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.

2021
November 22, 2021
SGH Insight
Debate over Medium Term Forecasts
The need to build optionality in this next, and presumably final, leg of the ECB bond purchase program is predicated on the central bank’s commitment to sequencing lift-off on interest rates only after the completion of its asset programs.
And while the ECB is united (sort of), in pushing back on late 2022 rate hikes, there is a very broad and tacit understanding that these hikes could very well come soon after, in 2023, with considerably less certainty than is projected by the ECB leadership over its medium-term inflation forecasts.
Chief Economist Philip Lane, and ECB President Christine Lagarde, continue to emphasize that judging from where the ECB sits now, the medium term forecast is still for inflation to drop back below its 2% target level after spiking sharply higher this year, due to an essentially mean-reversion assumption that energy prices will fall back down, faith that supply constraints will ease in the fullness of time, and a technical drop off in the German VAT tax effect come January 2022.
In making the case for continued aggressive stimulus, ECB President Christine Lagarde, while acknowledging that prospects for medium term inflation have improved, even went so far as to emphasize in a November 15 speech that by the fourth quarter of 2022, Eurozone inflation could be back down at 1%.
That forecast, however, is due to a year-on-year base effect comparison to the massive spike in inflation now, in the fourth quarter of 2021, and does not reflect any certitude on the far more germane, and unknown, questions over the potential broadening of underlying inflationary pressures and expectations.
In a direct rebuttal to both Lane and Lagarde, Bundesbank President Jens Weidmann warned one week later that “the fallout from the pandemic could have a marked impact on the inflation setting. And it could well be that inflation rates will not fall below our target over the medium term, as previously forecast.”
Policy Implications
For policy purposes, the key point is a concern that the gap between the hawkish and dovish views is in fact not that large.
As stated by ECB Governing Council Member and Belgian National Bank Governor Pierre Wunsch, while the 2023 staff forecast is likely to remain below 2%, “it wouldn’t take much for realized inflation in 2023 to be at 2% — one or two surprises or some second-round effects, so just a fraction of everything we’ve seen in the last three months.”
These differences in forecasts will clearly not be resolved over the next days or even weeks, but the ECB will need to build optionality and policy flexibility for the upside as it gauges the momentum behind underlying inflation impulses going into 2022, including when it rolls out the new “modalities” on December 16 for the 2022 Asset Purchase Program.
Market Validation
FT 11/25/21

European Central Bank policymakers expect the central bank to raise its short-term inflation forecasts next month as uncertainty persists about how quickly it will need to respond to surging prices.

The ECB has consistently underestimated how fast eurozone inflation would rise this year as the economy rebounded from the coronavirus pandemic. Members of the central bank’s governing council said they expected it to raise its 2022 forecast again in December, according to the minutes of its October meeting, published on Thursday.

But council members agreed there was “elevated” uncertainty over the outlook for price growth in 2023 and 2024, which is one of the main yardsticks that the central bank will use to calibrate bond purchases and interest rates next year.

They believe this means they should maintain “optionality” on their future bond purchases for as long as possible, so they can respond if inflation either drops back below their target or stays above.

“While an increase in the upside risks to inflation had to be acknowledged, it was deemed important for the governing council to avoid an overreaction as well as unwarranted inaction, and to keep sufficient optionality in calibrating its monetary policy measures to address all inflation scenarios that might unfold,” it said.
Read full report
November 22, 2021
SGH Insight
Li said that in considering the whole picture of the macroeconomic situation, the MOF should study issuing a new debt quota for local governments in 2022 in advance. The amount of new local government bonds next year can be tentatively set at 4.5 trillion yuan, a slight increase over this year.
(*Note, the annual limit of newly issued local government bonds is usually passed by the country’s legislature and policy advisers in March, after the country’s “two sessions.” But the State Council could be authorized to deliver a part of the quota earlier to accelerate financing for investment projects. China issued 4.47 trillion yuan in new local government bonds in 2021, and 4.55 trillion yuan in 2020).
Li expressed satisfaction with the current monetary policy and reiterated the need to make macro policies more forward-looking and targeted, step up cross-cyclical adjustments, and maintain major economic indicators within the proper range and ensure a stable job market.
Market Validation
Bloomberg

11/25/21

China’s State Council called on local
governments to sell more special bonds this year in order to
boost investment amid a slowdown in the economy.
Premier Li Keqiang chaired a meeting of the State Council,
China’s cabinet, on Wednesday, urging local governments to have
more ongoing construction of projects at the beginning of next
year, the official Xinhua News Agency reported. It also called
on them to make better use of proceeds from special bonds to
expand domestic demand.
Read full report
November 22, 2021
SGH Insight
“At present, China’s crude oil supply is sufficient, the supply and demand of crude oil is very balanced. Although US President Joe Biden wants China to release its strategic petroleum reserves along with the US, China does not have the need to release our SPR immediately. We will take caution in releasing strategic crude oil reserves,” said one senior source.

In practice, China publicly announced a modest release of its SPR twice over the last fourth months, but our understanding is that China has adjusted SPR data almost every month under its own timetable, without any publicly announcement. Perhaps more to the point, on oil policy, China is keen to maintain its relations with Russia and Saudi Arabia rather than be seen to simply embrace a US request.
Market Validation
Policy Validation

Reuters 11/24/21

Speaking in a daily press briefing, foreign ministry spokesman Zhao Lijian again declined to comment on whether China was participating in the oil stocks releases coordinated by the United States.

"The Chinese side will organise a release of crude oil from state reserves according to its own actual needs," said Zhao, adding that it would publish relevant information without delay.

Zhao said that China would maintain communication and co-operation to ensure the long-term stability of the oil market.
Read full report
November 22, 2021
SGH Insight
European Central Bank officials, concerned by the notion that markets may start pricing “premature” rate hikes some twelve months into the future, have pushed back on expectations of a fourth quarter 2022 liftoff from the current negative 0.5% benchmark deposit rate.
*** But even as they insist that this pricing does not conform to the ECB’s own reaction function and forecasts, our understanding is that there is a strong likelihood the ECB will seek to build some optionality into the revised Asset Purchase Program at its upcoming Governing Council meeting on December 16 to allow for a more rapid run-off of the bond purchasing program should inflationary pressures persist.
Market Validation
Bloomberg 11/23/21

The European Central Bank’s markets chief
and the Dutch National Bank governor urged an end to emergency
stimulus, highlighting inflation risks while insisting the
recovery can weather new pandemic restrictions.
Executive Board member Isabel Schnabel and Governing
Council member Klaas Knot both suggested increasing vigilance to
the threat of surging prices, just weeks before a crucial
decision on the future of asset purchases.
“The risks to inflation are skewed to the upside,” Schnabel
said in an interview. That was the most hawkish comment yet from
one of institution’s top team of six officials before the
December meeting, prompting investors to resume bets on an
interest-rate hike next year. The plan to terminate emergency
bond buying in March is “still valid,” she added.
Read full report
November 18, 2021
SGH Insight
Finally, West Virginia Senator Joe Manchin reported on his meeting with Federal Reserve Chair Jerome Powell. Via The Hill:
Sen. Joe Manchin (D-W.Va.) told The Hill that he was “looking very favorably,” but hadn’t made a final decision, on supporting Federal Reserve Chair Jerome Powell if he’s renominated as chairman, after the two spoke on Wednesday.
“Well we’re looking very favorably towards that, because I needed that conversation with him. But I have not made up my mind yet. But I’m just saying that it helped an awful lot having him clear up a lot of the concerns I had,” Manchin told The Hill.
This is a political decision and part of that decision will be the difficulty of getting the nominee confirmed. If Republicans were to be largely united in opposition to one nominee, Manchin would be a critical vote, and his leaning toward Powell could help seal the deal (Democrat Jon Tester also leans towards Powell, Warren of course favors Federal Reserve Governor Lael Brainard).
Market Validation
Policy Validation

11/22/21

President Joe Biden selected Jerome Powell for a second four-year term as Federal Reserve chair while elevating Governor Lael Brainard to vice chair, keeping consistency at the U.S. central bank as the nation grapples with the fastest inflation in decades and the lingering effects of Covid-19.
The move, announced by the White House on Monday, rewards Powell for helping rescue the U.S. economy from the pandemic and tasks him with protecting that recovery from a surge in consumer prices. A Republican, Powell faces what will likely be a smooth confirmation in the Senate, where he was backed for his first term as chair in an 84-13 vote and whose members he subsequently worked hard to woo.
Read full report
November 17, 2021
SGH Insight
The last paragraphs of today’s just released speech by influential European Central Bank Board Member Isabel Schnabel have been flagged to us by European Central Bank officials as noteworthy and of particular significance. As many of you are inundated with news and speeches, we are flagging and sending just that key, new takeaway, of her speech as it was highlighted to us below. The speech is clear, excellent, and worth a read in its entirety.
“Eventually, if we are serious about fighting climate change, the green transition will need to bring about a measurable further rise in the price of carbon, which can be expected to lead to higher fuel and electricity prices.

These effects may become entrenched in expectations if people start to anticipate them.

Similarly, some of the bottlenecks we are observing today may not only reflect the reopening of our economy but also structural forces, such as the secular shift to electric vehicles. Adapting supply capacities to such shifts in demand can take several years.[11]
In other words, if some factors that are by nature temporary – such as supply and demand imbalances – are stronger and last longer, then inflation may become more persistent and broad-based.”
In reading that key passage from Dr. Schnabel’s comments, we believe they are especially significant in tying socially desirable, environmentally conscious green policies to inflation, to the risk and potential for higher energy prices to stick longer than initially, and still widely assumed, by the ECB, and to its potentially longer lasting impact on inflation expectations and dynamics.
Market Validation
Policy Validation

Bloomberg 11/23/21

ECB’s Schnabel Sees Inflation Risks ‘Skewed to the Upside’
Official reckons resurgent pandemic won’t ‘derail’ recovery
Executive Board member Isabel Schnabel speaks in interview

European Central Bank Executive Board member Isabel Schnabel said there’s an increasing threat of inflation taking hold, as she played down the danger that resurgent coronavirus infections might impede the euro zone’s recovery.
Isabel Schnabel
Investors resumed bets on an interest-rate increase next year after her comments in an interview in Frankfurt on Monday, just weeks before a crucial decision on stimulus.

Read full report
November 16, 2021
SGH Insight
Bottom Line: The economy is gaining steam in the fourth quarter while inflationary pressures remain elevated. That’s a mix that will push the Fed in a hawkish direction. Watch for the consensus to drift as Bullard suggests, toward starting to lay the groundwork that would allow a policy pivot that accelerates tapering or even pulls rate hikes earlier in 2022. Discount the doves as the Fed has been pulled in the direction of hawkish Presidents because the data runs in a hawkish direction. Places to watch include warnings about high inflation and reassessments of what constitutes full employment.
Market Validation
Policy Validation

Bloomberg 11/19/21

The Federal Reserve looks on course to
consider a more rapid drawdown of its mammoth bond-buying
program just weeks after it instituted a plan to scale the
purchases back in a methodical manner.
A trio of policy makers -- Vice Chairman Richard Clarida,
Governor Christopher Waller and St. Louis Federal Reserve Bank
President James Bullard -- signaled this week that the topic of
a faster taper might be on the table when the Federal Open
Market Committee meets Dec. 14-15.
Read full report
November 15, 2021
SGH Insight
My focus this week is on the retail sales numbers. The Biden administration and the Fed are spinning a story that goods spending will fall as the economy normalizes and this transition will alleviate inflation. Wall Street, however, is looking for a 0.9% gain in retail sales excluding autos and 0.7% in the control group. Be wary of the potential for an upside surprise. These are nominal figures so inflation may be pushing them even higher. Moreover, note that the Chicago Fed estimates retail sales excluding autos rose 2.6% in October...
Market Validation
Policy Validation

Bloomberg 11/16/21

U.S. Oct. Retail Sales Rose 1.7%, Above Estimate
Treasuries pressured lower, while breakeven inflation rates for TIPS rise to session highs after October retail sales data beats estimates.
U.S. 10-year note futures drop as low as 130-06+ and through earlier session low as well as Monday’s low; 10-year yields around 1.62% move back to slightly cheaper on the day.
U.S. 5-year TIPS breakeven climbs to 3.24%, new all-time high
Belly-led losses flatten 5s30s to session low 71.6bp following the data; futures volumes over the data included around 30k 10-year note futures trading over 3-minute period.

Read full report
November 08, 2021
SGH Insight
This feels to me like a potentially unstable situation. I continue to play with this scenario because it has a knife edge feel. With long yields held down, right now it looks like the Fed doesn’t have a lot of room to cool growth without inverting the yield curve, which suggests we don’t have a lot of space between fast growth and recession. This makes sense in a world where the Fed has flooded the economy with unneeded financial accommodation. The Fed maintained emergency levels of accommodation long after the emergency ended and continues to add accommodation albeit at a slower pace. What strikes me is that this acts with a lag. The maximum impact of the accommodation will be reached after asset purchases stop. That’s a long time to let this system run unimpeded.
I bring up this scenario because it raises the possibility that the Fed may need to focus on reducing the balance sheet before hiking rates. That’s not on the radar yet; we don’t have any visibility on the Fed’s balance sheet plans after asset purchases end. All the discussion is on rate hikes. As we move closer to March, balance sheet policy will need to come into focus. That’s something I will be looking for.
Market Validation
Policy Validation

Dow Jones 11/10/21

Federal Reserve Bank of St. Louis President James Bullard said
Tuesday that he was open to allowing the central bank's massive holdings of
cash and bonds to shrink at some point.

Mr. Bullard, who was speaking in a virtual appearance, was commenting on what
he would like to see happen once the U.S. central bank winds down, or tapers,
the process of expanding its holdings.

At last week's Federal Open Market Committee meeting, the Fed said it would
progressively slow its stimulus campaign of bond purchases and likely complete
that process by the middle of next year. That, in turn, opens the door to what
happens with the Fed's balance sheet: The central bank could keep it steady by
purchasing new bonds to replace maturing ones, or allow holdings to passively
shrink as securities run off.

"I think one thing we could consider going forward, which would lean a little
bit hawkish, would be to allow runoff of the balance sheet at the end of the
taper or shortly thereafter," Mr. Bullard said.
Read full report
November 01, 2021
SGH Insight
Finally, an even trickier issue. Will the recent trends in fixed income markets continue this week? Recent moves – pulling forward rate hikes, higher short rates, bear flattening – have been sharp and swift. I have been happy to ride that train, but I am getting to the place where I am concerned that these moves are now vulnerable to near-term repositioning. I think part of these moves are attributable to investors caught on the wrong side of the flattening and unwinding positions ahead of month-end. That said, I don’t want to get in front of this train. Powell could do everything I said above and still inadvertently say something market participants perceive as hawkish that won’t be cleaned up for another day or two. Getting off the train but not in front of the train seems like a more comfortable place for me going into this week.
Market Validation
Bloomberg 11/2/21

Fed Rate-Hike Premium Eases Following Front-End Treasuries Rally

Interest rate swaps market are cutting the amount of Fed hike premium around 2022 and 2023 area of the curve, following Tuesday’s front-end rally in Treasuries.
First rate hike has been pushed out to July from June, while 50bp or two hikes remain priced by the end of 2022; pricing of a 25bp June hike have dropped to around 60% from 80% at the end of last week
On the day, U.S. 2-year yields are lower by 4bp and heading for the largest daily drop since February (closing 4.5bp lower Feb. 26), following a wider rally across global bonds after RBA’s policy shift -- large block buyer in 2-year note futures added to front-end gains in late U.S. morning session
The front-end rally has seen U.S. rates volatility crushed, led by upper-left underperformance as rate hike premium erodes; drop in vol was aided by a large $35 million straddle strip package sold over U.S. morning session

Read full report
November 01, 2021
SGH Insight
So what’s the Fed going to do? The Fed doesn’t like to break things. The whole tapering process was designed to avoid that exact outcome. As always, back to the baseline. Based on the messaging prior to this meeting, the Fed intended for us to expect:
1. A tapering announcement, with tapering beginning in November and ending in the middle of next year, a pace of $15 billion per month, proportionately distributed between treasuries and MBS. This is operationally the same as $20 billion per meeting.
2. A reiteration of the basic “inflation is transitory” story with the acknowledgement that the process is taking longer than expected. I think the Fed needs to modify the language in the statement accordingly, but at the same time can’t drop the word “transitory.” If “transitory” is not in the statement, markets are going to overrun the Fed.
3. Powell will highlight the upside risks for inflation but will add that the Fed won’t know the true inflation story until at least the beginning of next year, more likely the end of the first quarter. The message is that the Fed intends to let the inflation story play out for some time yet.
4. Powell will continue to lean heavily on the inflation expectations story to justify the Fed’s faith in the “transitory inflation” forecast but at the same time will likely acknowledge the data implies greater inflation risks. The Fed likely thinks it already has room to maneuver because there is space between the end of the taper and the SEP-implied forecasts to pull rate hikes forward.
5. Powell will caution that structural changes to the labor market mean that labor force participation may not entirely return to pre-pandemic levels but add that the economy is still a long way from full employment. He will likely repeat his pre-blackout statement that reaching full employment by the latter half of next year is very possible. This is code for “it’s OK to price in rate hikes for the latter half of next year because we may hike rates if the data confirms full employment.”
6. Watch for Powell to say that “policy is in a good place.” Similarly, this is a signal that Powell isn’t ready to fight the markets, a sort of “we think our policy stance is correct and aren’t changing it for you.” Instead, Powell can see the risk relative to the September dots and doesn’t want to prevent markets from preparing for those dots to rise in the December and March SEPs. This would help avoid a surprise like that which occurred when the June SEPs were released.


Market Validation
Policy Validation 11/4/21

FOMC Statement and Jay Powell press conference

1. In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
2. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.
3. Getting to your question our baseline expectation is supply bottle necks and shortages will persist well into next year and elevated inflation as well. As the pandemic subsides supply bottle necks will a bait. As that happens inflation will decline from elevated levels. The timing of that is uncertain. We should see inflation moving down by second for third quarter.
4. We are committed to our longer run goal of 2% inflation and to having longer term inflation expectations well anchored at this goal. If we were to see signs that the path of inflation or longer term inflation expectations was moving materially and persistently beyond levels consistent with our goal, we would use our tools to preserve price stability. We will be watching carefully to see if the economy is evolving in line with expectations.
5. if I could follow up, based on your outlook for the labor market, do you think it's possible or likely even that maximum employment could be achieved by the second half of next year? >> JEROME POWELL: If you look at the progress we made over the course of the last year, if that pace were to continue, the answer would be yes, I do think that is possible. Of course we measure maximum employment based on a wide range of figures, but it's within the realm of possibility.
6. To look at your question this way, I don't think we are behind the curve. I believe policy is well-positioned to address the range of plausible outcomes. That is what we need to do. I think it's premature to raise rates today. I don't think it's controversial. I


Read full report
October 19, 2021
SGH Insight
Premier Li Keqiang, who is also the head of China’s National Energy Committee, presided over three meetings in Zhongnanhai over the last ten days.
In those meetings, he stressed that an unprecedented energy crunch is sweeping much of the world even before the Northern Hemisphere winter season fully sets in, when more electricity and heat will be needed in homes and in factories.
Li called on relevant departments under the State Council, and government at all levels, to work together to ensure that this winter the supply of electricity, coal, crude oil, and natural gas is fully guaranteed, electricity and heating for people’s livelihoods is guaranteed, and the normal operation of industrial and transportation production is ensured.
Market Validation
Policy Validation

Bloomberg 11/07/21

China’s coal imports almost doubled in October from a year
earlier as Beijing scrambled to deal with power cuts caused by a
shortage of the commodity and surging demand for electricity,
especially from export-oriented manufacturers. Imports of
natural gas, an alternative to electricity for heating homes,
jumped 22% in the first 10 months of the year.

Bloomberg 10/22/21

Xi Calls for More Effort to Secure Power, Heating Supply: CCTV

Local govts should plan for winter to ensure heating and power supply to households, state broadcaster CCTV cites Chinese President Xi Jinpingas saying at a meeting while visiting the Yellow River area.
Shift in energy production structure should be accelerated; outdated capacity and production processes with high carbon emissions should be phased out
Calls for water conservation and environmental protection in Yellow River area
Sees Yellow River region as energy hub, highlights clean coal use



Read full report
October 18, 2021
SGH Insight
The Governing Council of the European Central Bank is scheduled to meet again on Thursday, October 28.

With important decisions on the future path of the ECB’s bond purchase programs looming at its subsequent, December meeting, the October meeting will serve mainly, in the words of one official, to “gauge the mood” around the table on inflation.
Our understanding is that these deliberations are likely to lead to a change in the wording of the language around inflation in the ECB’s communications. To what exactly, we are not sure, but the upside directionality of the inflation deliberations, and further upside forecast revisions come December, we believe are all but certain.

Market Validation
Policy Validation

Reuters 10/28/21

Lagarde said inflation had dominated the Governing Council’s discussions.

“We talked about inflation, inflation, inflation,” she said.

Bloomberg 10/28/21

Lagarde’s Comments on Inflation Send Euro, Bond Yields Higher
The euro touches an intraday high against the dollar and sovereign bonds in the euro zone decline after ECB President Christine Lagarde comments on inflation at a Frankfurt press conference.

Italian bonds lead euro-area declines, sending the 10-year yield surging 14bps to 1.08% as money markets bet on a 20bps ECB rate hike in December 2022
EUR/USD gains as much as 0.3% to $1.1636
Lagarde says the phase of higher inflation will last longer than expected

Read full report
October 18, 2021
SGH Insight
There will be plenty of Fed speak this week. I have my eyes on speeches by Governor Christopher Waller (Tuesday) and Vice Chair for Supervision Randal Quarles (Wednesday). Both will be talking about the economic outlook and should help gauge the direction of the Board; I am looking to see if they push the Board in a more hawkish direction; similarly, Governor Michelle Bowman gave a hawkish speech last week. In addition, Chair Jerome Powell will take part in a panel discussion on Friday hosted by the South African Reserve Bank. At this point, text and Q&A are to be determined. If the Fed is looking to tilt the discussion toward the hawkish side (more warnings about the persistence of inflation, medium term tightness in labor markets, need to protect against rising inflation expectations), we could see Quarles and Waller pave the way for Powell later in the week. Or Powell could push back on such talk, but it seems to be the overall direction.
Market Validation
Policy Validation

Dow Jones 10/19/21

Waller: If Inflation Doesn't Cool by Year-End, Fed Could Bring Rate Increases Forward

Federal Reserve Gov. Christopher Waller said the central bank could move forward the timeline for raising short-term interest rates to restore price stability if high levels of inflation don't start cooling soon, adding that he supports the Fed slowing its asset buying stimulus effort starting next month.
Mr. Waller said in the text of speech Tuesday that when it comes to moving up what is now a near zero federal-funds rate target range, "the pace of continued improvement in the labor market will be gradual, and I expect inflation will moderate, which means liftoff is still some time off." But he also said there is some amount of flux in the path forward for interest rate policy amid unexpectedly high inflation readings.
"The next several months are critical for assessing whether the high inflation numbers we have seen are transitory," Mr. Waller said. "If monthly prints of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may well be warranted in 2022."
Mr. Waller also said he supports the Federal Open Market Committee beginning to reduce asset purchases following its November meeting.

Read full report
October 18, 2021
SGH Insight
The staff work for the next quarterly forecast revisions has not yet begun in earnest, but it appears that further revisions upwards of somewhere in the magnitude of 0.2% for next year, putting inflation at around 1.8%-1.9%, are likely again in December, which will also debut the 2024 forecasts. There will likely be upwards revisions to the 2021 and 2023 inflation forecasts as well.
That will necessitate changes in advance to how inflation pressures, these forecasts, and continued policy accommodation are characterized.
The hawks – and we hesitate to even use that term at the ultra-accommodative ECB — will note that the Governing Council agreed in its policy review this summer that it would incorporate the impact of Owner-Occupied Housing (OOH) into its decision making. As you will recall from previous SGH reports, this is estimated to add around 0.2% to inflation, even if Eurostat has not yet formally incorporated OOH into its inflation measures.
And so, miracle of miracles, come December the ECB it now appears will show a forecast by that measure effectively at or slightly above its 2% inflation target for next year. And that will open an interesting debate over overshoots, and for how long and by what magnitude the Governing Council will fuel, and let these inflationary pressures run.


Market Validation
Bloomberg 10/28/21

European Central Bank policy makers expect inflation to exceed 2% target next year but hold different views on whether it will stay there in 2023, according to people familiar with the talks, a debate fundamental to the institution’s forward guidance.
Chief Economist Philip Lane insisted at the decision on Thursday that the path for consumer prices will fall back below the goal after 2022 and that underlying pressures won’t be strong enough, according to the people who spoke on condition of anonymity because the deliberations are private. A few others countered that it might exceed that level and cited the risk of second-round effects, they said.
Read full report
September 30, 2021
SGH Insight
Li stressed that electricity demand for high-tech companies must be absolutely guaranteed, even while it would be necessary to continue to impose power cuts on high energy consumption enterprises, as well as for enterprises temporarily relocated to China from Vietnam, Malaysia, and other ASEAN countries due to the Covid Delta variant.
Some provinces, he said, have been too rigid in meeting emissions reduction targets, in the process triggering harmful undulations for industrial production, and they would need to carry out the country’s “dual controls” and “dual restrictions” more prudently, with power outages only used as a last resort, and with advance warning, to prevent overall grid risks.

Market Validation
Policy Validation

Bloomberg 10/22/21

The southern province of Guangdong, home to major companies including Huawei Technologies Co., is removing government-fixed electricity prices for industrial and commercial users in an effort to trim consumption and encourage power generators to use their full capacity

It adds to the raft of policy measures taken in recent days to ease a squeeze on energy supply that’s caused widespread power shortages, and to tame a frenzied rally in coal prices. China’s Vice Premier Han Zheng earlier this week vowed to take “powerful measures” against speculation and hoarding in the energy sector.
Read full report
September 30, 2021
SGH Insight
...my opinion is that I doubt Ambassador Tai would use the CSIS forum to break ground on any high-level decision or shift on the existing tariff or trade regime in place, which I think would come in a formal announcement from the appropriate political levels depending on the intended magnitude of the announcement. But I do not pretend to be privy to what Ambassador Tai will say and am interested to hear.


But here is out take on the overall US-China trade/economic situation:
The administration will talk and stand tough on some important issues that the US needs/wants to address, unfair trade practices, transparency, subsidies, Taiwan, human rights, Uighurs, Hong Kong, all with less and less effect, but we believe the goal is to improve and de-escalate in general on economic issues. Why? Growth, economy, markets, consumers, increasing inflation and commodity, supply chain concerns, good old-fashioned profits and lobbying, they don’t like “Trump-era” tariffs really, would like to make the case that they have not been effective, can conduct a multi-faceted (as opposed to the old one track) policy designed to help the economy and working people, manufacturing, but tough on security issues. We have been writing this for a while, more or less, been quite a bit out there on it I have felt.
Often people get more rattled (albeit increasingly less so) by hawkish rhetoric, always they rightly cite the domestic US political difficulties to any easing with China, but which can be overcome with the right concession/cover, so we talk and speculate about how the trade plays out politically. Phase One will be declared dead at some point, I don’t know when, but we have thought there would be movement on trade before year end, which is not so far away now.
Massive, massive corporate lobbying (Chamber of Commerce, US China Business Council, etc.) and financial industry lobbying one might reasonably presume may come into play as well — how do I phrase this delicately! And there has been lots of communication/dialogue between American and Chinese notables, not just private sector participant/sponsored, but with officials as well.
Market Validation
Policy Validation

Bloomberg 10/4/21

The Biden administration will directly engage with Beijing in the coming days to enforce commitments in their trade deal and start a new process to exclude certain products from U.S. tariffs in an effort to help American workers and businesses.
U.S. Trade Representative Katherine Tai is set to speak to Chinese Vice Premier Liu He soon, in what will be the first meeting where she will mainly stress China’s shortfalls in the agreement struck under former President Donald Trump.
Katherine Tai
“I am committed to working through the many challenges ahead of us in this bilateral process in order to deliver meaningful results,” Tai said in a speechat the Center for Strategic and International Studies in Washington on Monday. “But above all else, we must defend -- to the hilt -- our economic interests.”
While the Biden administration won’t take any tools off the table when dealing with Beijing, it doesn’t intend to escalate the trade tensions, an administration official said in a call with reporters. The official acknowledged that China may not change its practices and therefore the U.S. needs a strategy that takes that into account.
Read full report
September 30, 2021
SGH Insight
As to more specific measures, our understanding is that China’s State Council approved an immediate expansion of coal imports, mainly from Russia, Mongolia, and Indonesia. (Note – Indonesia is China’s largest coal supplier, followed by Russia and Mongolia. China imports roughly 300 million tons of coal, which is around 10% of its total consumption).
The State Council also asked 20 provincial governments to implement differential electricity pricing for power usage peaks and valleys as part of a peak shifting power supply policy, and to provide subsidies to power generating enterprises.
It also urged coal producers to seek out and secure additional supplies.
Market Validation
Policy Validation

Bloomberg 10/1/21

China’s leadership has told the country’s
state-owned miners to produce coal at full capacity for the rest
of the year even if they exceed annual quota limits as they
struggle with the deepening power crisis.
The directive, along with other measures to secure energy
supplies for this winter at all costs, was emphasized during
emergency meetings this week in Beijing, according to people
familiar with the matter. Boosting domestic thermal coal
production is critical, said the people, asking not to be named
as the discussions aren’t public.

Read full report
September 28, 2021
SGH Insight
Regarding inflation, Brainard expects this year’s surge to be transitory, placing particular attention on used-car prices:

Next let's consider price stability. Inflation is currently elevated. This is creating challenges for consumers and businesses alike. But the high inflation readings from the spring and early summer were disproportionately driven by a few sectors experiencing specific supply bottlenecks. In May and June, new and used vehicle prices accounted for half of the outsized monthly increases in core consumer price index (CPI) inflation. These categories were lesser contributors in July, and in the August CPI their joint contribution declined to essentially zero, as prices finally began to retreat for used cars, offsetting increases in new car prices.

With that in mind, note this from Black Book:

Traditionally, as we move past Labor Day, values begin to decline, with the largest portion of the yearly depreciation typically occurring in the fourth quarter. However, that is not the case this year, we’ve now had four consecutive weeks of overall market increases in wholesale values. With new inventory not expected to improve until later into 2022, wholesale prices are anticipated to remain at elevated levels for the foreseeable future.

The seasonal factors will magnify used car price growth if they are again rising when seasonally they should be falling. Brainard recognizes such a possibility:

So, I expect inflation to decelerate, and pre-COVID inflation dynamics to return when COVID disruptions dissipate. But with Delta disrupting the rotation from goods to services and prolonging supply bottlenecks, it is uncertain just how fast and how much inflation will decelerate over the remainder of the year and into next year.

Market Validation
Bloomberg 10/7/21

Used-car prices, one of the biggest factors in U.S. inflation this year, rose to an all-time high in September as pandemic-driven supply-chain disruptions continued.
The Manheim U.S. Used Vehicle Value Index, a measure of pricing trends at wholesale auctions, increased 5.3% in September from a month earlier, the biggest monthly gain since April. The index is now up 27.1% from a year earlier.
Global supply-chain snags have hit new-vehicle production schedules, pushing some consumers into the used-car market and leading dealers to step up their buying efforts, according to the Manheim report, released Thursday. Retail used-car prices will likely remain elevated in the months ahead, it said.
Used-car prices have been a major contributor to U.S. inflation this year, responsible for about 2% of overall consumer prices. The August consumer price index report showed a decline in used-car and truck prices, but that was a temporary pause rather than a peak.


Read full report
September 22, 2021
SGH Insight
Looking ahead, my instinct is the Fed’s inflation forecast for 2021 is still too low; 3.7% feels like a minimum that I suspect depends on used car prices collapsing. The unemployment forecast for this year reflects the growing concern we had noted across the Fed that the labor force was not returning as quickly as expected, but now feels perhaps overly cautious to me. We are at 5.2% now; an exceptionally good report could take that to 4.8% in one fell swoop. Together that suggests that the December dots will move the majority expectations of a rate forecast to a full hike in 2022.

Market Validation
Policy Validation

Bloomberg 10/13/21

The U.S. added fewer jobs than forecast for
a second month in September, signaling weakness in the labor
market recovery and complicating a potential decision by the
Federal Reserve to begin scaling back monetary support before
year end.
Nonfarm payrolls increased 194,000 last month after an
upwardly revised 366,000 gain in August, a Labor Department
report showed Friday. The unemployment rate fell to 4.8%, while
average hourly earnings jumped.
Read full report