Altogether this argues for the dots to edge higher in 2022 and 2023 such that the median FOMC participant anticipates a rate hike in 2023. I think any reasonable forecast likely has the economy meeting the Fed’s employment and inflation objectives as early as the end of 2022 and as such it doesn’t seem particularly credible within the context of the new framework to not expect a rate hike in 2023.

The EU and US will also commit to putting an end before July 11 to the long -standing conflict over aircraft subsidies in the Boeing-Airbus wars, and in doing so will prevent an escalation of the retaliatory measures that the EU has warned it could impose under WTO rulings should there be no deal by that date.

** In addition to a global minimum tax, and indeed as a condition of that agreement with the United States, the G7 also struck a deal on the even thornier issue of a cross-border digital tax, agreeing in its communique that the largest and most profitable multinational digital firms [read Google, Amazon, Facebook, Apple, Microsoft, etc.] will have to pay [some] tax in the countries where they operate, not just in their tax-based domiciles.

The G7 will commit to “properly embed” climate change and biodiversity loss in economic policymaking and will use carbon pricing as a policy lever. Central banks, and supervisory agencies, are to treat risks posed by climate change as financial risks.

The G7 will agree that the global financing system needs to be “greened” to better price climate risks and will call for mandatory climate related financial disclosures from companies to help markets value shares accordingly.

To avoid many different standards around the world for what constitutes a “green” or “sustainable” investment, the G7 will pledge to work among themselves and with other international partners towards one common line.

The meeting warned of shocks overseas, and sought to deal with imported inflation, and to enhance expectations management with well-prepared policies. We noted that much more aggressive fiscal stimulus and strong economic recovery expectations in the US have resulted in rising inflation and have boosted global asset prices, triggered more capital flows to the US from emerging markets, and increased debt risks in emerging economies. We should pay attention to the changes in monetary policy in emerging economies, which may result in a short-term impact on our financial system.

Liu He’s Opening Comments:
The extraordinary quantitative easing and huge stimulus package of the US are creating a new round of global inflation and asset bubbles, which are likely to cause sharp turmoil in global financial markets over the rest of the year. If that is so, it will have a negative impact on China’s economic growth, as well as on the RMB (renminbi), domestic stock, and bond markets.
I therefore decided to hold the FSDC meeting [to deliver] a strong warning. The most important topic of the meeting is to strengthen risk management and prevent financial risks. We have made risk management a priority for the financial services industry and the country. It will help reduce or avoid negative outcomes while building a solid foundation for rapid and continued growth.

Lest there be any questions as to the seriousness of Beijing’s efforts and its intentions, a very senior official source had this to say after the ban:
There is no doubt that this time we have cracked down on encrypted virtual currency more severely than in September 2019, and the price of virtual currency will be hit even harder than last time. We must provide an absolutely safe financial environment for the pilot and promotion of the digital RMB in China [our emphasis added].

EU officials say in private that the 15% rate is likely to be good enough for Luxembourg, Ireland, and other EU tax havens. There is a very strong expectation that the G20 will reach an agreement in principle on that 15% global minimum tax rate during the G20 finance ministers and central bank governors’ meeting in Venice in the first days of July.

Falling sales, weak starts, and rising prices are all consistent with a market where demand has pushed supply to the limit. On the existing home side of the ledger, limited inventory is holding back sales and pushing up prices. Higher prices will push lower-income purchasers out of the market while, in theory, inducing some homeowners to sell. But if you sell your house, you have a problem – finding a new one. Also in theory, builders could bring new product to the market, but in practice right now builders are constrained by high materials costs (although lumber has come down off its highs), labor shortages, and lot shortages.

The housing situation is analogous to the current automobile market. This is the best time to sell a used car, but not so great for buying a new car. Automakers are also struggling with rising costs and, most importantly, a chip shortage that severely limits new production:

In both cases, we should expect the end result of slower sales in the near term as, hopefully, the supply situation adjusts. Some commentators will suggest that slower sales signal softening demand, but don’t be fooled. It’s the supply constraints in both cases that limit growth. It can’t be “solved” with easier monetary or fiscal policy. That said, it could press the Biden administration to push an even faster reopening of the economy.

If this goes sideways, it will because we didn’t challenge the conventional wisdom. The Fed is not ready to challenge the conventional wisdom. It is far too early in the process to think the Fed will back down from its current position. It is more likely that it hangs onto its current position even tighter if evidence mounts that challenges the conventional wisdom. Fed officials are deeply committed to returning the labor market to its pre-pandemic full employment conditions. I think the Fed’s tolerance for inflation will rise before it shifts its employment goals. It is hard for me to see it can make another choice and I can already see that happening. Last week, Federal Reserve Governor Christopher Waller said steady, above 4% inflation was the redline. That’s a surprisingly high redline; there is a lot of room between here and there and, importantly, that room is just elevated inflation, not hyperinflation. If it was hyperinflation, the Fed would be quick to act. If it’s a continuous but modest tug upward, the Fed will be quick to dismiss. That’s probably how you back yourself into a higher-inflation environment.

Senior Chinese sources hope the talks may be held by the end of this month. Furthermore, our understanding is that media reports that Vice-Premier Hu Chunhua has replaced the elderly but still extremely highly respected Vice-Premier Liu He as the top Sino-US trade negotiator are false, and that these negotiations are still being led by Liu.

Bottom Line: Fed speakers continue to yield no ground, leaving me unable to change my expectations about the path of policy. The data flow, however, makes the risks to the Fed’s position look increasingly one-sided. A modest April inflation number would give the Fed some room to breathe whereas a hot print will push hard against its narrative, but it won’t drop that narrative easily.

Correcting High-Tech Monopolistic Behaviors

** An important policy support to ensure a strong domestic high-tech sector, President Xi praised the big three Chinese tech companies. Alibaba, Baidu and Tencent as “the pride of the Chinese people” and committed the government to support their further development.

** But to correct a disorderly and uncontrolled expansion of the high tech sector, the government will seek to establish a comprehensive set of rules to strengthen its supervision of financial activities on internet platforms to “help correct monopolistic behaviors.”

** In order to strengthen anti-monopoly measures and to prevent uncontrolled capital expansion, ten government departments, include the NDRC, the Peoples Bank of China and the State Administration for Market Regulation have begun coordinated work to update antimonopoly policies with proposals due by September that should “safeguard fair competition” in the market.
Policy validation

There was consternation last Friday when the German constitutional court suspended the signing into law by the German president of the European Union’s “Own Resources Decision” despite its passage by overwhelming majorities in both the Bundestag and the Bundesrat just hours earlier.

** The court’s move was in response to a last minute emergency complaint filed by opponents in Germany to the EU’s recovery plan, mainly the far-right Alternative for Germany (AfD) and a group called Citizens’ Will Alliance. They argue in their petition to the Court that the plan violates German law by making the country liable for debts incurred by other EU countries.

** Friday’s suspension is a temporary measure that will probably take no more than a few weeks to be resolved. A full injunction seems very unlikely, while the court may issue a “conditional” ruling allowing the scheme to proceed with safeguards to ensure no violation of the German constitution. But the overwhelming sense is that the constitutional complaint will be dismissed.

Bottom Line: Overall, the message of this FOMC meeting was that the Fed fully intends to follow the new framework when setting policy and will not be pulled into a pre-emptive policy tightening. The forecasts even foreshadowed the expected near-term inflation acceleration, effectively formalizing the stated intention to look through transitory inflation outcomes. The Fed very much intends to let the economy run hot to make up lost ground as quickly as possible. We should not doubt the Fed’s intentions when the first high inflation numbers start coming in but the reality is that this meeting will not be the end of the cat and mouse game between market participants and the Fed. This environment of steady policy in the face of improving economic conditions should remain consistent with a general steeping of the yield curve.

I take the Fed’s position that rate hikes are unlikely until after 2023 as a baseline (of course we get new dots next week but I don’t anticipate they will move enough to show a change in the median 2023 rate forecast). The degree of job growth needed in addition to actual inflation makes this a reasonable expectation in light of the Fed’s new policy framework.

Though a close run thing, we think the 2023 median rate plot will not show a rate hike. It would require five or more of the now 18 FOMC members to join the five who in December had already penciled in one or more hikes in 2023. On balance, we think it unlikely. The linchpin to that more benign rate dot plot outcome, even if markets latch on to any signs of earlier hike expectations by a growing FOMC minority, will be core PCE projections that steadily rise across the forecasting horizon but remain still shy of an inflation overshoot in the 2023 median.

** The pace of these purchase will therefore be a topic for discussion at the Executive Board meeting today and at the wider Governing Council discussions tomorrow and Thursday. We expect the pace of PEPP purchases will be modestly stepped up as a signaling device to lean into rising yields, but within its overall “envelope” of 1.85 trillion euros that leaves plenty of room for such flexibility, as (almost) no Council member thinks the program itself needs revision. As of March 5, the ECB had conducted 878 billion euros in PEPP purchases, leaving almost a trillion still unused in its arsenal.

Saudi Arabia is likely to press at today’s OPEC+ meeting for a “calibrated” increase in the group’s crude oil output starting in April, staggering an easing of its own voluntary withholding of one million barrels per day over the next few months, a cautious approach that should keep a more bullish tone to crude prices and which Riyadh believes will help stabilize benchmark crude prices in a narrow $62 to $68 a barrel price range.

The Saudi oil delegation, led by Prince Abdul Aziz al-Salman, will concede some additional output by Russia and some of the most fiscally hard-pressed OPEC+ members. But in effect, the Saudis oil stance means it is more likely than not that OPEC+ will be increasing its collective oil output by no more than 500,000 additional barrels per day in April, and only slowly building up to some 1.5 million bpd in extra crude output through the next several months.

** And while expectations in general are that Beijing will, like last year, refrain from setting a formal GDP target for 2021, our understanding is that Premier Li Keqiang will propose an option to the NPC Standing Committee, whether adopted or not, of setting an easily met GDP target of above 6.0% as well. The Politburo’s expectations are for GDP growth this year to fall in the 8.3 - 8.5% range.