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
November 30, 2022
SGH Insight
The three main European Union countries that have been holding out for a lower, more aggressive price cap by the EU and G7 allies on imports of Russian oil via tanker – Poland, Lithuania, and Estonia – have made the case that the $65-70 per barrel price cap presented by the European Commission to EU governments on behalf of the G7 last Wednesday was a level fixed in September, when the Russian Urals crude traded on the market between $68 and $76.
This reflected a U.S. administration view apparently that a price cap of about 5% below the market price would be just right as it would be a level at which Russia could swallow the discount, but not low enough to make it worthwhile for Moscow to set up elaborate by-passing and smuggling schemes.
Since then, however, Russian crude prices have been trending down to below $65, so setting a price cap at that level does not make much sense — it will not be a cap at all.
Moreover, these hawks point out that Russia’s 2023 budget was built on the assumption that it would be able to sell its oil at $65 per barrel, so setting the limit at that level would do nothing in terms of diminishing the Kremlin’s expected ability to finance its war in Ukraine — Putin would get exactly the price he planned for.
Indeed, these three countries say that Russian production costs are $20-25 per barrel, so even with a cap at $30 there would be profit for Moscow. That said, EU officials believe Washington would be amenable to a price cap in the $50-$60 per barrel range, leaving the impression that this is where they expect the landing zone to be.
Talks between EU countries and G7 capitals will continue this week. They are likely to continue through the weekend, but ambassadors involved in the discussions seemed cautiously optimistic a deal is possible before their December 5th deadline in time for the rollout of what was originally a ban on Russian sea-borne oil imports.

Market Validation
Bloomberg 12/2/22

EU Agrees to Set $60 Price Cap Level for Russian Oil Exports

The European Union agreed to put a price cap on Russian oil at $60 a barrel, paving the way for a wider Group of Seven deal, according to a Polish diplomat.
The price is higher than where Russia already sells most of its crude. That’s because one of the main aims of the measure is to try to keep Russian oil flowing to global markets. But it’s less generous than an earlier proposal after pressure from Poland and the Baltic countries.
After long negotiations, those countries succeeded in securing additional conditions aimed at punishing Moscow, including a mechanism that would allow for revisions of the price every two months, There’s also a plan to make sure any resetting of the cap should leave it at least 5% below average market rates.
Read Full Report
November 28, 2022
SGH Insight
The Fed is poised to hike rates 50bp at the upcoming FOMC meeting. The Fed will hike rates at subsequent meetings, but we still don’t see a clear reason to expect the terminal rate will be greater than 5.125%. We expect Fedspeak, particularly from Powell, will reiterate that slowing the pace of rate hikes does not mean any less commitment to the inflation target. We think his comments on the labor market will emphasize that although there are signs of cooling, the labor market remains overheated. The Fed would like to hold financial conditions steady here, but if market participants remain predominantly focused on the potential for a Fed pause and concerns about recession, any jawboning intended to keep the “higher for longer” story may fall on deaf ears.
Market Validation
Bloomberg 11/30/22

Treasuries Pare Losses After Powell; Target Peak Priced Below 5%

Treasuries pare declines, led by front and belly of the curve, after Fed Chair Jerome Powell says the time for moderating hike pace may come as soon as December.
Treasury yields flip to richer on the day at the long-end of the curve, while 2-year yields moved to be 1bp up on the day and and well off session highs; 2s10s and 5s30s spreads pared earlier flattening move although remain tighter on the day
Over the release volumes spike with around 40k March 10-year note futures trading in move from around 112-21 up to 113-01 -- price action remains inside session range however
Swaps showed a dialing back of expectations for Fed terminal rate to just under 5%, down from level pre-remarks and similar to end of prior day

FT
In a wide-ranging speech about the outlook for monetary policy, Powell said that in order to bring inflation back down to the Fed’s 2 per cent target, the labour market must become substantially softer and there would need to be a “sustained period of below-trend growth”. He said that job gains still remain far too high, at about 290,000 positions per month over the past three months. And wage growth remains well above than the figure that would correspond to inflation falling back to target, he added.
Read Full Report
November 22, 2022
SGH Insight
In yesterday’s report, (SGH 11/22/22, “ECB: Frontloading Pressures”), we outlined ongoing pressures beneath the surface across the ECB to continue the process of frontloading interest rate hikes. And while 50bps is by all standard measures an aggressive move, we wrote that what had been seen to date in markets and by analysts as a lack of agitation from ECB hawks for another 75bp hike at their next meeting should not be interpreted to mean there might not end up being a good deal of support for that by December 15, and that 75 would be a serious option on the table, and that the 50bp hike assumed by many would be in fact a razor’s edge decision in light of continued problematic inflation figures and what we expect will be another upside revision to the ECB’s inflation forecast at the same meeting.

We are now switching our call from leaning 50 (“just barely”), to leaning to 75 for December, under the assumption that some last few data releases, and most importantly the ECB staff forecast revision on December 15, pan out broadly along the lines we expect.
Market Validation
Bloomberg 11/25/22

Eurozone Bonds Drop as More Hawkish ECB Comments Stall Rally

A rally in European bonds ground to a halt
on Friday, with investors betting on a faster pace of interest
rate hikes as they digested more hawkish comments from central
bank policy makers.
German 10-year yields rose as much as 13 basis points to
1.98%, trimming what’s set to be the third weekly drop in
yields.
European Central Bank policymaker Isabel Schnabel signaled
on Thursday that it may be premature to scale back rate
increases, pushing back against a market watching for signs that
global monetary policy tightening can ease. ECB Governing
Council member Madis Muller echoed the sentiment on Friday,
saying that the main risk in the battle to quench record
inflation is halting the hiking process too soon.


Read Full Report
November 21, 2022
SGH Insight
The Fed plans to raise its policy rate to a level that is sufficiently restrictive to restrain the demand side of the economy and put downward pressure on what it views as the persistent component of elevated inflation. The Fed does not know exactly what the appropriate level of the terminal rate will be, but given the cumulative tightening already in place, the Fed is ready to downshift to 50bp-increments at the December FOMC meeting. The Fed does not want to see financial conditions ease markedly now, especially if the easing reflects a misunderstanding of the Fed’s reaction function. From the Fed’s perspective, the market reaction to the October CPI report, specifically the equity rally and decline in longer term interest rates, was premature and does not recognize the Fed’s belief that labor market restraint is a prerequisite for restoring price stability. We expect the Fed will emphasize that it expects to hold policy rates restrictive until labor markets soften substantially to try to front run a soft November CPI report.
Market Validation
Bloomberg 11/26/22

Federal Reserve officials concluded earlier
this month that the central bank should soon moderate the pace
of interest-rate increases to mitigate risks of overtightening,
signaling they were leaning toward downshifting to a 50 basis-
point hike in December.
“A substantial majority of participants judged that a
slowing in the pace of increase would likely soon be
appropriate,” according to minutes from their Nov. 1-2 gathering
released Wednesday in Washington.
In addition, while Chair Jerome Powell said during his
post-meeting press conference that rates will probably
ultimately go higher than officials’ September forecasts
indicated, Wednesday’s report gave a more nuanced take:
“Various” officials -- a descriptor not commonly used in the
minutes -- had concluded that rates would ultimately peak at a
higher level than previously expected.
Read Full Report
November 21, 2022
SGH Insight
The preference for 50 in December should not be news to many followers of the ECB, nor to our readers, and it is not the story for today.
What is newsworthy at this juncture is that the arguments and support for a continued front loading of rate hikes are under the surface still very much alive.
Indeed, the lack of public agitation for a 75bp hike in December from traditional hawks within the Council should not be interpreted to mean it will not be on the table as a serious option on December 15. Whether it carries the day remains to be seen, but what appears certain is that the glidepath from 75 to 50 to 25bp hikes in 2023 as envisioned by many ECB officials is very much in doubt.
Market Validation
Bloomberg 11/22/22

The European Central Bank will deliver
another “robust” interest-rate increase next month, though it’s
premature to settle on its size just yet, according to
Bundesbank President Joachim Nagel.
Inflation data due before the Governing Council’s Dec.
14-15 meeting and new economic projections through 2025 will be
key to determining whether a third straight 75 basis-point hike
is needed to tackle record inflation, or whether a half-point
step is sufficient, Nagel told journalists in Frankfurt.
Either way, the ECB’s efforts on rates should be
complemented by a reduction in the stash of bonds it bought as
stimulus during recent crises, starting early next year, he
said.
Read Full Report
November 14, 2022
SGH Insight
The October CPI report reinforced our caution last week about pushing the expected terminal rate for the Fed’s tightening cycle above 5.125% for the time being. Even if like us you believe that inflation will not be dispelled quite so easily, there is simply too much risk of reports like this between now and next May to have much visibility beyond 5.125% for the time being. Indeed, now there is a path to 4.625%, although we think that is unlikely. The CPI report locked in expectations that the Fed will step down to a 50bp rate hike in December, and that is widely seen as a precursor to stepping down to 25bp, and then to a pause. We will be living with this CPI report until the next one is released in December.
Market Validation
Bloomberg 11/17/22

Fed Daly Says Rate Peak Between 4.75%-5.25% a Reasonable Range

Federal Reserve Bank of San Francisco President Mary Daly said 4.75% to 5.25% was a “reasonable” range for where the US central bank could lift interest rates and then go on hold.
“Somewhere between 4.75 and 5.25 seems a reasonable place to think about as we go into the next meeting,” Daly said in a Wednesday interview on CNBC. “And so that does put it in the line of sight that we would get to a point where we would raise and hold.”
Read Full Report
November 14, 2022
SGH Insight
Beijing expects the hawkish US Taiwan Policy Act to pass in Congress most likely in the spring of next year once the new legislature is in session. Officials also note that House GOP leader Kevin McCarthy has declared that if the Republicans win the House majority he plans to create a China select committee to confront China in all areas. They expect GOP focus and pressure to extend far beyond the planned select committee, with weapons sales to Taiwan as a front and center focus for the Republicans.
Furthermore, they believe that as long as the Republicans win the House majority, McCarthy or whoever may end up as House speaker will visit Taiwan during their two-year term, compounding the escalation that followed the visit this year by Speaker Nancy Pelosi to Taipei.
Market Validation
Reuters 11/21/22

Kevin McCarthy, the Republican leader in the U.S. House of Representatives, said on Sunday he would form a select committee on China if he is elected speaker of the chamber, accusing the Biden administration of not standing up to Beijing.
"China is the No. 1 country when it comes to intellectual property theft," he told Fox News in an interview.
"We will put a stop to this and no longer allow the administration to sit back and let China do what they are doing to America."
Read Full Report
November 07, 2022
SGH Insight
The Fed is heading toward a 50bp rate hike in December, and we think odds favor pushing through another 50bp rate hike at the January/February FOMC meeting. Still, the Fed does appear to be looking for a place to pause and although Federal Reserve Chair Jerome Powell guided the terminal rate higher again last week, we can see the makings of a peak of this cycle if core inflation does not accelerate, but it will be higher than the doves think is appropriate. For us, an important question is whether Powell pushes that peak past the point where “higher for longer” is no longer a viable policy option.
Market Validation
Bloomberg 11/10/22

Treasuries rise sharply to fresh highs of the day, soaring after October CPI data prints below estimate. Fed-dated OIS market drops sharply, almost pricing in a 50bp move at the December Fed meeting instead of another 75bp hike.
Futures volumes surge with almost 100k 10-year note contracts trading in the post-CPI bid; 10-year yields drop to around 3.94%, richer by 15bp on the day while 2s10s spread re-steepens
Fed-dated OIS pricing in 52bp rate hikes for the December meeting vs 58bp priced Wednesday close; further out Fed peak drops to 4.88% by May next year, down from 5.05% prior close
Read Full Report
November 01, 2022
SGH Insight
...Xi stressed that the most important task in the next six months is to ensure economic stability, financial market stability, the stability of the RMB exchange rate, and the stability of attracting foreign investment. He particularly stressed that it is necessary to strive for economic growth in the current fourth quarter of 2022 to return to the “normal” level, that is, 5.0%.
Xi particularly emphasized the need to take corresponding measures to stabilize the stock market, to ensure that the RMB does not depreciate in a disorderly manner, and to make foreign investors have confidence in China, as well as help Hong Kong to stabilize its financial market...
Market Validation
Bloomberg 11/2/22

People’s Bank of China Governor Yi Gang gave
an optimistic outlook for the economy on Wednesday, saying it
remains “broadly on track” and he hoped the property market can
achieve a “soft landing.”
Currency
We follow a flexible and, by and large, market-determined
exchange rate regime with reference to a basket of currencies.
Since the beginning of the year, thanks to sound long-term
fundamentals of China’s economy, the RMB remained relatively
stable against a basket of currencies, with some depreciation
against the USD and somewhat appreciation against other major
currencies. In the future, we will keep on with the market-
determined exchange rate regime. The RMB exchange rate will
continue to remain relatively stable at a reasonable and
appropriate level, maintaining its purchasing power and keeping
its value stable.

Economy

I should say that the Chinese economy has remained broadly
on track, despite some challenges and downward pressures. The
Chinese economy has proved to be quite resilient. In Q3 the GDP
grew by 3.9%, up by 3.5 percentage points over the second
quarter. The job market remains stable with the surveyed
unemployment rate posting 5.5% in September.
Thanks to a bumper grain harvest and stable supply of coal
and electricity, inflation remained subdued. The CPI increased
by only 2.8% year-on-year in September and PPI increased by 0.9%
year-on-year.
I expect China’s potential growth rate to remain in a
reasonable range. China has a super large market, as there is
still much room for urbanization and demand of middle-class
consumers is still on the rise. Thanks to a large group of
engineers and skilled workers, China has built a full-fledged
modern industrial system, and a high-quality infrastructure
network.
Read Full Report
November 01, 2022
SGH Insight
On tomorrow’s FOMC meeting, our baseline hasn’t changed. The Fed will discuss the pace of rate hikes at upcoming meetings, and Federal Reserve Chair Jerome Powell will acknowledge the discussion, but will most likely claim that the Fed makes policy decisions on a meeting-by-meeting basis with nothing decided in advance.

At issue is how much guidance Powell provides regarding the path of monetary policy. We believe he will retain the option of 75bp in case the Fed needs to respond to upside surprises to the inflation outlook. That said, we don’t think he will leave us flying completely blind; we think he will need to define the Fed’s reaction function more carefully...

...We don’t think Powell will embrace the idea of a pause at the SEP-implied terminal rate. Although a group of presidents has been unusually vocal in their desire to find a place to pause, that’s still too far in the future to commit to, and could easily change with the December SEP. Indeed, our expectation is that the dots move higher again in December, albeit a nudge rather than another leap...
Market Validation
That's why I've said it's appropriate to slow the pace of increases. So that time is coming. And it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we'll have a discussion about this at the next meeting, a discussion. To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive which will be our principle focus.

POWELL:
That's meant to put that question really as the important one now going forward. I've also said that we think that the level of rates that we estimated in September, the incoming data suggests that that's going to be higher. That's been the pattern. I would have little confidence that the forecast, if we made a forecast data, if we did SEP today, one after another that will go up. That will end when it ends. There's no sense that inflation is coming down. If you look at the -- I have a table of the last 12 months of 12-month readings, there's really know pattern there. We're exactly where we were a year ago. Okay. So I would also say it's premature to discuss pausing. It's not something that we're thinking about. That's really not a conversation to be had now. We have a ways to go. The last thing I'll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. I control those messages. That's my job.

Read Full Report
October 31, 2022
SGH Insight
...The Fed will follow through with another jumbo-sized rate hike this week but will signal a high likelihood that this will be the last 75bp rate hike in the cycle...

...I repeat my mantra that it is ill-advised to bet against the consumer in the absence of substantial job losses. To be sure, we get a fresh read on the labor market this week, but initial unemployment claims clearly tells us that the labor market is not coming unglued:
Market Validation
11/2/22

Following is the FOMC statement released today by the Federal Reserve in Washington:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. 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.

Bloomberg 11/1/22

Job Openings in US Unexpectedly Rise, Keeping Pressure on Fed
Vacancies climbed by 437,000 to 10.7 million in September
Quits rate held at 2.7%, while number of hires eased

US job openings unexpectedly rose in September, highlighting enduring tightness in the labor market and risking sustained upward pressure on wages that will likely keep the Federal Reserve on a path of steep interest-rate increases.
The number of available positions increased to 10.7 million in September from a revised 10.3 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Tuesday. The median estimate in a Bloomberg survey of economists called for a drop to about 9.8 million.
The surprise pickup in vacancies highlights unrelenting demand for workers despite mounting economic headwinds. The persistent imbalance between labor supply and demand continues to underpin robust wage growth, adding to widespread price pressures and reinforcing expectations for yet another large rate hike on Wednesday.

Read Full Report
October 27, 2022
SGH Insight
...That said, as with US rates, European rates traders have also latched on to a deceleration story to aggressively drop their estimates for the terminal rate for this cycle. While reporters kept pressing Lagarde on whether she agreed with the market’s expectations of a 3% peak, that bird flew some time ago, and markets have already dropped well below that, to a bit over 2.5%.
As to where markets are today, color us skeptical that the cycle will end at 2.5%. Barring the materialization of a deeper geopolitical shock, for which we must of course always be on alert, we suspect that is a view that is shared by many ECB officials...
Market Validation
Bloomberg 11/3/22

*ECB'S VISCO: MARKETS' PEAK RATE OF 3% IS `A POSSIBILITY'
*ECB'S VISCO: RATE HIKES SHOULD BE `GRADUAL, CONTINUOUS'
*ECB'S VISCO: NORMALIZATION MEANS TIGHTENING GRADUALLY

Read Full Report
October 27, 2022
SGH Insight
A resurgence in Australia’s inflation rate rate to a 32-year high will challenge the Reserve Bank of Australia (RBA) to weigh another large rate hike when it meets next week though it will probably settle on 25 basis points.
Consumer prices rose 7.3% in the 12 months through the September quarter, following a 6.1% rise in the prior quarter and marked its highest annual rate since 1990. The data reflected higher prices for food, fuel and housing and showed a broadening into services.
The latest outcomes will prompt more serious consideration of 50bp than a slower inflation outcome would have required at the November 1 board meeting. The RBA however will not panic and reverse last month’s step-down to a slower pace of moves in response to one, albeit important, data point...

...The Bank will use next week’s interest rate announcement that accompanies the monetary policy decision to reiterate its option to resume larger hiking increments if necessary.
RBA deputy governor Michele Bullock said in a speech on October 17 that the RBA’s schedule of 11 board meetings a year provides it more flexibility on the size and timing of rate increases than most other major central banks.
“It also means that if we increase interest rates at every meeting, we can potentially move much faster than overseas central banks,” she added.
The latest inflation spike demonstrates why the RBA’s October 4 step down was accompanied by language that retained a clear and stridently hawkish hue, just as it will again next week.
It almost certainly locks in at least another 25bp hike in December to 3.10%, and likely more moves through the first quarter of 2023...

...More important to RBA thinking will be how the report impacts its forecast path for inflation through 2024. A higher inflation peak would require a higher peak in the cash rate, beyond 3.50% next year.
That elaboration probably will come in upward adjustments to the inflation path in the quarterly Statement on Monetary Policy (SMP) that follows this meeting by a few days, on November 4...
Market Validation
AAP 11/1/22

RBA hikes interest rates 25 basis points
The Reserve Bank of Australia has hiked rates by another 25 basis points on Melbourne Cup day, adding to the pressure already felt by mortgage holders.

The central bank has pulled the trigger on another 25 basis point rate rise and upgraded its peak inflation forecasts off the back of a surprise surge in the cost of living.
The seventh hike in the Reserve Bank of Australia's policy tightening cycle brings the official cash rate to 2.85 per cent.

Bloomberg 11/1/22

“If we need to step up to larger increases again to secure
the return of inflation to target, we will do that,” Lowe said,
reiterating the bank isn’t on a pre-set path. “Similarly, if the
situation requires us to hold steady for a while, we will do
that.”
The RBA has raised rates by 2.75 points since May and broke
ranks with global peers last month when it surprisingly pivoted
to smaller hikes following four consecutive half-point
increases.
“The board judged that it is appropriate to move at a
slower pace while we assessed the data, the economic outlook and
the impact of the rate rises to date,” Lowe said. “The board’s
base case remains that interest rates will need to go higher
still to bring inflation back to target.”

Bloomberg 11/1/22

The RBA also provided headline numbers from its quarterly
update of forecasts that will be released in full on Friday. It
expects inflation to now peak at around 8%, slightly up from a
previous 7.75% and remain above 3% through 2024.

Bloomberg 11/7/22

Australia’s central bank increased its
forecasts for inflation and wages growth and highlighted the
risk of a price-wage spiral emerging among key reasons it
expects to raise interest rates further.
Headline inflation is now seen peaking at 8% this year,
from 7.75% previously, the Reserve Bank said Friday in its
quarterly Statement on Monetary Policy. Both the headline and
core measures are predicted to remain above the RBA’s 2-3%
target over the next two years. The RBA had, in August,
predicted both measures would hit the top of its band in late
2024.
Today’s forecasts assume the cash rate will rise to 3.5% by
next June before easing back to around 3% by end-2024. The
exchange rate is assumed to be unchanged at current levels.
Read Full Report
October 24, 2022
SGH Insight
The Fed is poised to raise rates 75bp next week and further rate increases are expected at upcoming meetings. Still, Fed presidents are increasingly vocal in their assessment that the current SEP-implied terminal rate of 4.50-4.75% is not just a near-term goal but an opportunity to pause and assess the impacts of the Fed’s actions. The forthright and consistent nature of their comments suggests they expect the support of their colleagues on the Board. We think there remains upside risk to the terminal rate (it is easy to see the Fed managing market expectations by dropping down to 50bp in December while nudging the terminal rate higher), but the discussion is turning toward the ability to slow the pace of rate hikes and find a terminal rate as long as inflation does not worsen further in the near-term. Even if the Fed follows this road, it will retain a bias toward future rate hikes and argue it can raise rates later in 2023 if inflation doesn’t fall or fall far enough to see a return to price stability with a reasonable forecast horizon.
Market Validation
POWELL:
That's meant to put that question really as the important one now going forward. I've also said that we think that the level of rates that we estimated in September, the incoming data suggests that that's going to be higher. That's been the pattern. I would have little confidence that the forecast, if we made a forecast data, if we did SEP today, one after another that will go up. That will end when it ends. There's no sense that inflation is coming down. If you look at the -- I have a table of the last 12 months of 12-month readings, there's really know pattern there. We're exactly where we were a year ago. Okay. So I would also say it's premature to discuss pausing. It's not something that we're thinking about. That's really not a conversation to be had now. We have a ways to go. The last thing I'll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. I control those messages. That's my job.
Read Full Report
October 20, 2022
SGH Insight
Evolving the Narrative
Bottom Line: Fed presidents increasingly sound like 4.5-4.75% is not just a near-term objective, but also a medium-term objective in that they believe it will be sufficiently restrictive – if held for a long time – to restore price stability. The destination which members agreed to at the September meeting as we have written also appears to be based more on a “feeling” than any type of hard evidence, and such feelings have gotten the Fed in trouble this year.
Market Validation
Bloomberg 10/20/22

Federal Reserve Bank of Philadelphia President Patrick Harker said officials are likely to raise interest rates to “well above” 4% this year and hold them at restrictive levels to combat inflation, while leaving the door open to doing more if needed.
“We are going to keep raising rates for a while,” Harker said Thursday in remarks prepared for an event with the Greater Vineland Chamber of Commerce in Vineland, New Jersey. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year,” before pausing hikes sometime next year, he said.
Read Full Report
October 19, 2022
SGH Insight
...The European Central Bank will hike its benchmark deposit rate by 75 basis points, from 0.75% to 1.50%, when the Governing Council convenes again in Frankfurt next Thursday, October 27 for its monetary policy meeting.
With so many officials having already come out in force to express their strong preference for another 75bp hike, it would indeed, as one official quipped, be truly bizarre if the ECB was not to hike by 75 bps next week...

...Eyeing the Next Two Meetings
The near-term, broad policy consensus among ECB officials beyond the October meeting remains as we laid out in detail in SGH 9/29/22, “ECB: Staying the Course.” If anything, these expectations have been reinforced since by ECB and Eurosystem officials in speeches, and most notably in detail by Banque de France Governor Francois Villeroy de Galhau.
The December 15 meeting will entail a debate between another 75bp hike to 2.25% or a 50bp hike to 2%.
Many officials are leaning to a modest step down in pace from the 75s, to 50, including Villeroy, and we believe it would be fair to say this is a rough, if not rather loosely held, consensus at this time.
But there are many officials also already leaning towards another 75bp in December, and it seems a reasonable bet to us that the continued poor inflation data going into the turn of the year, with core pressures remaining high even if headline stabilizes, will keep our (and the market’s) lean towards 75.
With the usual caveat of considerable uncertainty around the turn of the year, energy prices, growth concerns, and most importantly a true sense of the underlying dynamics behind core inflationary pressures, the strategy as we also laid out in the Sep 29 report is to then decelerate the pace of rate hikes once the ECB gets above a 2% handle, perhaps to 25s (if they can get away with that), as the ECB starts the process of shrinking its balance sheet...

...As to timing, some financial wire services predict that the balance sheet reduction will not start until March 2023, but we believe this is off the mark.
We expect the ECB will know by its February 3 meeting, the first meeting of 2023, what it intends to do, decide, and announce the details at that meeting. With a massive balance sheet clearly working at odds to monetary policy objectives, the ECB will then start the gradual reduction process in the same month — February...
Market Validation
Bloomberg 10/27/22

The following is a reformatted version of the introductory remarks of European Central Bank President Christine Lagarde at a press briefing on Thursday:
“Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, we have made substantial progress in withdrawing monetary policy accommodation. We took today’s decision, and expect to raise interest rates further, to ensure the timely return of inflation to our two per cent medium-term inflation target.

Bloomberg 10/27/22

European equities erased earlier losses as the region’s central bank raised interest rates while its statement was seen as less hawkish, with traders paring bets on longer-term interest-rate hikes.
The Stoxx Europe 600 was up 0.2% by 2:17 p.m. in London after the ECB doubled its key interest rate to the highest level in more than a decade through a 75 basis points hike. At the same time the central bank slightly tweaked its policy guidance to remove reference to “next several meetings.”
Rates-sensitive technology shares trimmed declines after the decision, while real estate and banks outperformed.
While the ECB said that it expects to raise interest rates further, it adopted a slightly less hawkish tone. That led money markets to cut rate-hike wagers by as much as 20 basis points, pricing a peak below 2.75% next year. That compares with above 3.25% seen as recently as last week.
“Markets are happy with the more dovish tone of the ECB, as it indicated the pace of tightening would slow going forward,” said Esty Dwek, chief investment officer at Flowbank SA.

(AFP) 10/27/22

ECB to decide how to trim balance sheet in December: Lagarde

European Central Bank policymakers will determine at their next meeting in December how to start winding down the Frankfurt-based institution's huge pile of public and corporate debt.
The ECB would determine the "key principles" to trim its massive balance sheet, which has swelled to trillions of euros over years of expansionary measures aimed at nudging up stubbornly low inflation.
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October 17, 2022
SGH Insight
...The calendar here seems important. The SEP implies the last hike is in January, a 75-50-25 path, and by extension that the last hike is right in front of us. If Fed speakers keep leaning into the SEP as we move closer to that point, the pause will look more real. Imagine that in the context of the current data flow; it would suggest pausing even with high inflation. Also imagine the possibility that Powell at the next press conference says that the “meeting discussion was in the context of the September SEP.” That will be only two meetings away then. They must have a good idea what they are planning over the next two meetings.
Strategically, the Fed could manage this debate by finding a consensus between those focused on current high inflation and those worried about the risk of overshooting. The Fed can step down to 50bp at the December meeting, thereby acknowledging the more dovish participants’ concerns while at that same meeting raising the SEP-implied terminal rate a notch to reflect the still too-high inflation data. Such a continued upward drift in the terminal rate remains our base case. Rather than shortening the cycle as Bullard suggests, the Fed elongates the cycle with what eventually become 25bp rate hikes. Remember, Waller said that there will be a substantial discussion of the pace of rate hikes at the next meeting; that’s where FOMC participants would develop a consensus around the next stage in the cycle...
Market Validation
Bloomberg 10/21/22

Treasury Yields Jolted From Highs on Prospect of Fed Let-Up
10-year yield still on track for 12th straight weekly increase
Five-year note’s rate topped 4.5% for first time since 2007

The US five-year Treasury yield exceeded 4.5% for the first time since 2007 on Friday on the prospect of unrelenting Federal Reserve rate increases to control inflation. It subsequently slid to the lowest level of the day on a report undercutting that thesis.

Earlier, yields across the maturity spectrum reached multiyear highs led by the 30-year, which rose as much as 14 basis points to 4.36%, the highest since 2011. The five-year yield rose as much as six basis points to 4.504%. By mid-morning, short-dated rates were lower on the day while long-dated ones remained higher.
The reversal in short-maturity yields occurred after the Wall Street Journal reported that some Fed officials are concerned about overtightening, after having raised the policy rate by three percentage points since March, with another three-quarter point increase anticipated next month. The article said policy makers are likely to debate whether to signal that a smaller rate increase is possible in December.

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October 17, 2022
SGH Insight
Chips Ban Retaliation

Our understanding is that five ministries and commissions under China’s governing State Council are jointly studying countermeasures against the latest round of US chips bans against China. The Ministry of Commerce is expected to announce countermeasures against the US shortly after the 20th National Congress at the end of this month or early next month.

In the words of a senior Chinese official:
The move [chip ban] is the toughest measure the US has taken against China’s high-tech sector so far. It does have a serious short-term impact on China, but it will definitely not cause China’s high-tech companies to go out of business or bankrupt. How much impact the latest move has on China’s artificial Intelligence and chip sectors depends on how broadly Washington enforces the restrictions. In the long run, Washington’s extreme export control toward China will be difficult to sustain….
Market Validation
Bloomberg 10/20/22

China’s top technology overseer convened a
series of emergency meetings over the past week with leading
semiconductor companies, seeking to assess the damage from the
Biden administration’s sweeping chip restrictions and pledging
support for the critical sector.
The Ministry of Industry and Information Technology has
summoned executives from firms including Yangtze Memory
Technologies Co. and supercomputer specialist Dawning
Information Industry Co. into closed-door meetings since
Washington unveiled measures to contain China’s technological
ambitions.
MIIT officials appeared uncertain about the way forward and
at times appeared to have as many questions as answers for the
chipmakers, people familiar with the discussions said. While
they refrained from hinting about counter-measures, officials
stressed the domestic IT market would provide sufficient demand
for affected companies to keep operating, the people said,
asking to remain anonymous on a sensitive issue.
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October 14, 2022
SGH Insight
...EU energy ministers also agreed as we had expected to task the Commission to develop a different price benchmark for LNG so that the sector can dump the volatile and no-longer-representative-of-reality Dutch Title Transfer Facility (TTF) that is linked to pipeline gas. That will take time too.

EU energy ministers are to meet in November to approve whatever the Commission produces on October 18th...

...There was still no agreement on Wednesday on introducing any price caps on gas — for all the reasons discussed in our last report.

And while it is unclear yet if any price caps will be presented as an option by the Commission on October 18 or not, we believe that option remains highly unlikely...


...On Wednesday, October 12, European Union energy ministers agreed that the European Commission should present on October 18 a proposal for joint natural gas purchases by the whole EU, just like the bloc did for COVID-19 vaccines, to avoid one EU country outbidding the others.
This is relatively low hanging fruit in political terms, although it does involve a change of heart by Germany and the Netherlands, whose governments some time ago did not support joint purchases as they believed they were in good position to negotiate deals and pay what would be needed if necessary to keep their industries running.
The joint buying, however, would not start before mid-2023, the ministers agreed, so it is not an imminent measure, even if agreed sooner.

Joint Issuance
Despite press reports to the contrary, the idea of new, jointly issued EU debt to deal with the energy crisis does not seem to be happening for now.
The calls for new joint debt issuance have come largely from the Commission and given that it was French and Italian commissioners calling for it, one might reasonably suspect these had the blessing of Paris and Rome. But there is still strong pushback from Germany, and the usual group of fiscally conservative northern countries hiding behind Berlin.
The German case is simple and remains that there is still a lot of unused money from the recovery fund and the RePowerEU project that could finance whatever is needed, and there is therefore no point in borrowing more if the EU has not used what it has.
German officials choose to highlight the bigger figure of 600 billion euros still unspent from the EU recovery plan to make that case – which is the amount of money that has yet to be paid out from the recovery fund since actual disbursements so far have amounted to only around 200 billion euros...

Market Validation
Reuters 10/20/22

European Union leaders ended another debate on the bloc's response to the energy crunch without agreement on whether to cap gas prices, deciding in the early hours of Friday morning to keep examining options to put a ceiling on costs.

Bloomberg 10/17/22

The European Union’s executive arm plans to
propose a mechanism to curb price volatility on the bloc’s
biggest gas marketplace and prevent extreme price spikes in
derivatives trading to rein in the region’s energy crisis.
The temporary mechanism designed by the European Commission
would impose a dynamic price limit for transactions on the Dutch
Title Transfer Facility, whose main index is the benchmark for
all gas traded on the continent.
“This will help avoid extreme volatility and price hikes,
as well as speculation which could lead to difficulties in the
supply of natural gas to some member states,” the commission
said in a draft document seen by Bloomberg News.
The EU executive arm has a policy of not commenting on
documents that haven’t been published and the draft may still
change before adoption scheduled for Tuesday. In the next step,
the package will be discussed by EU leaders at their summit on
Oct. 20-21 in Brussels.
The package of measures would also include a temporary
intra-day price spike cap mechanism to avoid extreme volatility
in energy derivative markets, according to the draft. The aim is
to “ensure sounder price formation mechanism,“ protecting the
region’s energy companies from large spikes and helping them
secure supply in the medium term.

Bloomberg 10/18/22

The commission’s plan will be discussed by EU leaders at a
summit on Oct. 20-21 in Brussels. They may endorse a plan to
“explore a temporary dynamic price corridor on natural gas” that
would be implemented before a new LNG index is in place and are
likely to support joint gas purchases, according to a draft
political statement by the heads of government seen by Bloomberg
News. In the next step, energy ministers will debate the
specifics at a gathering in Luxembourg on Oct. 25.

The common purchase platform would coordinate the filling
of gas reserves. If storage supplies are depleted at the end of
this winter, meeting the 90% filling goal by November 2023 may
be more difficult next winter, according to the commission. The
plan is to mandate member states to jointly purchase enough gas
to account for at least 15% of their storage and allow companies
to form a European consortium to negotiate long-term contracts.
Russian supply sources would be excluded from participation.

The package will also offer tools for member states to use
state aid to mitigate the impact of high energy crisis on
companies and households, with member states offered the
possibility to use as much as €40 billion from the bloc’s
cohesion funds. To boost liquidity in energy markets, the
commission will propose increasing the clearing threshold for
non-financial counter parties to €4 billion and broadening the
list of eligible assets that could be used as collateral for one
year.
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October 13, 2022
SGH Insight
...The 19th Communist Party of China Central Committee concluded its seventh plenary session in Beijing on Wednesday afternoon, local time (October 12).
Xi Jinping Thought Through 2049
As we have written before, the seventh plenum decided to submit the draft amendment to the CPC Constitution to the 20th Central Committee emphasizing “Comrade Xi Jinping” as a “well-deserved” “people’s leader,” and to explicitly write into the CPC Constitution the statement of “Two Affirmations” that says: The Party has established Comrade Xi Jinping’s core position on the Party Central Committee and in the Party as a whole and has defined the guiding role of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era...
Market Validation
Bloomberg 10/20/22

President Xi Jinping has accumulated so many
titles he’s been called the Chairman of Everything. But one
gaining traction among Communist Party elites is raising
concerns of a Mao Zedong-style personality cult.
Lingxiu, or “leader,” is a revered title of praise
previously reserved for Mao, the founder of the People’s
Republic, who was referred to as “the great leader” when the
Cultural Revolution started in 1966. While party officials and
state media have occasionally bestowed the title on Xi in the
past few years -- in the form of renmin lingxiu, or “people’s
leader” -- this week has seen more cadres using the term,
including at least two Politburo members.
Beijing party chief Cai Qi, a close ally of Xi, said Sunday
afternoon that the past decade has proven the Chinese president
is the “people’s leader who has heartfelt love from us.” Wang
Chen, a senior lawmaker, also used the phrase to extol Xi during
a discussion of the Hubei province delegation on Monday morning.
“General Secretary Xi Jinping is the outstanding figure of
our great era, the people’s leader that all people look up to,”
Tian Peiyan, deputy head of the Central Committee’s Policy
Research Office, told a press briefing Monday on the sidelines
of the party congress, at which Xi is expected to secure a third
term in office.

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