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.

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
...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
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


“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

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.


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 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 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

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.
Read full report
July 13, 2022
SGH Insight
Markets have taken to heart European Central Bank President Christine Lagarde’s guidance to expect a modest, 25-basis point hike lift-off from the bank’s negative 0.50% deposit rate at its upcoming Governing Council meeting on Thursday, July 21.
That 25 bp lift-off, as we have written, is expected by ECB officials to be followed almost certainly by 50 basis points at their next meeting in September, with a high likelihood that at least one of the next two meetings of 2022 also results in a 50-basis point hike.
Those expectations, in particular the odds of a 50-basis point hike in July, may rise over the course of the next week, even as the ECB enters a blackout period on communications.
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 so as we wrote in our last ECB report, 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, with the penciled in 25 bp lift-off essentially representing a sort of “anomaly” (see SGH 7/5/22; “ECB: Hiking Through a Slowdown”).
In such an environment, we believe the odds for a surprise 50 in July are high, and arguments for a more cautious first-rate hike are increasingly hard to justify, especially with the roll out of an anti-fragmentation backstop that will help allay concerns over an “unwarranted” blow-out in peripheral (Italian) bond spreads now slated for release also on July 21.
Market Validation
Bloomberg 7/21/22

ECB Raises Main Refinancing Rate By 50BPS to 0.5%; Est. 0.250%

European Central Bank raised its main refinancing rate more than economists expected.
Main refinancing rate raised to 0.5% (estimate 0.250%)
38 of 46 economists in Bloomberg's survey expected 0.250%

Dow Jones 7/21/22

ECB Surprises as It Hikes Interest Rate by Half Percentage Point

The European Central Bank announced a larger-than-expected interest-rate increase of half a percentage point and outlined a new plan to buy the debt of Europe's most vulnerable economies, taking bold action to protect the currency union as it navigates the twin threats of skyrocketing inflation and slowing economic growth.
The ECB's surprise move on Thursday takes its key interest rate to zero and ends the bloc's controversial eight-year experiment with negative interest rates.
It suggests that the bank's top officials are increasingly concerned about the threat of persistently high inflation in the eurozone. Officials had telegraphed for weeks that the bank would likely raise rates by only a quarter percentage point this month.
The ECB said it would continue to increase rates toward a more normal level. It also said it had created a new bond-buying program, known as the Transmission Protection Instrument, which will ensure that the bank's interest rates are transmitted smoothly across the currency union. The scale of purchases under the new program will depend on the severity of the risks, the ECB said.

Bloomberg 7/21/22

The euro rallied and European bonds extended declines after the European Central Bank raised rates by 50 basis points.
German 2-year yields rise 17bps to 0.78%

Reuters 7/19/22

European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation, two sources with direct knowledge of the discussion told Reuters.
To cushion the impact of the higher borrowing costs, policymakers are also expected to announce a deal to help indebted countries like Italy on the bond market. The deal will require they stick to European Commission rules on reforms and budget discipline, the sources said.

Bloomberg 7/19/22

The euro jumped to a two-week high and
short-dated bonds slid across Europe as markets priced in a more
aggressive pace of interest-rate hikes from the European Central
The common currency rose more than 1.2% after reports that
ECB policy makers may consider a 50-basis-point rate hike at
their meeting on Thursday, larger than the quarter-point move
signaled in June.
That led money markets to bet on almost 50% odds of a half-
point hike this week and more than a percentage point by
September. Shorter maturity bonds led a selloff, with German
two-year yields -- among the most sensitive to changes in policy
-- surging as much as 12 basis points to 0.64%.
Read full report
July 11, 2022
SGH Insight
US Treasury Secretary Janet Yellen has been tasked with the formidable challenge of selling a buyer’s cartel/oil price cap scheme to America’s major economic global counterparts when she travels to Bali, Indonesia for the G20 meeting of finance ministers and central bank governors later this week.
Intended to force Russia to sell its oil at a substantial discount from market prices, a unified “G20-minus 1” position on the oil price caps – Russia, of course, would never agree — would entail convincing Moscow’s allies and major swing importers of Russian oil China and India to go along with the scheme. It would also need sign off from other member states who have tended to avoid taking sides against Russia in its aggression against Ukraine, including South Africa, Brazil, and the host country itself, Indonesia.
That is not likely to happen.
Market Validation
Bloomberg 7/17/22

An oil-price cap initiative to mitigate global inflation
while punishing Russia over what she calls “horrific
consequences” of the war in Ukraine has been high on the agenda
for US Treasury Secretary Janet Yellen, but a non-starter for
others like China and India. Indrawati said she will discuss the
proposal with Indonesia’s energy-related ministries.
Treasury said in a statement Yellen held a number of
bilateral meetings including sessions with Saudi Arabia’s
Finance Minister Mohammed Al-Jadaan, Australian Treasurer Jim
Chalmers, South African Minister of Finance Enoch Godongwana and
Singapore’s Deputy Prime Minister Lawrence Wong. The statement
didn’t include details with how ministers responded to Yellen’s
appeal on the oil price cap.

Read full report
July 08, 2022
SGH Insight
Russia’s Defense Minister Sergei Shoigu held a video call recently with China’s Defense Minister Wei Fenghe on the Ukraine crisis and Sino-Russian military cooperation.
During the call, Shoigu expressed his satisfaction with Russian military operations in the Donbas region. Shoigu told Wei the ongoing battle in Donetsk will be the most important battle in Russian special military operations after the battles of Mariupol and Luhansk. The Russian and Ukrainian amies are gathering their most elite military units to fight. As long as [once?] Donetsk is seized, the Russian army will no longer have large-scale military operations in Ukraine.
The Chinese side predicts that after seizing all of the Luhansk region, the Russian army will take full control of the Donetsk region within a few weeks and the entire Donbas region within two months. [China believes] the outcome of Russia’s special military operation in Ukraine is clear: Russia will win the war without doubt – Russia has de facto territorial control of eastern Ukraine, linking Crimea, four eastern Ukrainian states, and Russian territory.
The Chinese side believes the situation is becoming more and more disadvantageous to Ukraine. It is time for Kyiv to sit down and negotiate with Moscow as soon as possible. The longer the delay in negotiations with Russia, the more land Ukraine will lose.
As far as Beijing knows, Putin’s two major military objectives remain unchanged: 1 – To completely restore the territory of the two “republics” of Luhansk and Donetsk; 2 – [to control] the de facto occupied territories of Kherson and Zaporozhe regions.
Market Validation
Reuters 7/21/22

Lavrov said geographical realities had changed since Russian and Ukrainian negotiators held peace talks in Turkey in late March that failed to produce any breakthrough.
At that time, he said, the focus was on the Donetsk and Luhansk People's Republics (DPR and LPR), self-styled breakaway entities in eastern Ukraine from which Russia has said it aims to drive out Ukrainian government forces.
"Now the geography is different, it's far from being just the DPR and LPR, it's also Kherson and Zaporizhzhia regions and a number of other territories," he said, referring to areas well beyond the Donbas that Russia has wholly or partly seized.
"This process is continuing logically and persistently."
Read full report
July 06, 2022
SGH Insight
...senior officials in Beijing note that the request from Secretary Yellen for a meeting of the heads of state comes on the heels of two similar requests that were made by National Security Advisor Jake Sullivan to China’s top diplomat and Politburo member Yang Jiechi, both of which were shelved at the time.

This time, we are told, “President Xi will consider it,” and well-placed officials suggest the two leaders may hold a video conversation call this month.

That would allow Xi Jinping to speak with Biden before he goes on the annual leadership summer retreat at Beidaihe...
Market Validation
Bloomberg 7/10/22

US President Joe Biden and his Chinese
counterpart Xi Jinping are set to speak again in the coming
weeks, Secretary of State Antony Blinken said on Sunday.
Blinken spoke with Chinese Foreign Minister Wang Yi a day
earlier for more than five hours to help lay the groundwork for
a call between the leaders. While Biden said last month he would
speak with Xi “soon,” Blinken suggested it was getting closer.
“With regard to President Xi and President Biden, our
expectation is that they will have an opportunity to speak in
the weeks ahead,” Blinken told reporters during a stop in
Bangkok, Thailand.

Read full report
July 06, 2022
SGH Insight
Fullsteam Ahead for the Fed

Since the June meeting, commodity prices have dropped sharply, raising the question of whether the Fed would remain committed to “expeditiously” raising rates to neutral by the end of the year. In particular, clients ask about the Fed’s willingness to carry through with the expected 75bp July hike. We think the Fed would find it difficult to deviate from the current plan.

Market Validation
Bloomberg 7/9/22

Shorter-dated Treasuries slumped Friday,
sending yields surging, after a stronger-than-expected US jobs
report bolstered the case for bigger interest-rate increases by
the Federal Reserve.
The two-year Treasury yield leaped as much as 13 basis
points to 3.14%, while swaps showed increased odds that
officials will choose to lift the Fed benchmark by 75 basis
points in July rather than 50. Expectations for where the Fed’s
benchmark might peak in the first quarter of 2023 jumped to more
than 3.6% as traders looked ahead to consumer price inflation
data next week.

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July 05, 2022
SGH Insight
The Fed remains committed to restoring price stability even at the expense of growth. I think recession fears are premature, but even if not, the Fed is not likely to break from current messaging, including consensus support for 75bp in July. I expect that outlook to be reinforced by hawkish minutes this week. Yes, the Fed seemingly made a last-minute shift to 75bp at the June meeting on relatively little new data, giving reason to worry that relatively little new data could trigger a reversal. Still, I think the bar to remaining hawkish is lower than to becoming more dovish.
Market Validation
Bloomberg 7/6/22

Treasury Yields Surge as Fed Minutes Underscore Inflation Fight
Yields at session highs after Fed minutes from June arrive
Minutes show inflation worries trump growth concerns

Treasuries extended their losses, driving yields to session highs, after the minutes of the most recent Federal Reserve meeting underscored policymakers’ commitment to tighten monetary policy aggressively to keep inflation from becoming entrenched in the economy.
Benchmark yields rose in mid-afternoon trading in New York, up more than 10 basis points across much of the curve, after the minutes from the June meeting showed officials saw a significant risk of entrenched inflation and that “even more restrictive” policy was possible.
The jumps capped another volatile day in the world’s largest bond market as traders try to navigate between the risks of persistent inflation and a potential recession set off by rising rates.
Yields on two-year Treasury notes -- among those that are more sensitive to central bank policy -- jumped 13 basis points to 2.95%, more than erasing a 6 basis point drop from earlier in the day. The swings mirrored the trading from Tuesday, when 2-year yields swung between a 13-basis-point advance and a 6-basis-point drop before ending the day little changed.
The 10-year higher by 12 basis points at 2.92%. The three-year note led the market selling, pushing the yield up 16 basis points to 2.98%.

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July 05, 2022
SGH Insight
...The challenge however for traders who are now wiping rate hikes off the table over recession fears is that energy supply cuts are of course also highly inflationary, and the ECB already has a serious, imminent, and spreading inflation problem at hand, even as it is likely to significantly mark growth down from its June estimates.
Perhaps most important of all is the long-term evidence that, in Lagarde’s own words, after 25 years of an “heroic” fight against disinflation, the global central banks are facing a “new regime” in which the cost of dealing with the retrenchment of a high-inflation regime is unacceptably high.
To riff off the popular Game of Thrones, “winter is coming,” but the ECB will unfortunately have to hike rates through the slowdown...
Market Validation
New York Times 7/26/22

Pierre Wunsch, a member of the European Central Bank’s Governing Council, said the deposit rate should probably reach at least 1.5 percent.
The European Central Bank should keep raising interest rates to tackle inflation even if the eurozone slips into a recession, said Pierre Wunsch, a member of the bank’s Governing Council and the head of Belgium’s central bank.
Increasing the E.C.B.’s deposit rate to 1.5 percent is a “no brainer,” Mr. Wunsch said, as long as the economy didn’t fall into a “deep recession.” Last week, the bank raised interest rates for the first time in more than a decade, lifting the deposit rate from minus 0.5 percent to zero.

For fifty in sept its the same clip

The bank has been slower to raise rates and end its bond-buying program than other major central banks because much of the inflation in the eurozone has been generated by rising energy prices, exacerbated by Russia’s war in Ukraine, and there was little the bank could do to control those price increases. But as inflation has spread to more goods and services and risks becoming more entrenched in the economy, the bank raised rates by twice as much as it indicated it would last week.
Mr. Wunsch said his preferred course of action given the economic outlook was to raise rates in half-percent increments and then maybe slow down when the deposit rate is closer to reaching 1.5 percent. Last week, the central bank withdrew some of its so-called forward guidance on interest rates, in which central bankers send strong signals to markets about what they plan to do in the future, and said decisions would instead be decided by a “meeting-by-meeting approach.”
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June 21, 2022
SGH Insight
The Fed intensified its commitment to its inflation target last week, accelerating the pace of rate hikes to 75bp increments and raising the expected terminal rate to 3.8%. In the statement that followed the FOMC meeting, the Fed emphasized its commitment to price stability but offered no such commitment to the employment side of the mandate. While the Fed isn’t trying to induce a recession, and while no Fed speaker will predict a recession, the Fed has already made clear that if the choice is between recession and inflation, it now chooses recession. The Fed has committed to maintaining rate hikes until inflation is clearly on a path to 2%, something that will likely not be evident in the data for several months. If inflation prevents the Fed from pivoting to rate cuts when the economy turns, a recession feels all but guaranteed under the current guidance...

...The next several months will become very uncomfortable. We have become accustomed to the Fed responding quickly to signs of economic weakness, but in recent history those have always occurred in a period of low inflation. Now the Fed will hold rates higher for longer by design, which will appear as if it is ignoring the real side of the economy. Assuming the Fed does not change its guidance, it needs to see clear and compelling evidence of slowing inflation before it can pause rate hikes. Considering that inflation lags the cycle, we aren’t likely to see significant slowing in the near-term. For example, the Cleveland Fed predicts core-CPI will be 0.49% in June, the only release before the July FOMC meeting (which helps guarantee a 75bp hike).
Moreover, one or two soft inflation prints will not likely suffice to convince the Fed that it will restore price stability given that the Fed tried that strategy last year and was badly burned when inflation rebounded in the fall after an apparent improvement over the summer. That error will create a bias in the opposite direction, and could set up a dichotomy with markets, where the Fed will tend to dismiss any good news on inflation (from, for example, any discounting that occurs when retailers try to shed excess inventories) as insufficient to justify a policy shift. At the same time, we can expect slowing in the interest rate sectors of the economy and eventually a weaker job market...
Market Validation
Bloomberg 6/23/22

Traders Hedge Fed Cuts in 2023 as Recession Risk Hits Yields

A newfound uneasiness on where US interest rates will be a year from now has started to fester throughout the bond market, as traders seek hedges to cover against an abrupt dovish shift in the Federal Reserve’s policy plans.
With fears of a recession evolving, rates extended their plunge Thursday, taking the three-year Treasury rate down more than 20 basis points to less than 3%. Ominously, traders are also piling into hedges that protect against Fed policy rates not only topping out, but actually being cut back down toward zero as soon as next year.
The moves follow comments from Fed Chairman Jerome Powell on Wednesday which appeared to accept that steep rate increases could trigger a US recession.

Bloomberg 6/24/22

Inflation could remain high until the second half of next year, despite the Federal Reserve’s rate hikes and the after-effects of higher oil prices, according to a blog post published Friday by the New York Fed.
Inflation is accelerating both in the US and the euro area, and the expected path for policy rates has risen sharply in both economies, the researchers say.
Those factors, when combined with the potential for a slowdown in economic growth, add more uncertainty to the outlook for inflation, they say.
“Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy,” researchers wrote in the blog post.
Tighter monetary policy alone is not enough to explain the deceleration projected for U.S. inflation over the next year.
“There is an important role for disinflationary payback in the latter part of 2022 for the current inflationary consequences of recent adverse oil supply shocks, driving the downside risk to the forecast,” the post says.
Inflation is projected to ease somewhat in both the US and the euro area, “but will remain elevated by May 2023.” There is a “higher likelihood of a larger-than-expected easing of inflation in the United States compared to the euro area.”
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June 15, 2022
SGH Insight
Weaker UK growth and wages data all but lock in another 25bp hike by the Bank of England tomorrow as it races to get spiraling inflation under control to avoid it ravaging household spending power and plunging the UK economy into recession.
This week’s data will likely constrain the Bank’s policy choice for this meeting to a 25bp hike despite the possibility for additional dissents for a larger move by the Bank’s Monetary Policy Committee (MPC) members. At its early May meeting when the MPC raised rated 25bp to 1%, Michael Saunders, Catherine Mann, and Jonathan Haskel dissented in favor of 50bp.
This time around, that continued pressure may however force the MPC to amend its forward guidance so that it at least widens its options for additional moves later this year.
In May the Bank said, “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in coming months,” but it noted “risks on both sides of that judgement.”
The Bank may seek to harden that guidance as it continues to navigate what it calls a narrow path between the twin risks of upside prices and the intensifying squeeze on real household incomes that is coming from higher energy and goods prices. That dichotomy is splintering consensus as members are increasingly forced to choose between hitting their inflation target within their forecast horizon and avoiding a more pronounced recession.
Market Validation

The Bank of England hiked interest rates for
a fifth straight meeting and sent its strongest signal yet that
it is prepared to unleash larger moves if needed to tame
The nine-member Monetary Policy Committee voted 6-3 to
increase rates by 25 basis points to 1.25%, with a minority of
officials maintaining their push for a move double that size.
Still, the BOE hinted that it may join a growing global
trend for larger hikes if inflation continues to soar, saying
“it would be particularly alert to indications of more
persistent inflationary pressures, and would if necessary act
forcefully in response.”
Crucially, that language was endorsed by all the BOE’s
voters, a departure from May when two declined to sign up to
guidance that more hikes were needed.

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June 15, 2022
SGH Insight
Going through the various cycles in the ECB’s history, Schnabel recounts periods of dangerously compressed eurozone sovereign yields, as well as the historic blow outs in southern European bond markets during the European debt crisis of 2010-12, putting the current widening of spreads in historic context in a series of charts in the appendix that are highly illustrative.
As to the current state of affairs, Schnabel reiterates the ECB position — which we have repeatedly written as well — that the ECB has dealt with fragmentation successfully many times in its history, can easily redirect Pandemic Emergency Purchase Program bond reinvestments as needed to surf any excess (peripheral) market volatility, can structure new facilities if and as needed for new situations, and that the ultimate backstop against eurozone fragmentation is the ECB’s unwavering and unquestioned commitment to the euro.
Market Validation

“With regard to Italy -- I’m personally of
the standpoint that we should not do too much,” European Central
Bank Governing Council member Madis Muller told Estonian Chamber
of Commerce earlier on Wednesday.
* “We had a situation where the central bank bought up bonds on
a massive scale, including government bonds, resulting in very
low interest rates”
* “If we now end this activity, it is in and of itself expected
that interest rates rise and countries’ real fundamental
indicators start to play a bigger role. So in the case of the
Italy, which has a larger debt burden and a more complicated
outlook, it is logical that interest rates have to rise faster
than in Germany’s case”
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