Highlights

SGH reports are highly valued for helping clients understand and stay ahead of the news cycle on central banks and macro policy events that drive the global economies and financial markets.

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2024
May 20, 2024
SGH Insight
Monday Morning Notes, 5/20/24
The Fed still anticipates the falling inflation will allow it to cut interest rates later this year. The first quarter inflation numbers have not upended that story and instead only delayed the timing of a rate cut. From a bigger picture perspective, the Fed doesn’t anticipate it needs to hike rates again, anticipates the ability to cut rates even if growth remains strong, and stands ready to ease policy in response to weaker-than-expected employment outcomes. That’s setting up a one-way bet for the economy, and it’s hard to see such signaling as anything other than an invitation to financial markets and firms to embrace risk.

Market Validation
BBG 5/22/2024
“If the data were to continue softening throughout the next
three to five months, you can even think about doing it at the
end of this year,” Waller said on CNBC Tuesday. “If we get
enough data going the right way, then we can think about cutting
rates later this year, beginning of next year.”
Waller’s comments about the rate outlook follow those made
earlier Tuesday at the Peterson Institute for International
Economics, where he said he needs to see “several more” good
inflation numbers to begin interest-rate cuts.
He noted April consumer price figures were a reassuring
signal price pressures are not accelerating and suggest progress
toward the central bank’s 2% goal has likely resumed.
“In the absence of a significant weakening in the labor
market, I need to see several more months of good inflation data
before I would be comfortable supporting an easing in the stance
of monetary policy,” Waller said at the Peterson Institute for
International Economics.
Read Full Report
May 06, 2024
SGH Insight
If You Don’t Have Time This Morning
The April employment report will help reassure the Fed that it doesn’t need to raise policy rates again but by itself doesn’t step up the timetable for a rate cut. Despite the unemployment rate edging up to 3.9%, the report does not represent an “unexpected weakening” of the labor market. Indeed, the solid numbers support the “no rush” story and allows for the Fed to be patient before it cuts rates. Rate cuts are still about the inflation story, and now the Fed needs a string of low inflation to regain its confidence that it is on a sustainable path to price stability. The Fed has not given any direct signals of how much data it needs to be confident in the inflation outlook, but the change in the Fed’s language away from “rate cuts likely appropriate this year” indicates that the Fed doesn’t anticipate having that confidence any time soon. Although speculation on a July rate cut increased after the employment report, we don’t think the Fed is actively considering a July move. If it did, it would continue to actively speculate that a rate cut is likely appropriate this year. The Fed could in theory cut rates in September, but the data needs to fall in line; the risks are high that at least one of the inflation prints between now and then will leave the Fed uncomfortable with cutting rates. Instead, we set a baseline of a December cut.

Market Validation
BBG 5/22/24
“If the data were to continue softening throughout the next
three to five months, you can even think about doing it at the
end of this year,” Waller said on CNBC Tuesday. “If we get
enough data going the right way, then we can think about cutting
rates later this year, beginning of next year.”
Read Full Report
April 30, 2024
SGH Insight
That said, today’s data does not add any fuel to the fire for a July rate cut. As we wrote in (SGH 4/26/24; “ECB: Note on Rates and Markets”) US data and policy dynamics had already reduced the appetite for front loading. ECB president Christine Lagarde has, of course, avoided committing to any path beyond the initial June rate cut.
Despite the welcomed softening in core inflation in today’s data, most Governing Council members are likely to continue to shy away from declaring victory over inflation, stressing the importance of further progress on domestic inflationary pressures.
Market Validation
Reuters 5/22/2024

The European Central Bank should not necessarily follow up a rate cut in June with another move the following month, even if inflation is on its way to target, Bundesbank President Joachim Nagel said in a newspaper interview published on Tuesday.
The ECB has all but promised a rate cut on June 6, so policymakers have shifted their attention to debating where rates will go thereafter.
While some are advocating for further cuts, others including board member Isabel Schnabel, Belgium's Pierre Wunsch, the Netherlands' Klaas Knot and Latvia's Martins Kazaks have suggested that a second cut in July may be premature.
"If rates are lowered for the first time in June, that does not mean we will cut rates further in subsequent Governing Council meetings," Nagel said during a joint interview with Germany's Handelsblatt, France's Les Echos, Italy's Corriere della Sera and Spain's El Mundo. "We are not on auto-pilot."
Read Full Report
March 19, 2024
SGH Insight
The Bank of England (BOE) is tipping toward a June cut in Bank Rate, awaiting confirmation that headline inflation is going to continue to slow and squeeze out the risk of persistence in underlying price impulses.
With BOE committee members divided over how entrenched inflation persistence is, and looking to new data to judge how long to maintain rates at 5.25%, the MPC will vote to hold rates steady again when it meets Thursday.
How members split on that vote, however, could convey how much time the Bank is willing to wait before it starts to signal the prospect of lower rates.
Cautious inflation comments from hawkish voices inside the committee who have been worried about the residual stickiness of services inflation in particular, are on the whole, slightly more muted since the last meeting.
There is a risk too that external member Jonathan Haskel, a key inflation hawk, could join the majority ranks of the committee in voting for unchanged rates at the March 21 meeting.
If he does so, it could be a strong signal the Bank is inching its way toward a midyear easing. Haskel along with fellow inflation hawk Catherine Mann, who was recently reappointed for another term as an external member, both wanted another rate hike at the Bank’s February 1 meeting,

Market Validation
Bloomberg 3/22/24

UK bonds rallied as traders amped up bets on
monetary easing after two of the Bank of England’s most hawkish
policymakers withdrew their support for interest rate hikes at
Thursday’s decision.
The yield on two-year gilts fell 12 basis points to 4.12%,
the largest move in over a month, on the dovish tilt. Sterling
extended its decline to 0.5%, trading as low as $1.2726, as
traders added to bets on monetary easing. BOE officials voted to
hold policy steady for a fifth straight meeting as widely
expected.
Traders now see around 80 basis points of rate cuts in 2024
compared to 75 basis points before the decision. While the first
cut is still fully priced by August, the market-implied chances
for a move by June rose to around 80%.
Read Full Report
March 13, 2024
SGH Insight
As for the destination for rates, the BOJ plans for a gradual removal of accommodation may ultimately be interrupted by global economic softening over the next 12 months, so the BOJ will likely shy away from explicitly answering questions about its next moves.
Market Validation
Bloomberg 3/19/24
The Bank of Japan scrapped the world’s last
negative interest rate, ending the most aggressive monetary
stimulus program in modern history, while also indicating that
financial conditions will stay accommodative for now.
The lack of signaling on any future rate hikes weighed on
the yen — which slid past the closely watched 150 mark versus
the dollar — while benchmark government bond yields edged lower.
The weaker currency supported Japanese equities, helping the
Nikkei 225 Stock Average reclaim the key 40,000 level.
Read Full Report
March 04, 2024
SGH Insight
While far too early to speculate on the path of ECB rate cuts for the second half of the year, we will try to present a bit of a framework, nevertheless.

To start, we do not expect that the ECB’s 2024 rate cuts will be any shallower than the 75 basis points of 2024 rate cuts that were incorporated into its December 2023 forecast round, a forecast that is going to be revised downwards on both inflation and growth.

In fact, we consider 75 basis points to be a minimum for what the ECB will need to deliver this year, with the likelihood that it cuts by 100 bps, or possibly even more...

...We continue to expect these revisions will clear the path and solidify consensus for a 25-basis points rate cut at the next ECB quarterly revision round meeting on June 6, but that the totality of the revised outlook and data will be insufficient to tip the balance to a rate cut either this week, or at the April 11 meeting that follows soon after.

As to why wait until June, ECB President Christine Lagarde will continue to stress on Thursday the need to see more data on early 2024 wage negotiations before making the assessment that inflation, in particular domestic underlying inflation, is on a sustainable path toward hitting the bank’s 2% target in a reasonable time frame before cutting rates....

Market Validation
Bloomberg 3/7/24

Traders stepped up bets on interest-rate cuts from the European Central Bank this year after policymakers lowered their inflation forecasts.

Money markets are betting on four quarter-point reductions by the end of the year, with a first cut by June fully priced. Before the meeting, wagers were on three cuts, with a 72% chance of a fourth.

Bloomberg 3/7/24

Lagarde Says ECB Will Know ‘Lot More’ About Inflation in June

“We clearly need more evidence, more detail, and we know that this data will come in the next few months,” ECB President Christine Lagarde says at press conference in Frankfurt on Thursday.
• “We will know a little more in April, but we will know a lot more in June,” she says
• “We have not discussed rate cuts for this meeting, we have just begun discussing the dialing back of our restrictive stance, but of course we need a lot more information coming in in the next few months to be sufficiently confident,” Lagarde says

Read Full Report
February 14, 2024
SGH Insight
Bottom Line: Given the hawkish bias in recent data, we can’t assign a high probability to a May cut at this point. It’s just difficult to see that Fed hawks will come to a consensus on a rate cut if jobs continue growing more than 300k per month, for example. And even if we could assign a high probability to May, that case depends on data that might not become available until after the March meeting, meaning strategically there remains a hawkish risk for market pricing for the next month. Something needs to give to provide a clearer path to a May cut.
Market Validation
Bloomberg 2/16/24

The Treasury market extended a slide Friday after US producer prices rose faster than forecast in January, dimming the chances the Federal Reserve will begin reducing interest rates before July and trimming expectations for cuts over the whole of 2024.

Yields of all maturities rose in the wake of a fresh dose of concern over inflation proving more sticky than some expected, with shorter tenors leading the march. This comes after a reading earlier this week showed consumer prices rose more than forecast.

The two-year yield, the most sensitive to changes in the outlook for US monetary policy, rose as much as 14 basis points to 4.72%. That came as short-term interest-rate swaps contracts trimmed odds of the Fed’s first rate cut coming in June down to only about 80%. For all of 2024, traders now see only about 85 basis points of easing, pushing the market as close as ever to three quarter-point hikes, which the median of Fed officials’ forecasts — known as the dot plot — signaled in the last quarterly update in December.

Read Full Report
February 12, 2024
SGH Insight
The data flow steps back up this week with fresh readings on both inflation and consumer spending. On Tuesday, Wall Street expects to see that core-CPI was 0.3% in January although we remind readers to look through the CPI numbers to the implications for PCE inflation; for a more complete picture of the latter, we need to wait until Friday to get the latest PPI numbers. There has been heightened concern that inflation ran a bit hotter in January, and if so, market participants will reduce pricing for rate cuts this year as the Fed has been pretty clear that it sees this outcome as the primary threat to its expectation that it will be appropriate to cut rates later this year.

Market Validation
Bloomberg 2/13/2024
*FED SWAPS ASSIGN LOWER ODDS TO MAY, JUNE RATE CUTS
*US 2- TO 5-YEAR YIELDS RISE AT LEAST 15 BASIS POINTS ON DAY
*FED SWAPS PRICE IN LESS THAN 100 BASIS POINTS OF EASING IN 2024
*FED SWAPS SHIFT FULL PRICING OF RATE CUT TO JULY FROM JUNE
Read Full Report
February 05, 2024
SGH Insight
Monday Morning Notes, 2/5/24

A lighter week for data that might begin with a bang. Monday morning, we get the January services sector PMIs for S&P Global and ISM. Given the recent run of data, it seems like we should be looking for an upside surprise. The ISM number should get a boost from the reversal of the shockingly low employment number in December. We don’t know how to explain another weak number in the context of the employment report. Upside surprise for the ISM measure could be the catalyst that forces market participants to undo the move in rates since last November.
Market Validation
Bloomberg 2/5/24

Treasury yields extended Friday’s surge, pushing the two-year note’s toward its highest level this year, as strong economic data reinforced the message of Federal Reserve officials including Chair Jerome Powell that interest-rate cuts are unlikely to begin before May.

Yields across the maturity spectrum climbed as much as 10 basis points on the day, reaching session highs after the ISM gauge of service-sector activity for January exceeded economist estimates. Friday was the US bond market’s worst day in nearly a year after stronger-than-anticipated January employment data dashed hopes for a speedy pivot toward easier monetary policy.

The chance of a quarter-point cut in March dwindled to almost 10% after Powell said in an interview with CBS’s 60 Minutes which aired Sunday that Americans may have to wait beyond the Fed’s next meeting to cut interest rates. Minneapolis Fed President Neel Kashkari made similar comments Monday, and nine other central bank officials are slated to speak this week.
Read Full Report
January 30, 2024
SGH Insight
Rate cuts are coming this year, but the timing and magnitude of cuts depend on both the inflation and growth/jobs data. The Fed will provide additional guidance on the policy path at the conclusion of this week’s FOMC meeting. We remind readers that a March rate cut remains very possible, only that the Fed likely needs a push from the real data to be confident that inflation will remain on the path to price stability. That could come from the jobs data, but not likely with the current consensus expectations for the January employment report. In other words, while we are confident that the inflation data clears the way for a rate cut, the growth outcomes are an impediment to a March cut and we are less confident the data on that front will turn in time for a March cut. If that report reveals job growth less than 100k or an uptick in unemployment, the odds of a March cut will rise.
Market Validation
Federal Reserve Board Press Conference 1/31/2024
The current context, we will be data-dependent. We will be looking at this meeting by meeting. Based on the meeting today, I would tell you that I don't think it is likely that the Committee will reach a level of confidence by the time of the March meeting to identify March at as the time to do that, but that is to be seen. So, I wouldn't call it, you know -- when you ask me about in the near term, I am hearing that as March. I would say, I don't think that is -- it is probably not the most likely case, or what we would call the base case.
Read Full Report
January 29, 2024
SGH Insight
If You Don’t Have Time This Morning
As for this week’s FOMC meeting, we think the statement and press conference will fall short of endorsing imminent rate cuts. The reality that the Fed needed to see the upcoming CPI revisions before cutting rates already made it impossible to conclusively clear the way for a rate cut at this meeting, and the GDP number reinforces the case for waiting until the Fed has clear visibility on the first quarter growth, which would push a rate cut back to May.

We expect the statement will shift to reflect the pivot to talking about the timing of rate cuts but not entirely to an easing bias. This argues in favor of replacing “any additional policy firming” with more neutral language like “future policy adjustments.”
Market Validation
Federal Reserve issues FOMC statement 1/31/2024
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
Read Full Report
January 24, 2024
SGH Insight

The European Union is grappling with how to secure 50 billion euros in financing for Ukraine for the next four years, without which Kyiv will not have enough money to keep the country, and war, running.
EU leaders tried to agree on the cash in December but failed after Hungary, keen under Prime Minister Viktor Orban always to maintain good relations with Moscow, blocked the agreement that would have required unanimous approval of all 27 EU governments.
EU leaders will have another go at it on February 1 and it appears they are likely to succeed, probably at the cost of yielding to Hungary’s demands that the disbursements be reviewed annually.

Market Validation
Bloomberg 2/1/2024
European Union leaders struck a deal as Hungarian Prime Minister Viktor Orban yielded to their demands to lift his veto on a €50 billion ($54 billion) financial aid package for Ukraine. The forint reversed an earlier drop on the news.
“This locks in steadfast, long-term, predictable funding for Ukraine,” European Council President Charles Michel said in announcing the deal in a post on social media platform X Thursday.
As part of the accord, the member states agreed to debate the implementation of the Ukraine aid package every year and, “if needed,” the European Commission, the bloc’s executive body, could be asked to propose a review in two years, according to a draft document seen by Bloomberg News. The Hungarian leader’s demand for a veto was dropped.

Read Full Report
January 22, 2024
SGH Insight

Powell will be threading a needle at the FOMC meeting. The Fed looks prepared to move to a balanced risk assessment and will want to maintain flexibility going forward as it eyes its next move. Powell can’t cut off March given inflation and the possibility that labor markets surprise on the downside, but at the same time won’t endorse March.
Bottom Line
Having pushed the inflation story as far as it can go, the focus is back on the real economy. On that side, a run of better-than-expected data reduces the urgency for rate cuts, leaving the timing of the first cut dependent on softer employment data between now and the March meeting. We currently assess the odds of a March cut at 30%.
Market Validation
Bloomberg 1/31/2024
*FED SWAPS CUT ODDS OF MARCH RATE CUT TO CONTRACT LOW NEAR 30%
The Federal Reserve held interest rates steady for a fourth straight meeting and signaled an openness to cutting them, though Fed Chair Jerome Powell threw cold water on investors’ hopes that reductions would begin in March.
The central bank’s policy-making Federal Open Market Committee showed it is in no rush to reduce rates, noting in a statement Wednesday that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Powell reinforced this message by saying, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting.”

Read Full Report
January 12, 2024
SGH Insight
Some private sector inflation forecasters are tipping that falling energy prices will push down UK inflation to 2% by April, halving the current rate.
The Bank in November said it expected inflation would return to the 2% target by the end of 2025. Inflation would then fall below target, it said, as “an increasing degree of economic slack reduces domestic inflationary pressures.”
At that meeting, the Monetary Policy Committee (MPC) voted 6–3 to hold Bank Rate steady, with three members preferring to raise rates again by 25bps.
Later that month Bailey said in an interview that rates would not be cut for “the foreseeable future” at the same time as he expressed concern about sagging growth.
Now, the upcoming February meeting’s vote is likely to reflect that shift in concern with most members favoring a hold.
In November, the Bank’s now outdated projected inflation path back to target was based on an implied path for Bank Rate to remain at 5.25% until the third quarter this year before it declined “gradually to 4.25%” through end 2026.
Its February 1 update could show it now expects inflation to return to target this year, far sooner than it expected in November when senior members of the MPC including Bailey, stressed the need to keep Bank Rate at its 15-year high until the path back to target was in sight.
Market Validation
Bloomberg 2/1/2024
The Bank of England opened the door to interest-rate cuts for the first time since the pandemic struck — affirming predictions that inflation will fall to target this spring — while warning that price pressures could reemerge.
The UK central bank removed key guidance that borrowing costs may have to rise again, with Governor Andrew Bailey acknowledging that keeping rates unchanged would push inflation “significantly” below the target of 2%. The nine-member Monetary Policy Committee split three ways on how to act, with a majority of six opting to leave the key rate unchanged at 5.25%.
Still, MPC member Swati Dhingra pushed to cut rates, the first vote for a reduction in almost four years. Catherine Mann and Jonathan Haskel stuck with their previous position to raise rates to 5.5%.
Traders held bets that the BOE will deliver at least four quarter-point interest-rate cuts this year, with the first coming in June. The chance of an earlier move in May remains at around 50%.

Read Full Report
January 10, 2024
SGH Insight
As to the timing of cuts, the data and outlook will of course drive the ultimate decisions, but from where we sit today we continue to rule out a cut at the March 7 meeting barring a shock on the growth side (Banco de Portugal Governor Mario Centeno has been the dovish outlier advocating for a March cut).
Furthermore, while we had thought the March forecast round could set the stage for a cut at the April 11 meeting, if inflation bounces around above 2% as expected, and with little data between the March and April meetings, this also appears unlikely, even though it is possible.
We expect the most likely base case for a first rate cut by the ECB to be at the June 6 forecast round meeting.
The argument for June over April is partly about waiting for the results in May of the all-important national wage data. The ECB will have some sense even by March of tracking wage data (see below), and April could be live depending on the totality of the data, but the preference will be to see the hard data and not rely too much on tracking data with little history. And while it is not written in stone that the first cut has to come at a quarterly forecast round meeting, that is far cleaner for both internal consensus and external communication. Perhaps most interestingly, waiting until June has a lot to do with tactics around managing the pace and destination of cuts as well.

Market Validation
Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Federico Fubini
January 13, 2024

What is it that the market is getting so wrong by expecting ECB rate cuts by March or April, and for these to then continue rather aggressively in 2024? Do you believe the market discounts euro area recession, due in part to a more restrictive German budget, that were not included in the more recent ECB staff projections?
The inflation release for December was broadly in line with our projections – I’m not seeing some major downside surprise. It was in line with our signal that there would be a jump. And the continued progress on the easing of core inflation is welcome. But we do see some headwinds to services inflation this year and, for the time being, wages are still growing well above any kind of long-run equilibrium rate. We don’t expect energy prices to continue falling at the same rate as last year.
Our baseline staff projections include a significant recovery in the European economy this year due to stronger demand in Europe which is, on its own terms, inflationary. But we flagged in December that there are downside risks to our forecast. And that is one of the big data questions we have for these weeks: will we see a recovery or a continuation of the kind of stagnation we had for much of 2023? We remain very data dependent.
The ECB needs to assess wage settlements before getting an orientation on monetary policy in 2024. Many wage deals will happen this month and during the spring. Do you think you will have a clear enough idea by the governing council on April 11th?
I have a range of data I want to see. We do receive the data on the latest wage settlements every week. We have a wage tracker measure that we use as an early indication of the wage dynamics. We also look at market data on wages. But the most complete dataset is in the Eurostat national accounts data. The data for the first quarter will not be available until the end of April. By our June meeting, we will have those important data. But let me emphasise, we do have other data that we will be looking at every week, because, as you say, a lot happens every month and we look at all of the data available to us.
It will take time to have a good understanding of whether the wage settlements are decelerating. We expect that 2024 will still have high wage increases, and it is important for people to recover the losses from high inflation. But the scale of that will determine the timing and the scale of rate adjustment this year.

Bloomberg 1/23/2024
European Central Bank officials who until
recently had been wary of even discussing interest-rate cuts now
look increasingly open to commencing them in June.
Read Full Report
January 04, 2024
SGH Insight
The Reserve Bank of Australia (RBA) will likely hold rates steady at its first meeting of the year when it meets next month, with prospective easing likely to lag other developed economies this year as officials try to hold the line on higher for longer rates.
With Australian inflation slowing but still well above the Bank’s 2-3% medium term target band and estimates of neutral somewhere below 4%, the cash rate is restrictive as long as the RBA holds policy at the current 4.35% rate.
There is some local excitement around the prospect that prices (mostly as a result of energy price declines) could slow to as much as 2.9% by the end of this year. That would be a full year ahead of the RBA’s own projections.
We view the Bank as unlikely to suddenly relent on its hawkish policy stance, as December’s meeting debate over holding or hiking the cash rate illustrates. It is not so hawkish that it will hike again in February as some market participants think but it remains wary enough to try to push off pricing of rate of cuts for some months yet.
Market Validation
Dow Jones 4/6/2024

The Reserve Bank of Australia moved to a more neutral
stance on interest rates Tuesday but pointedly reminded markets not to rule
out the prospect of a further interest rate increase if inflation remains
sticky.

The RBA kept the official cash rate on hold at 4.35% at the conclusion of its
first policy meeting for this year. While it said rates may rise more, the
central bank separately announced downward revisions to its inflation and
growth forecasts.

"The path of interest rates that will best ensure that inflation returns to
target in a reasonable timeframe will depend upon the data and the evolving
assessment of risks, and a further increase in interest rates cannot be ruled
out," the RBA board said in a statement.

In a press conference following the announcement, RBA Governor Michele Bullock
added that "the signs are good" about inflation but added "we've got to be
very vigilant."

The comments suggest the RBA is likely to lag the Federal Reserve and other
major central banks like the European Central Bank in moving to cut interest
rates.
Read Full Report
January 02, 2024
SGH Insight
Monday Morning Notes, 1/2/24
The Fed releases the minutes of the December FOMC meeting on Wednesday. The directionality for the Fed is clear as falling inflation is pushing it toward a rate cut. The minutes are unlikely to directly point to a March cut, but I suspect they will reveal the Fed becoming increasingly confident that inflation is on a path to price stability.
Market Validation
Bloomberg -1/3/2024
Federal Reserve policymakers agreed last month that it would be appropriate to maintain a restrictive stance “for some time,” while acknowledging they were probably at the peak rate and would begin cutting in 2024.
“Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” according to the minutes of the Dec. 12-13 Federal Open Market Committee meeting released Wednesday.
The minutes indicated increased optimism among participants about the path of inflation, noting “clear progress.” The committee expressed a willingness to cut the benchmark lending rate in 2024 should that trend continue, though they gave no indication easing could begin as soon as March, as futures traders expect.
Read Full Report
2023
December 21, 2023
SGH Insight
Naturally, the multi-year spending path agreed between the Commission and a country might be overshot from time to time. To keep track of this, the Commission will set up a “control account” for each country where it will record how much the agreed expenditure was exceeded. If the agreed path is breached by 0.3% of GDP in a single year, or 0.6% of accumulated breaches over several years, the Commission will start disciplinary steps against the country, forcing it to cut the deficit by 0.5% of GDP a year. The control account will be reset at the end of each four- or seven-year period.
This deal now goes to the European Parliament where negotiations over it will start in January. Some tweaks are possible, but the main thrust of the reforms is unlikely to be changed.
Market Validation
Bloomberg 2/12/2024
The European Union hashed out a preliminary agreement on fiscal reform that will aim to reduce debt and protect investment in key areas such as defense and the green
transition.
The political deal will introduce a gradual fiscal adjustment path for nations whose government debt exceeds 60% of gross domestic product or whose deficit is above 3% of GDP. The agreement struck in Brussels late Friday between representatives of the European Commission, the European Parliament and member states in the EU Council still needs formal approval by national.
governments and the EU assembly to become law.
Read Full Report
December 20, 2023
SGH Insight
Though the BOJ will keep its options open for the March 18-19 and April 25-26 meetings, we suspect it continues to favor the latter meeting to make its move.
In the leadup to April, look for the BOJ to use its published meeting materials to recast its language on overshooting the inflation goal and to tilt its risks assessment from focusing on downside risks to a more balanced risk outlook.

(2) The Bank of Japan (BOJ) is targeting an April 2024 exit from negative interest rates, with a risk that the decision is brought forward to March.
A January move is off the table. Instead, the Bank will use its January 22-23 forecast round meeting to signal via updated forecasts that its inflation goal is in better view and that it is closer to a live meeting.

Market Validation
Reuters 12/22/23

Bank of Japan board members were divided on how to communicate a tweak to yield curve control, with some showing tolerance for explaining the move as laying the groundwork for an exit from ultra-loose policy, minutes of their October meeting showed.

One member said it was necessary to clearly indicate that the measure was not intended as preparing for a future end to YCC and negative interest rate policy, the minutes showed on Friday.

But another member said the BOJ should not strongly deny the chance that the tweak to YCC could lead to an end to the current stimulus programme, according to the minutes.

"With a future exit in mind, it was important for the BOJ to provide communication to markets that prepare them" for when Japanese interest rates turn positive, one member was quoted as saying.

The debate highlights a growing awareness within the BOJ of the chance of phasing out its complex framework consisting of YCC, huge asset buying and a negative short-term rate target.

(2) Bloomberg 1/4/2024
Bank of Japan board members discussed the
potential timing of the nation’s first interest rate hike since
2007 during their meeting last week, with several members
indicating they see no rush to make the move.
“It would not be too late even if the bank makes a decision
after it sees developments in labor-management wage negotiations
next spring,” one of nine board members said at the December
18-19 gathering. There is only a small risk of underlying
inflation overshooting its 2% target by a significant degree,
the same member said.
Another voiced the opinion that there is now “sufficient
leeway” to determine whether a virtuous wage-inflation cycle has
been achieved after the bank enhanced the flexibility of its
yield curve control mechanism in October.
Those opinions may help cool market speculation as to
whether policymakers will end the world’s last negative rate
regime at their January meeting.
The yen weakened and yields fell after the release of the
summary, an indication that investors’ initial impression was to
nudge back their expectations of an imminent rate hike


Read Full Report
December 18, 2023
SGH Insight
Monday Morning Notes, 12/18/23
Reconsider the growth numbers as the immediate consequence of a disinflationary shock. With inflation collapsing, growth receives a mechanical boost, and this appears to have begun in the third quarter. Inflation effectively returned to a 2% annualized rate in June on a monthly basis and has held there, and we were so busy looking at three-, six-, and twelve-month averages it just slipped right past us. Inflation has simply collapsed:
Market Validation
Forbes 12/22
Inflation has officially fallen to the critical 2% level, according to a measure released Friday morning by the Bureau of Economic Analysis, adding fuel to the historic equity market rally heading into year’s end.
The core personal consumption expenditures price index fell to 1.9% in November on a six-month annualized basis.
The core PCE index is the Federal Reserve’s favored inflation metric as it directly tracks how much Americans spend on less volatile goods and services.
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