that the concerns we had in July have not been alleviated.”
Schnabel’s remarks are the most concrete yet about the ECB’s future interest-rate path after policy makers decided last month to no longer flag the size of upcoming hikes. A worsening inflation outlook prompted officials to act more forcefully at their last meeting than they previously communicated, triggering a debate about the merit of precomitting when uncertainty is high.

Bloomberg 7/25/22

The European Central Bank may not be done
with big increases in interest rates after surprising with an
initial half-point hike last week, according to Governing
Council member Martins Kazaks.
“I would not say that this was the only front-loading,”
Kazaks, one of the ECB’s most-hawkish officials, said in an
interview in Frankfurt. “I would say that the rate increase in
September also needs to be quite significant.”

Bloomberg 7/25/22

The European Central Bank will follow a
step-by-step approach in raising borrowing costs, according to
Governing Council member Ignazio Visco.
“We will see depending on data how to go on, but this does
not mean that we are not going to proceed in a gradual way,” the
Italian central bank governor said in an interview with
Bloomberg Television. Gradualism “means moving step by step, not
being very slow.”
He added that “there is no way now to say now” whether the
ECB’s next step should be a quarter-point or half-point
increase.

Bloomberg 7/25/22

European Central Bank President Christine Lagarde said interest rates will be increased as much as is required to bring inflation back to 2%.
“We are sending a clear message to companies, employees and investors: inflation will return to our target value of 2% in the medium term,” she said in an op-ed for Germany’s Funke Mediengruppe. Measures taken so far “are already having an impact on interest rates across the euro area.”
The comments come a day after the ECB raised rates more than expected, ending eight years of negative interest rates to fight inflation that hit 8.6% in June and is expected to accelerate further. The 50 basis-point hike brought the deposit rate to 0%, ending eight years of negative rates. Investors see about 113 basis points of addition ECB rate increases by year-end, according to market bets.
“We will raise interest rates for as long as it takes to bring inflation back to our target,” Lagarde added. The Governing Council will “decide on the right pace for our next steps based on the newly available data.”
Read Full Report
July 13, 2022
SGH Insight
Another Disastrous CPI Report

With this report, we can’t ignore the possibility that the Fed steps up to 100bp at the July meeting. The Bank of Canada did exactly that this morning. The argument for 100bp is that it is too late to avoid a recession, so just embrace it. The argument against 100bp is that the Fed has kept the focus on 75bp or 50bp to dispel speculation that it would hike 100bp at the next meeting, that 100bp would induce additional unwanted volatility, at a certain point continued escalation is just reckless (creating a deeper recession than necessary), and unlike in June the Fed doesn’t have a new SEP to provide a framework to support the move.

That said, the Fed has put itself in a position where to maintain credibility on its intention to restore price stability it almost needs to find a way to escalate with each new bad inflation number. The question is what direction that escalation will take; either 100bp in July or signaling another 75bp for September. I think, and have been expecting, the Fed will opt for the latter option, but the risk is clearly weighted toward a 100bp move in July. We have a couple of days before the blackout period for the Fed to put any speculation of 100bp to rest (I don’t think the Fed wants to shift gears the weekend before the FOMC meeting again).
Market Validation
Bloomberg 7/14/22

Federal Reserve Governor Christopher Waller said he supports a three-quarter percentage-point increase in the benchmark lending rate later this month after seeing the latest jump in the consumer price index, but could vote for more aggressive action if coming economic reports point to further inflation risks.
“With the CPI data in hand, I support another 75 basis-point increase,” Waller said Thursday in remarks to a Global Interdependence Center event in Victor, Idaho.
While the CPI figures were a “major league disappointment,” Waller stressed that his vote is contingent on additional data due before the July 26-27 Fed policy meeting, citing retail sales and housing.
“If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” said Waller, who will answer questions from Bloomberg’s Michael McKee following his prepared remarks.
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