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
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
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 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.
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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
September 21, 2021
SGH Insight
We expect Beijing will try to ensure a smooth transition of Evergrande’s portfolio but expect a relatively hard line when it comes to resolution of the firm’s debt load.
Market Validation
Policy Validation

Bloomberg 9/24/21

China’s housing regulator has stepped up oversight of China Evergrande Group’s bank accounts to ensure funds are used to complete housing projects and not diverted to pay creditors.
Read full report
September 21, 2021
SGH Insight
Importantly, the deal that is being negotiated between the US Department of Justice and Meng’s lawyers is part of a broad political push to lower tensions on the economic front between the United States and China – not that the justice system would be politicized, of course.
Our understanding is that since President Biden came to office, Beijing has brought up the US extradition case against Meng repeatedly in backchannel discussions, and in every discussion with senior US officials since the Sino-US talks in Anchorage, Alaska in March of 2021.
In fact, sources in Beijing indicate that Meng Wanzhou’s case was even brought up directly by China’s President Xi Jinping in his call two weeks ago with US President Joseph Biden.
The current state of play appears to be that the DoJ will drop the extradition case if Meng admits her guilt, which appears to be a stumbling block still, and agrees to pay a hefty fine, which seems, as one might suspect, less of an obstacle.
While direct linkage of the Meng case to US-China (and of course Canada-China) relations may seem rather unseemly, in the words of one admittedly hardline senior Chinese official, “If the Biden administration wants to seek China’s cooperation on climate, counter-terrorism, the economy and trade, the release of Meng is a necessary condition.”
Bellicose threats aside, we suspect this rhetoric is further corroboration that a resolution in the Meng case is close at hand.
Market Validation
Policy Validation

Reuters 9/24/21

Huawei Technologies Chief Financial Officer Meng Wanzhou is expected to appear virtually in federal court to resolve U.S. charges against her, according to a source familiar with the situation.
Resolving the case would remove one of several major disputes between the world's two biggest economies.
Meng was arrested at Vancouver International Airport in December 2018 on a U.S. warrant that charged her with fraud for allegedly misleading HSBC about Huawei's business dealings in Iran.
A spokeswoman for Huawei declined to comment. A spokesman for the U.S. Attorney's office in Brooklyn declined to comment. An attorney for Meng could not be immediately reached for comment.
Read full report
September 20, 2021
SGH Insight
This week’s FOMC meeting is turning into something of a nail biter with the dots being the main source of contention. The general expectation is that this next meeting is too early to announce a tapering decision. I concur; the likely outcome of this meeting is guidance that opens the door to tapering at a subsequent meeting.

On inflation, the core-PCE inflation forecast for 2021 will be at least 3.7%, a level well above what anyone on the Fed thinks is moderate, and the 2022 forecast, currently 2.1%, will rise to at least 2.2% (I think 2.3% but arguably that is an aggressive call), and 2023 will likely still be above 2% as well. That means the inflation surge is almost entirely transitory (in line with the Fed’s story) but with enough persistence to drive underlying inflation moderately above the Fed’s 2% target. This strikes me as a forecast in which the Fed is likely to achieve its objective of 2% average inflation with expectations of continued above target inflation (certainly the new policy framework is sufficiently undefined and flexible to admit such an outcome is likely) in the context of something close to full employment in 2022 and thus a forecast of a rate hike in 2022 would be appropriate policy. Remember too that the Fed will not view this as slamming on the brakes. In the context of the forecasted period of elevated inflation, a single rate hike is a very dovish policy.

Admittedly, there is also a numbers game at play here. Only two dots need to shift off zero to get a partial rate hike in the median, three for a full rate hike. The above logic doesn’t need to be adopted by all eleven participants who in June expected no rate hike in 2022, just three of them.
Also contentious is the question of the 2024 dots. I think the consensus is that the 2023 dots will reveal another two hikes. For 2024, there is an argument that the Fed will signal another four hikes. The logic here – again, entirely reasonable – is that the Fed will be intentionally behind the inflation curve and consequently will need to move policy rates quickly up to neutral to stave off inflationary pressures. Surely this is the thinking of a least a minority of FOMC participants and will be evident in the upper range of the dots. I expect a more dovish reaction function in which the median policy maker anticipates only another two rate hikes in 2024. I think in the context of the new policy framework, the median policy maker will anticipate a more gradual return to the neutral rate, driven both by a desire to not slam the brakes on the economy and the short distance to neutral. Also, pulling the lift off into 2022 could be seen as a risk management exercise that allows for a more dovish path of subsequent rate hikes. That said, I admit to not being entirely confident on the 2024 dots. I think four hikes is too aggressive but the risk to my outlook is that the median policy maker anticipates three hikes in 2024.
Market Validation
Policy Validation

Bloomberg 9/22/21

Federal Reserve officials signaled they would probably begin tapering their bond-buying program soon and revealed a growing inclination to start raising interest rates in 2022.
If progress toward the Fed’s employment and inflation goals “continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the U.S. central bank’s policy-setting Federal Open Market Committee said Wednesday in a statement following a two-day meeting.
The Fed also published updated quarterly projections which showed officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year, according to the median estimate of FOMC participants. In June, the median projection indicated no rate increases until 2023.
Projections for 2024 were also published for the first time, with the median suggesting a federal funds rate of 1.8% by the end of that year. The median for 2023 rose to 1%, from 0.6% in the June projection.
Other Forecast Takeaways (median estimate):
2021 median PCE inflation 4.2% vs 3.4%
FOMC median projection for 2022 inflation rose to 2.2% from 2.1% in June; held the 2023 forecast at 2.2%
Read full report
September 17, 2021
SGH Insight
In the interest of efficiency and time I thought we might share a few brief highlights of key market related points in (and not in) our reports while addressing some market rumors and chatter. Please let us know if you find them helpful, and we wish you in the meantime a good weekend.

*Debt ceiling suspension will probably be included in a Continuing Resolution going out to December. Beyond that there is no plan yet.
Market Validation
Policy Validation

Bloomberg 9/20/21

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer say a stopgap government funding bill will include a suspension of the debt limit through December 2022.
“We believe a suspension of the debt limit through December 2022 would provide an amount of time commensurate with the debt incurred as a result of passing last winter’s bipartisan $908 billion emergency COVID relief legislation,” Pelosi and Schumer say
Pelosi and Schumer say the stopgap bill would fund the government through December of this year.
Read full report
September 14, 2021
SGH Insight
To that, reports that US officials are pressing China to remove subsidies on certain industries as a prerequisite to the removal of sanctions can be discounted out of hand as a non-starter. Barring an intense escalation of pressure, that simply is not going to happen, certainly not in exchange for the removal of tariffs – even the Trump administration’s pressure could not get Beijing to move on subsidies.
Market Validation
Policy Validation

Bloomberg 9/15/21

We will implement the important agreements reached by the leaders of the two countries, Chinese Ministry of Commerce Spokeswoman Shu Jueting says in Beijing at regular press conference.

The economic and trade teams from the two sides have been in normal contact, Shu says, when asked if Presidents Xi and Biden will meet in person
When asked about reports that the U.S. is looking into Chinese subsidies, Shu says that unilateral trade protectionism isn’t in the interests of China, the U.S., or the world.
Read full report
September 08, 2021
SGH Insight
We have also heard rumors that former Defense Minister Shigeru Ishiba, who polls just behind front runner Taro Kono, another former Foreign Minister, Defense Minister, and current vaccine czar, may choose not to run.

Ishiba is relatively popular among the rank-and-file LDP members who are not members of parliament, but his group has only 17 lawmakers, which is less than the 20 supporters needed to run the race. Ishiba may announce that he will give up and throw his support to Kono.

That further boosts the likelihood that Kono, who is popular among the general electorate because of his image as a reformer, will win.

Market Validation
Policy Validation

Bloomberg 9/14/21

Kono Gains Momentum in Japan PM Race; Report Says Rival Out

Japan’s vaccine czar Taro Kono looked to be gaining momentum in the race to be the next prime minister after reports said several ministers were planning to back him and one of his expected rivals would stay out of the contest.
Former Defense Minister Shigeru Ishiba, who had been considering a run to take the top job in the Liberal Democratic Party and replace outgoing Prime Minister Yoshihide Suga, has dropped the idea and is thinking of supporting Kono, the Yomiuri newspaper reported Tuesday, citing sources close to Ishiba.
Read full report
September 03, 2021
SGH Insight
Our understanding is that John Kerry, after he arrived in Tianjin on August 31, then set up a virtual meeting with Wang. But the topic of Kerry’s conversation with Wang was not climate, but bilateral relations.

According to Chinese sources, Kerry also asked Wang to convey to Xi that Biden hopes and looks forward to holding bilateral talks with Xi in Rome.
But before the two leaders can meet, the two sides need to show some consensus on major issues.


Market Validation
Policy Validation

Bloomberg 9/10/21

The U.S. official criticized China’s linking of
transnational and bilateral matters, essentially holding hostage
any progress on areas like climate change while demanding
unrelated concessions in return.
That was clear when Biden’s climate envoy John Kerry held
talks with Chinese Foreign Minister Wang Yi last week. “China-
U.S. climate change cooperation cannot be separated from the
general environment of relations,” Wang said, according to the
ministry. “The United States should meet China halfway and take
positive actions to push relations back on track.”
Read full report
August 31, 2021
SGH Insight
Separately, President Xi Jinping discussed the US-China tech rivalry, negative list, and opening of China’s markets at a meeting in Zhongnanhai on Friday. Excerpts are included below:
“The most powerful weapon against the US all-round containment of China is to focus our efforts on our own affairs and to strive to develop our economy, high technology, and the military…. Opening up is one of the best weapons against the US to contain China…We must continue to welcome and support the development of foreign enterprises in China including US enterprises as long as do they do not become pawns of Washington against China. Relevant departments should speed up formulating and introducing the 2021 version of the national negative list for foreign investment ASAP.”
Xi added, “The competition between China and the US is fundamentally about talent and high technology…We must always adhere to the development of the industry-oriented real economy, must not learn from the US or must not be capital-oriented. A capital-oriented economy is fragile, built on bubbles and vulnerable to a single blow…
“We must ensure the stability of the financial system and eliminate any potential systemic financial risks firmly, forcefully and in a timely manner. While ensuring an average annual economic growth of five percent in the next 10 years, we must ensure high-quality and steady economic development, and we must never neglect medium – and long-term development goals for the sake of short-term economic growth.



Market Validation
Policy Validation

Bloomberg 9/8/21

The mouthpiece of China’s ruling Communist
Party has run a front-page editorial seeking to ease concern
that President Xi Jinping’s regulatory crackdown will hurt
foreign investors.
“Opening to the outside world is China’s basic national
policy, and it will not waver at any time,” the People’s Daily
said in the editorial, which was published on Wednesday under
the headline “Sticking to Regulatory Supervision While Promoting
Development.”
“Unswervingly, the principles and policies of encouraging,
supporting and guiding the development of the non-public sector
of the economy have not changed!” the newspaper said, adding
that the government of the world’s second largest economy would
protect the rights of foreign investors.
The goal of the regulatory moves has been “to promote the
formation of a market environment of fair competition and better
protect consumer rights,” the editorial added, and to open an
avenue for “promoting high-quality development.”
Read full report
August 26, 2021
SGH Insight
Furthermore, our understanding is that if the Eurozone data stays roughly on expectations over the next two weeks, the ECB will most likely decide to tweak its PEPP purchases modestly downwards for the fourth quarter when the Governing Council meets next on Thursday, September 9.
Market Validation
Policy Validation

The ECB Policy Statement 9/9/21

Pandemic emergency purchase programme (PEPP)

The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over.

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.

The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
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August 23, 2021
SGH Insight
Federal Reserve Chair Jerome Powell’s remarks will be viewed as the consensus view of the Board. Powell is slated to discuss the economic outlook and it is hard to imagine he could do so without shedding some light on the tapering discussion. Powell can firm up the view that tapering will occur in 2021 simply by reiterating the main themes of the most recent minutes and position the Board as more hawkish than the position elaborated by the most dovish members of the Board. This is my expectation.
Bottom Line: There will be a lot of tapering talk on the “virtual” sidelines at Jackson Hole. The weight of that talk will be on the hawkish side and lean toward tapering this year. Watch for that side, however, to follow Kaplan’s lead and offer additional caveats about the current Covid surge. What we are really looking for, however, is how closely Powell follows the positioning of the minutes and Clarida for evidence that the consensus on the Board is falling in line with a taper this year if Covid allows.
Market Validation
Policy Validation
8/27/21

Treasuries Rise as Powell Signals Taper on Course for This Year

Treasuries gained even in the wake of comments from Federal Reserve Chair Jerome Powell signaling that the central bank could begin paring its monthly bond purchases this year.
The remarks Friday at the Kansas Fed’s virtual Jackson Hole symposium kept intact the message traders already garnered from past comments by Powell and from the minutes of the central bank’s last policy meeting, in July -- that most officials judged that it probably would be appropriate to begin paring the buying in 2021.

Ten-year yields fell 2 basis points to about 1.33% and the yield curve reversed an early-session move that sent it to the flattest level in a year. The Fed is currently buying $120 billion a month in bonds, part of emergency measures introduced last year to support the economy and help markets function smoothly.

Powell said in his remarks that the economy has now met the test of “substantial further progress” toward the Fed’s inflation objective that he and his colleagues said would be a precondition for tapering the bond purchases, while the labor market has also made “clear progress.”
The yield curve, as measured by the gap between 5- to 30-year yields, was about 2 basis points steeper than Thursday’s closing levels, at about 111 basis points. The curve earlier in the session Friday touched around 107 basis points amid comments from other Fed officials that were deemed on the hawkish side in terms of pushing for a quicker start to tapering.


Read full report
August 10, 2021
SGH Insight
Second, the latest Covid wave is likely to hit Asia hard (low rates of vaccination will likely combine with the more transmittable Delta variant) and create a fresh series of supply shocks. See this, for example:

Nissan says its huge factory in Smyrna, Tennessee, will close for two weeks starting Monday due to computer chip shortages brought on by a coronavirus outbreak in Malaysia.

We are probably going to see more of these stories in the weeks ahead.
Market Validation
Policy Validation

8/12/21

China partly shut the world’s third-busiest
container port after a worker became infected with Covid,
threatening more damage to already fragile supply chains and
global trade as a key shopping season nears.
All inbound and outbound container services at Meishan
terminal in Ningbo-Zhoushan port were halted Wednesday until
further notice due to a “system disruption,” according to a
statement from the port. An employee tested positive for
coronavirus, the eastern Chinese city’s government said.
The closed terminal accounts for about 25% of container
cargo through the port, calculates security consultant
GardaWorld, which said “the suspension could severely impact
cargo handling and shipping.”
Read full report
August 03, 2021
SGH Insight
The Politburo’s over-arching directive for monetary policy is to ensure a balance of general money supply and social financing, to ensure the supply and price stability of bulk commodities, and to keep the country’s macro leverage ratio “basically stable.”
The meeting stressed the by now familiar, and slightly more dovish imperative that prudent monetary policy should maintain “reasonably ample” liquidity and support the continued recovery of small and medium-sized enterprises as well as stressed industries.
As to targets, sources indicate that new loans in H2 of 2021 will be guided to remain at or slightly above year-ago levels, and the People’s Bank of China will opt to use “low-profile tools” to quietly inject long-term liquidity.
The PBoC is also expected to cut the Reserve Requirement Ratio (RRR) for some financial institutions in a targeted way, but not to adjust (cut) the policy interest rate.
Market Validation
Bloomberg 8/10/21

China’s central bank fanned expectations of
further monetary policy easing, saying in its latest quarterly
report that inflation pressures are “controllable,” while
highlighting risks to the economic growth outlook.
The People’s Bank of China largely reiterated its stance of
stable policy, pledging to make it more forward-looking and
effective, while maintaining ample liquidity. The surge in
producer inflation in the first half was likely temporary, and
the domestic recovery is not yet solid, it said.
Read full report
July 30, 2021
SGH Insight
On the question of a visit by US Secretary of State Antony Blinken or National Security Advisor Jake Sullivan to China, Xie Feng quipped that whether they come to China or not does not depend on the Chinese side, but on whether the US side “is sincere in stabilizing” bilateral relations.
But while Xie said this was not the right time to discuss the topic, the door, by implication, appears to have been left open for a visit from these officials down the road.
As one high level Chinese official predicts, China-US relations will not improve significantly, but he expects bilateral relations in the second half of 2021 will be better than they were in the first half of the year. That, admittedly, is a rather low bar to meet.
And so even if there is no imminent agreement on a visit by Blinken or Sullivan to China, it appears the prospects for a one-on-one meeting between President Joe Biden and President Xi Jinping on the sides of the October 30-31 G20 Summit in Rome appear alive and well. At least that is the view, if not desire, of Beijing.
Whatever tensions may exist, “strengthening crisis management,” adds this official, “is a top priority for the two heads of state.”
Market Validation
Policy Validation

Bloomberg 10/6/21

Biden, Xi Plan Virtual Meeting Before End Of Year, U.S. Says

President Joe Biden plans to meet virtually with Chinese President Xi Jinping before the end of the year, a senior U.S. official said, with tensions escalating between the world’s two largest economies.
Plans for the meeting were announced in a conference call with reporters following about six hours of meetings Wednesday between White House National Security Adviser Jake Sullivan and a senior Chinese foreign policy adviser, Yang Jiechi, in Zurich.
The official called the Zurich discussions more meaningful and substantive than previous meetings between Biden administration officials and their Chinese counterparts.
According to a Chinese government statement published by Xinhua, Yang said that China attaches importance to Biden’s positive remarks recently and noted that the U.S. said it doesn’t intend to contain China or engage in a new cold war. He called the conversations with Sullivan comprehensive, candid and in-depth exchanges on the two countries’ relations as well as international and regional issues of shared interest.

Read full report
July 16, 2021
SGH Insight
The ECB had agreed to commit to a symmetric inflation “aim” of around 2% already in 2019 under then-President Mario Draghi, even while its formal target has remained a slightly lower, and more unwieldy, “close to, but below 2%.” But the codification of this symmetric 2% goal into a formal inflation target is still significant, and indeed, ECB President Christine Lagarde proudly flagged the upcoming July 22 Governing Council as one worth watching in that it will be now incorporating the new ECB target into its forward guidance on interest rates.

In the process, Lagarde may have been perhaps raising expectations for changes to policy as well.

** On forward guidance, the Governing Council will need to change its current commitment to keeping interest rates “at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics” to reflect the new 2% symmetric target, and the desire to hit that target on a “sustainable” basis.

** But on a pragmatic level, rate hike expectations are already more or less flat until 2024, and so an argument can be made that the ECB commitment to keeping rates at the current -0.5% is already more than baked into markets.
Market Validation
Policy Validation

FT 7/22/21

The new guidance came two weeks after the ECB agreed a new strategy that lifted its inflation target to 2 per cent, dropped a promise to keep price rises below that level and accepted that they can even exceed it temporarily. It was the first change in strategy for almost two decades.

After the monetary policy meeting in Frankfurt, the central bank said in a statement that its revised guidance would “underline its commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target”.

It said its deposit rate would not rise from minus 0.5 per cent until inflation hits 2 per cent “well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2 per cent over the medium term”.

It added: “This may also imply a transitory period in which inflation is moderately above target.”

Some ECB rate-setters have called for a reduction in the pace of bond purchases through the €1.85tn pandemic emergency purchase programme (PEPP) it launched in response to the Covid-19 crisis last year.

But in its statement on Thursday the ECB stuck to its guidance that the PEPP will last until at least March 2022 and only end once its policymakers decide that “the coronavirus crisis phase is over”.

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July 12, 2021
SGH Insight
Fedspeak picks back up a bit this week. The highlight will be Chair Jerome Powell’s Monetary Policy Report testimony at the House (Wednesday) and Senate (Thursday). I expect Powell will lean on a generally dovish story that commits to sustained policy accommodation even as he opens the door for tapering later this year.
Market Validation
Policy Validation 7/14/21

Semiannual Monetary Policy Report to the Congress
Chair Jerome H. Powell

At our June meeting, the Committee discussed the economy's progress toward our goals since we adopted our asset purchase guidance last December. While reaching the standard of "substantial further progress" is still a ways off, participants expect that progress will continue. We will continue these discussions in coming meetings. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.




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