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October 16, 2023
SGH Insight
The Fed is behaving as if it is done hiking, and I can’t say that it won’t choose to forego a rate hike in December even if it appears likely to hit the September SEP economic projections. Once the Fed skips two meetings, it will be “restarting” rate hikes, a shift that would seem to imply a higher bar. To be sure, Fed signaling could be dovish only because the outcome of the November meeting is already certain, and speakers don’t want to say anything that puts that back into question. But it feels as if speakers have gone further than necessary to achieve that goal. The hawks have all but given up the stage, which seems odd because presumably they were among the 12 participants anticipating another hike this year and the data should embolden that group.

...Arguably the data since the September meeting has already been sufficient to allow the Fed to hike rates at the upcoming FOMC meeting. GDP growth in the third quarter could top 5%, more than enough to put the Fed’s latest growth projection at risk barring an unlikely sudden stop in the fourth quarter.
Market Validation
Something’s Got to Give -Governor Christopher J. Waller 10/19/2023

At the Distinguished Speaker Seminar, European Economics and Financial Center, London, United Kingdom
I find myself thinking about two possible scenarios for the economy in the coming months. In the first, the real side of the economy slows. This is the scenario broadly reflected in the September Summary of Economic Projections (SEP) by FOMC participants, where an easing in demand helps bring the economy into better balance with supply and allows inflation to move closer to our 2 percent objective. In this scenario, I believe we can hold the policy rate steady and let the economy evolve in the desired manner.

Bloomberg 10/17/2023

The Federal Reserve Bank of Atlanta's GDPNow index suggests U.S. gross domestic product will expand 5.44 percent in the third quarter vs 5.15 percent in its previous release on Oct. 10.
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October 06, 2023
SGH Insight
On the back of increased stimulus, and a bump in consumption including through the Golden Week holidays and bolstered by the Asian Games that will conclude this weekend, officials in Beijing expect to be able to ride a consumption rebound, even if modest, through the fourth quarter of 2023 and hit their 5% GDP target for this year relatively easily.

Market Validation
Bloomberg 10/18/2023
China’s economy gained momentum last quarter
as people ramped up spending on everything from restaurants and
alcohol to cars, offsetting a drag from the property crisis and
putting Beijing’s annual growth goal well within reach.
Gross domestic product for the three months ended September
expanded 4.9% year-on-year and 1.3% from the previous quarter,
far exceeding economists’ expectations as government stimulus
efforts appeared to take root.
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October 03, 2023
SGH Insight
Published on October 3, 2023
The move in long rates further argues against a Fed policy rate hike at the next meeting. Quite simply, the Fed will recognize that financial conditions have tightened meaningfully and expect a subsequent hit to growth. In other words, the Fed will anticipate that the move in longer-rates offets the need for additional policy rate hikes. I don’t think the Fed will risk aggravating the market at this juncture to push for a rate hike in November. There is limited upside for such a move unless inflation rebounds. This is a very different situation from this past spring when the Fed was determined to keep hiking despite the SVB collapse. Now rates are in restrictive territory, and perhaps sufficiently restrictive, which wasn’t the case at the March FOMC meeting.
Market Validation
Bloomberg - 10/5/ 2023
Federal Reserve Bank of San Francisco President Mary Daly said policymakers can hold interest rates steady if the labor market and inflation continue to cool or financial conditions remain tight.
“If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work,” Daly said Thursday in remarks prepared for an event hosted by The Economic Club of New York.
“Importantly, even if we hold rates where they are today, policy will grow increasingly restrictive as inflation and inflation expectations fall,” Daly said. “So, holding rates steady is an active policy action.”
“Likewise, if financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished,” she added.


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October 02, 2023
SGH Insight
A collapse in growth and precipitous drop in inflation could of course make the earlier rate cut bets pay off, but for now the assessment at the ECB, which we would tend to agree with, is that tentative signs show that Europe’s hardest hit sectors in Germany could be bottoming out.
The German IFO sentiment indicators for example are not good, but they have stopped their steep descent. Likewise, the survey indictors from China, which is so vitally important for German manufacturers.
Market Validation
Dow Jones 10/17/2023
Germany's economic outlook improved more than expected in October on expectations that inflation will continue to tick down, according to a monthly survey published Tuesday.
The ZEW Indicator of Economic Sentiment for Germany over the next six months jumped 10.3 points to minus 1.1 in October, only slightly below the historical average, from minus 11.4 in September.
Economists polled by The Wall Street Journal expected a smaller rise to minus 8.5.
"It seems that we have passed the lowest point. There's a noticeable uptick in the economic expectations of financial market experts in October," ZEW President Achim Wambach said
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September 28, 2023
SGH Insight
The Bank of Japan’s (BOJ) October policy meeting is shaping up to be a watershed event; a forecast round wherein improved inflation projections for 2024 and 2025 should open up an early 2024 window for a positive policy rate for the first time in seven years.

By the time of the October 30-31 BOJ meeting, officials expect to have price data and preliminary guidance on the outcome of next year’s Spring wage negotiations that provide a crucial piece of evidence to confirm the central bank has met its price and wage goals.
Market Validation
Bloomberg 10/17/2023
The yen briefly spiked after a report that the Bank of Japan is likely to discuss raising its inflation projections for 2023 and 2024 fiscal years at its policy meeting later this month.
• USD/JPY falls as much as 0.5% to the day’s low 148.84, before clawing back to around 149.44
• BOJ officials see the bank’s projection for consumer prices excluding fresh food likely being revised up to 2% or above for the year starting in April, Bloomberg reports citing people familiar with the matter

Bloomberg 10/17/2023
Japan’s largest labor union federation will reportedly demand wage increases for next year that exceed this year’s historic gains, boosting the prospects for the positive growth cycle the central bank needs to see before it can pare
back stimulus. Rengo, the country’s biggest trade union group, is planning to urge companies to raise wages by “at least 5%” when it engages in annual wage negotiations next year, NHK reported tuesday, citing an unidentified source.
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September 26, 2023
SGH Insight
Bottom Line: As we have written repeatedly, the improved growth outlook has upended the expected drift downward in yields typical at the end of the cycle. The Fed’s place in this story is just as we expected before the FOMC meeting. It sees enough in the employment and inflation data to hope that it hiked rates in July for the last time, but it intends to respond to faster growth with at a minimum of more “higher for longer” and even higher rates if needed. We need to see weaker growth to change this story.
Market Validation
Bloomberg 10/17/23

US retail sales exceeded all forecasts and industrial production strengthened last month, fresh evidence of a resilient American consumer whose spending is helping stabilize manufacturing.Sales, unadjusted for inflation, increased 0.7% after upwardly revised advances in the prior two months, according to the Commerce Department. So-called control group sales — which are used to calculate spending on merchandise in the gross domestic product report — rose a better-than-expected 0.6%.Robust consumer demand, in the aftermath of September data showing stubborn inflation and surging job growth, risks prompting the Federal Reserve to raise interest rates again.
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September 19, 2023
SGH Insight
While Ueda’s comments last week did not exactly fling the door open to a rate hike this year, his guidance represented a sharper tilt by the BOJ toward higher rates than at any time in almost 25 years.
And, though we have consistently written this year that a rate move is not likely until next year, equally we have flagged the need to be on guard for signals from Ueda that could point to a BOJ pivot that could come before the second quarter of 2024.
Even if Japanese politics sideline BOJ rate action this year, we continue to caution clients not to dismiss the possibility that the BOJ brings forward a move to end negative interest rates which are at minus 0.10 bps.
When asked about the timing of a possible interest rate adjustment, Ueda said: “It is not impossible that we will have enough by the end of the year to anticipate (wage hikes next spring).”
Market Validation
Bloomberg 9/27/2023
One Bank of Japan policy board member said it might be possible to discern that the bank’s long-sought inflation target has been achieved during the first quarter of 2024, according to minutes from the July meeting published Wednesday.
The board member’s view contrasts with a more pervasive stance that hitting the price target isn’t yet in sight during the July 27-28 deliberations where the bank surprised financial markets by effectively raising the upper limit of long-term bond yields under its yield curve control program.
A month after that meeting, Naoki Tamura, a leading hawk on the board, told business leaders in Hokkaido that achieving the inflation goal “is finally and clearly within sight.”
In a note of optimism, the minutes showed that some of the nine-member board said companies are highly likely to keep raising wages next year. Sustained wage growth is a key element that the BOJ wants to see in order to set in motion a positive inflationary and growth cycle in the economy.
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September 18, 2023
SGH Insight
That said, Powell will still note that faster growth could slow the return to price stability and, if it continues, that could warrant another rate hike. I think the Fed will want to see if the third quarter growth spurt sustains momentum in the fourth quarter before deciding if another rate hike is necessary. Such data likely won’t be available until the December FOMC meeting at the earliest. I also expect the usual hawkish talk about the job not being done and a reminder that inflation progress could reverse as seen more than once in this cycle.
I think the Fed retains another rate hike in the 2023 dots. The balance of risks favors some downward drift in the distribution of the 2023 dots, but I think the improved growth outlook will justify retaining that last rate hike in the SEP. The risk is that the last dot disappears, although that would be akin to a declaration that the cycle is definitely over.
The improved growth outlook all will reduce the number of projected rate cuts in 2024 compared with the June SEP. The easy way to think about this is that the Fed’s forecast will simply push forward the slowing that was anticipated for the second half of 2023. If the Fed pushes it back three months, it probably delays the timing of the first rate cut in the next cycle by a quarter, which then translates into 75bp of cuts for 2024. If the Fed pushes forward the slowdown by six months, the risk is that the Fed will then expect only 50bp rate cuts in 2024.
Market Validation
Bloomberg 9/25/2023
In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.
The new projections reflected that. Fed officials now expect their benchmark rate to be at 5.1% by the end of next year, according to their median estimate, up from 4.6% in the last projection round in June.

During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally.
Treasuries sold off after the decision, with the yields on two-, five- and 10-year US government bonds all rising to the highest in more than a decade. Wednesday’s 0.9% drop for the S&P 500 was the second-worst this year on a Fed day, second only to the 1.7% decline registered in March.
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September 14, 2023
SGH Insight
The ECB has every reason to convey a far more tempered stance at this juncture, and a hope that this could be it for rate hikes, and that time, especially if inflation eases and thus real rates stay tight, will now be on their side.
But we suspect that our “hawkish lean” still lurks as well in the Governing Council very close beneath the surface.
With just one inflation print between now and October, that meeting will clearly be a hold. But we doubt that the decision at hand by December will be whether and when to cut, but rather an assessment of whether the ECB has done enough, as Lagarde said today, “to reinforce” the trajectory of easing inflation that it has penciled in for 2024 and through 2025.
Market Validation
Bloomberg 9/15/2023

Hawkish policymakers at the European Central Bank might still push for another interest-rate increase in December if wages keep rising and inflation proves stickier than anticipated, the Financial Times reports, citing people familiar with their thinking.

Bloomberg 9/15/2023
Another interest-rate increase by the European Central Bank can’t be ruled out — even after Thursday’s signal from officials that borrowing costs may have reached a peak, Governing Council member Bostjan Vasle said.

While slower economic growth should help policymakers in their quest to return price gains to the 2% goal, wage developments and fiscal policy still pose “significant risks,” according to Slovenia’s central bank governor. Recent energy-price pressures may also turn out to be more permanent.

“I wouldn’t exclude that further hikes might be necessary,” Vasle said in an interview in Santiago, Spain, where he’s attending a gathering of euro-zone finance chiefs. “What we’ll be doing in the future depends crucially on new information we’ll receive.”

“At the December meeting, we’ll have an additional set of new information and also new forecasts,” he said. “We’ll have three more readings of inflation, we’ll have more information on what’s going on with growth dynamics. I believe this will add to the significance of this meeting.”

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September 12, 2023
SGH Insight
Markets are still favoring a pause and are pricing a European Central Bank rate hike this week at less than even odds.

But we are switching our expectations for the ECB interest rate decision this Thursday from a pause to a 25-basis points hike.

The more we re-run in our minds what we have heard from ECB officials, wargame their tactical choices, and analyze the data and risk management dynamics that will be debated at the Governing Council meetings tomorrow and Thursday, the less comfortable we are with our briefly held, and highly unusual for us dovish call that they will pause at this meeting.

The forecasts, as characterized by ECB Vice President Luis de Guindos, are likely to show a lower growth trajectory than expected in June, and an inflation outlook that is “more or less” as expected in June.

Putting a finer point on that inflation outlook, analysts expect that is likely to translate into a slightly higher figure in the near term, and perhaps a small tweak lower to the 2.2% outlook for 2025 due to slower economic activity. But even a small revision to 2025 inflation, if it does show up in the numbers, will be insufficient progress for ECB hawks, and the leadership, to hang their collective hats on.
Market Validation
Bloomberg 9/13/23

Traders ramped up wagers that the European
Central Bank will deliver a quarter-point interest-rate hike
amid growing concerns that the region faces persistently high

Money markets now show a 70% chance that the central bank
will raise rates on Thursday, compared with a 20% probability
earlier this month.

The Times 9/14/2023
The European Central Bank (ECB) has increased interest rates for the tenth time in a row to the highest since the monetary authority was created more than two decades ago.
Rates in the eurozone were increased by 0.25 percentage points to 4 per cent in a move that surprised analysts, who thought the central bank would leave rates unchanged, although the call was tight heading into the meeting.
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September 11, 2023
SGH Insight
Bottom Line
It’s always risky to shift a position on a call where the market odds are sitting at 50-50, and perhaps even risky ahead of a CPI report. It’s a space where it is easy to find yourself on the other side of your own call with each new data point. After all, the odds are 50-50 for a good reason. The data is stronger than expected and the Fed has highlighted that stronger than expected activity could lead it to hike rates again. At the same time, however, lower inflation reduces the urgency to hike rates again, and the Fed is balancing policy against these two considerations. While my optimism hasn’t change, and indeed the data flow has supported the growth story, the tone of the conversation now leads me to believe that even with growth coming in faster in the third quarter, as long as core inflation stays low in these next two prints, the Fed will believe it can wait past the Oct/Nov meeting until it has much more visibility on the fourth quarter to decide if it needs to push rates up another notch.
Market Validation
MarketWatch 9/14/2023
U.S. Treasury yields mostly dipped Thursday morning as fed funds futures traders continued to boost the chances of no further interest rate action by the Federal Reserve for the rest of this year and as the European Central Bank signaled it might also be done tightening monetary policy.U.S. bond yields edged mostly lower Thursday morning as traders continued to price in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% at its policy meeting on Sept. 20. Meanwhile, the chance of the central bank also standing pat at the subsequent meeting in November inched up to 63.4%, according to the CME FedWatch Tool. And traders boosted the likelihood of no action in December to 57.6
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August 31, 2023
SGH Insight
The Canadian and Australian central banks, either finishing out or done with tightening, are turning their attention to how to fend off growing speculation that rate cuts will be brought forward – in Australia’s case, to early next year.

In Canada too, where the Bank of Canada (BOC) has not yet declared its 2% inflation goal in sight let alone attained, markets are assuming that with a headline CPI inflation rate at 3.3% in July, the BOC has topped out at a cycle peak of 5% and are expecting the BOC to cut rates by the summer of 2024.

This is notwithstanding important data in the interim including Friday’s release of second quarter GDP, forecast to have grown an annualized 1.2% in the second quarter from 3.1% a year earlier. If it fails to show growth moderating in line with the BOC’s projection of an annualized 1.5% rate, it could raise the odds of another hike sometime this year.
To be clear, while we see 5% as the BOC’s policy peak, the BOC noted in July persistent excess demand, reflecting its intention to hold rates higher and for longer than markets are pricing.

...The Canadian and Australian central banks, either finishing out or done with tightening, are turning their attention to how to fend off growing speculation that rate cuts will be brought forward – in Australia’s case, to early next year.

The RBA is just as cautious regarding the path to 2% inflation, notwithstanding this week’s stark slowing in July inflation data that has markets already tipping the RBA is done at its 4.1% cash rate.
While we agree the RBA won’t move rates again at its September 5 policy meeting, it is more likely than Canada to finish out its cycle with a final 25bp-hike, to 4.35%, though not until its November 7 policy meeting, a few days ahead of the November 10 release of the upgraded economic projections.
Market Validation
Bloomberg 9/11/2023
The Bank of Canada held interest rates steady and kept the door open to further hikes, with economists seeing its historic tightening cycle at its likely endpoint.
Policymakers led by Governor Tiff Macklem maintained the benchmark overnight lending rate at 5% on Wednesday, the highest level in 22 years. They acknowledged a rapid downshift in the economy and warned that price pressures are proving tough to wrestle all the way back to their target.
“With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, governing council decided to hold,” the bank said. Officials, however, remain “concerned about the persistence” of underlying inflation and are “prepared to increase the policy rate further if needed.”

...Bloomberg 9 /11/2023
Australia’s central bank kept its key
interest rate unchanged and maintained a tightening bias as Governor Philip Lowe wrapped up his final meeting at the helm with inflation in retreat. The Reserve Bank held its cash rate at 4.1% for a third
straight meeting on Tuesday in a decision widely anticipated by markets and economists
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the
evolving assessment of risks,” Lowe said in his post-meeting statement.

Read Full Report
August 24, 2023
SGH Insight
Battlelines Drawn Heading into Powell’s Speech
Bottom Line: The Fed wants to be done as every rate hike increases the risk of a hard landing. I don’t think the Fed was committed to an Oct/Nov rate hike at the July FOMC meeting, but that’s because it had a very pessimistic outlook for growth at that time. And I think participants were very confident in that outlook, but incoming data has shaken that confidence. Reiterating our outlook, our baseline going into Powell’s speech is that he wants to say, “policy is in a good place,” but he can only really be confident this will hold at the September FOMC meeting. Thinking beyond September, I think he will recognize that the possibility of an upside surprise to growth means the Fed “may have more work to do.” It doesn’t make sense to take that option off the table now given that the Oct/Nov meeting is still a long time away and in theory the data could cut decisively either direction by then.

Market Validation
Bloomberg 8/25/23
Federal Reserve Chair Jerome Powell said the US central bank is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed’s 2% target.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in the text of a speech Friday at the US central bank’s annual conference in Jackson Hole, Wyoming. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September, as investors expect.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.
Powell signaled Friday that policy has shifted to a more deliberative phase where risk-management is now “critical.”
He noted the economy may not be cooling as fast as expected, saying recent readings on economic output and consumer spending have been strong. The economy grew at a 2.4% annualized pace in the second quarter, a surprisingly robust reading that prompted many economists to boost forecasts for the third quarter and reconsider odds of a recession.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said
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August 23, 2023
SGH Insight
Many economists and analysts, however, are sticking with their calls for another ECB rate hike. They point to the underlying price components of the PMIs that do not paint a pretty picture and reinforce concerns over the durability in particular of service sector inflation.
Expectations in the forecasting community are that the preliminary Eurozone August CPI figures that will be released next week will paint a similar picture of stickiness in core prices, with most forecasts showing just slight improvement from July’s 5.5% reading.
While they may be right on the data, we no longer agree with the call for a September hike and now expect that the ECB will take a pass and leave rates unchanged at 3.75% at their upcoming meeting
Market Validation
Bloomberg 8/31/2023
Bunds are higher while the euro has extended declines as traders seem to focus on the slowdown in euro-area core inflation rather than the headline rate which held steady. Market pricing now suggests a less than 30% chance the ECB raises rates in September, down from ~40% before the data. German 10-year yields are down 5bps at 2.49% while two-year yields drops 9bps. The euro falls 0.5% versus the greenback.

Bloomberg 8/25/2023
European Central Bank policymakers are increasingly
concerned about worsening growth prospects, Reuters reports,
citing eight people familiar with the matter.
* The number policymakers advocating for a “pause” is growing
after economic indicators in the past six weeks came in below
expectations, Reuters says citing conversations on the sidelines
of Jackson Hole symposium
Read Full Report
August 22, 2023
SGH Insight
Bottom Line: The Fed is walking a fine line here. Despite disinflation trends, it has proven difficult to keep rates from rising in the absence of softer growth data. It’s not evident, however, that the Fed wants conditions any tighter, but at the same time sending that signal could backfire in the form of higher inflation expectations. Without a catalyst to refocus market participants on downside risks to the economy, there looks to be room for rates to break still higher
Market Validation
BBG 8/25/23
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August 16, 2023
SGH Insight
The Fed’s Forecast is at Odds with Reality
at the time of the July meeting, the Fed anticipated growth would continue to slow, and below trend growth is a prerequisite to restoring price stability. Second, the Fed’s growth forecast is quickly turning into a complete disaster.
I think we need to have an honest but harsh conversation about the second point in particular. The Fed’s GDP forecast in the June SEP was at best dead on arrival, and at worst simply ludicrous. It implied basically no growth for the second half of 2023, which was plainly wrong even at that time. It required a sudden stop in the economy that just clearly was not happening when those forecasts were made. That forecast was in June, at which point the Fed staff should have known with almost 100% certainty that growth wasn’t falling off the cliff.
Before the Fed minutes were released, the Atlanta Fed raised its estimate of Q3 growth to 5.8%. Even if the reality is half that number, it’s still a major forecasting error on the Fed’s part, and we have been pounding the table for weeks that the Fed has completely underestimated the strength of the economy. Granted, I understand in theory I might need to eat my words on that at some point, but I feel pretty safe for now given that we are already halfway through the third quarter with no sudden stop evident. And if growth is that fast in Q3, I suspect it will retain that momentum in Q4 and put a January rate hike on the table.

Market Validation
Financial Times 8/24/23

A top official at the US Federal Reserve has raised the spectre of further interest rate rises in the US, warning that the strength of the world’s largest economy means “we may have more to do”. In an interview with the Financial Times on Thursday, Susan Collins, president of the Boston Fed, said she was “surprised” by the economy’s resilience — including a tight labour market and robust consumer spending — despite months of higher borrowing costs. “I am not yet seeing the slowing that I think is going to be part of what we need for that sustainable trajectory to get back to 2 per cent [inflation] in a reasonable amount of time,” Collins said, later adding that “that resilience really does suggest we may have more to do”.
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August 14, 2023
SGH Insight
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting.

....If You Don’t Have Time This Morning
Despite what looks like still solid growth in Q3, low inflation keeps the Fed on track for holding rates steady at the September FOMC meeting. I think the growth will be strong enough to keep another rate hike in the SEP and that more likely than not, the Fed will deliver that hike at the Oct/Nov meeting. That said, I suspect the Fed also worries that policy is getting too tight, and hence we get mixed messaging that “maybe we need another hike, but rate cuts will be on the table in 2024.” The Fed can’t let policy become too tight if it wants to stick the soft landing, but I don’t think it can change its reaction function without letting inflation expectations rise. I don’t think sticking the soft landing will be as easy as the consensus increasingly appears to suggest.
Market Validation
Bloomberg 8/15/2023
US retail sales rose in July by more than forecast, suggesting consumers still have the wherewithal to sustain the economic expansion.
The value of retail purchases increased 0.7% in July after upward revisions in the prior two months, Commerce Department data showed Tuesday. The upbeat figure reflected increases in a variety of sales categories, including sporting goods stores, clothing outlets and restaurants and bars.

...Bloomberg 8/16/2023
Federal Reserve officials at their last meeting largely remained concerned that inflation would fail to recede and suggested they may continue raising interest rates.
“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes of the US central bank’s July 25-26 policy meeting published Wednesday in Washington.
“Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate,” the Fed said.
“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening,” the minutes stated.

The latest data illustrate how American households — supported by a strong labor market and rising wages — are so far buttressing the economy against recession in the face of high interest rates. Too much strength, however, could force the Federal Reserve to pursue more aggressive policy should inflationary pressures prove sticky.
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July 24, 2023
SGH Insight
The Fed will raise interest rates 25bp at this week’s FOMC meeting. The outcome of this meeting was effectively determined at the June meeting, something the Fed will deny but has been plainly evident in the signaling in the subsequent weeks. There has been no pushback against market pricing whatsoever during the intermeeting period, and the Fed doesn’t like to surprise markets. Moreover, failure to follow through on a rate hike would be equivalent to a substantial easing of financial conditions. It would rewrite the narrative around the path of monetary policy and bring forward rate cuts

...Monday Morning Notes, 7/24/23
The press conference is an opportunity for Powell to clarify the Fed’s reaction function. The Fed will discuss the conditionality around the timing and extent of further rate hikes at this week’s meeting. We think that Powell will lead market participants to broaden their focus beyond the inflation numbers by explaining that for the Fed to be confident it will restore price stability, it needs to see further cooling in demand evidenced by GDP growth slowing substantially, softer job growth, and further downward pressure on wage growth.
Market Validation
Bloomberg 7/26/2023
The Federal Reserve raised interest rates to the highest level in 22 years and Chair Jerome Powell said additional increases will depend on incoming data as officials fine-tune their effort to further quell inflation.
The quarter percentage-point hike, a unanimous decision, lifted the target range for the Fed’s benchmark federal funds rate to 5.25% to 5.5%, the highest level since 2001. It marked the 11th increase since March 2022, when the rate was near zero.

FOMC Meeting 7/26/2023

>> CHAIRMAN POWELL: I'll just say, again the broader picture of what we want to see is we want to see easing of supply constraints and normalization of pandemic related distortions to demand and supply. We want to see economic growth running at moderate or modest levels to help ease inflationary pressures. We want to see continued restoration of supply and demand balance. Particularly in the labor market. All that should lead to declining inflationary pressures. What we see are those pieces of the puzzle coming together and we're seeing evidence of those things now. But I would say what our eyes are telling us is policy has not been restrictive enough for long enough to have its full desired effects. So we intend to keep policy restrictive until we're confident that inflation is coming down sustainably to our two percent target. And we're prepared to further tighten if that is appropriate. We think the process, you know, still probably has a long way to go. >> REPORTER: Do you think under current conditions you are restrictive enough unless something changes? >> CHAIRMAN POWELL: Well I think -- we think, you know, today's rate hike was appropriate. I think we're going to be looking at the incoming data to inform our decision at the next meeting about is the incoming data telling us we need to do more. If it does tell us more, if that's our view we will do more.

Read Full Report
July 24, 2023
SGH Insight
As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.

The State Council has solicited ideas from megacities such as Shanghai and Beijing. As both cities reported double-digit growth in real estate investment and new home sales in H1, the State Council will not adopt a national real estate stimulus policy, but will rather support first, second, and third tier city efforts to improve city-specific policies according to individual situations.

...As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.
The State Council has solicited ideas from megacities such as Shanghai and Beijing. As both cities reported double-digit growth in real estate investment and new home sales in H1, the State Council will not adopt a national real estate stimulus policy, but will rather support first, second, and third tier city efforts to improve city-specific policies according to individual situations.
In order to support the real estate sector in super-large and mega cities, the State Council also just ordered all 21 of these cities to promote the construction of both “Emergency and Dual Use” facilities in H2 2023, recreational facilities that can be used also in case of pandemic and emergencies. The State Council also ordered all 21 super-large and mega cities with a population greater than 5 million to speed up the transformation of the lower income “cities within cities,” to ensure the stability of the national real estate industry in H2 2023.

In order to support the real estate sector in super-large and mega cities, the State Council also just ordered all 21 of these cities to promote the construction of both “Emergency and Dual Use” facilities in H2 2023, recreational facilities that can be used also in case of pandemic and emergencies. The State Council also ordered all 21 super-large and mega cities with a population greater than 5 million to speed up the transformation of the lower income “cities within cities,” to ensure the stability of the national real estate industry in H2 2023...

...Going straight to the numbers, fiscal spending for H2 was bumped up from the original budget and is targeted to increase by just under 7%, 6.9% to be precise, from H1 spending.

In H1 2023 China’s fiscal spending rose 3.9% over the same period last year, to 13.39 trillion yuan. This 13.39 trillion-yuan figure, comprised of 1.67 trillion in central government spending and 11.72 in local government spending, represents 48.7% of the total 27.51 trillion yuan allocated for 2023, leaving 14.12 trillion yuan for H2 spending.

Thursday’s CFEAC meeting approved an additional allocation of 200 billion yuan to H2 2023 spending, to bring the total spending for H2 to 14.32 trillion yuan, about 7% higher than fiscal expenditures for H1. The extra 200 billion yuan also symbolically bumps year-on-year comps by more than 1 trillion above the 13.17 trillion that was spent in H2 of 2022, by 1.15 trillion to be precise.

The CFEAC predicts that these levels of spending will pull China’s H2 GDP growth into the 5.3-5.5% range.

The additional 200 billion yuan will be allocated as follows: 11.5 billion to subsidize targeted semiconductor and artificial intelligence enterprises, 52.5 billion to advance the “transformation of villages in super-large and mega cities,” essentially urban slums, 55 billion to spur the private economy, and 81 billion towards stimulating consumption. Local governments are urged to encourage more nongovernmental investments, including in integrated circuits, new materials, and next-generation information technology.

The CFEAC meeting stressed that fiscal policy should also be used to extend the duration of temporary policies such as value-added tax relief for micro and small-scale taxpayers.

Premier Li Qiang pledged an additional 46.5 billion yuan towards meeting the country’s “Made in China 2025” high tech objectives, of which 35 billion yuan will come from the secretive “Premier Fund.”

As might be expected, Premier Li also said at the meeting that stabilizing the real estate sector is one of the priorities of governments at all levels for H2 2023.

Market Validation
Bloomberg 7/28/23

China Vice Premier He Lifeng urged the country’s mega cities to actively advance the urban villages redevelopment in an effort to boost domestic demand, Xinhua News Agency reports citing a conference held in Beijing on Friday.

• He called for improving the living conditions of urban villages residents and to strengthen real estate structure
• He also noted the difficulties for urban villages redevelopment at the moment and urged to explore new ideas to solve complex issues like use of funds, land resumption and how to resettle people and industries

MT Newswires 7/25/23

Chinese Shares Rebound on Beijing's Pledge to Support Real

Chinese shares staged a recovery on Tuesday as Chinese top leaders pledged to provide further assistance to the property market, while also focusing on boosting consumer spending and tackling local government debt during a Politburo meeting.

The Shanghai Composite Index, the main gauge of Chinese stocks, rose 2.1%, or 67.36 points, to 3,231.52, marking an end to a three-day downturn. The Shenzhen Component Index climbed 1.4%, or 148.99 yuan, at 11,021.29, after enduring a seven-day rout.

The positive shift in sentiment followed the assurance from Chinese politicians to implement macroeconomic adjustments, strengthen domestic demand, and promptly optimize property policies.

During the meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee, emphasis was placed on maintaining a proactive fiscal policy and a prudent monetary policy. Additionally, measures were discussed to extend, optimize, and ensure the implementation of tax and fee reductions, Xinhua News Agency reported.

The leaders also underscored the importance of promoting stable and sustainable development in the real estate market through concrete efforts.

Bloomberg 11/15/23
China plans to provide at least 1 trillion
yuan ($137 billion) of low-cost financing to the nation’s urban
village renovation and affordable housing programs in its latest
effort to shore up the struggling property market, according to
people familiar with the matter.
The People’s Bank of China would inject funds in phases
through policy banks with the money ultimately trickling down to
households for home purchases, the people said, asking not to be
identified discussing a private matter. Officials are
considering options including the so-called Pledged Supplemental
Lending and special loans, the people said, adding that the
government may take the first step as soon as this month.

Read Full Report
July 14, 2023
SGH Insight
...Conditions are falling into place for the Bank of Japan (BOJ) to tweak Yield Curve Control (YCC) again as the central bank takes its first tangible steps toward exiting a quarter-of-a-century-old easy policy equilibrium.

Since he landed back at the Bank of Japan (BOJ) in April as governor, Kazuo Ueda has been dropping clues about conditions under which he would change Japan’s monetary policy settings.

While at its policy meeting last month, Ueda and his BOJ colleagues held fast to their position that preconditions for changing interest rates had not yet been met, they have been less clear about what might prompt the BOJ to again widen the control cap on 10-year Japanese government bonds (JGBs).

The Bank reiterated that rates would stay put until inflation is stably and sustainably at 2%, and accompanied by wage rises.

Its July 27-28 forecast round will likely raise the fiscal 2023 (Apr-Mar) inflation projection above 2% from 1.8% in the April round, yet continue to show inflation slowing from fiscal 2024.

On YCC, when BOJ Deputy Governor Shinichi Uchida was asked about the possibility of a tweak, he said an adjustment would seek to maintain “easy monetary conditions, while taking into account (the) impact on financial intermediation and market function.” By failing to rule out the prospect of a tweak, Uchida in fact fueled speculation it was in the offing this month.

We have been warning that the BOJ might look to tweak its YCC policy again this meeting before it abandons the program later this year(see SGH 6/13/23; “BOJ: Ueda Games Exit Timing”)...

...While at its policy meeting last month, Ueda and his BOJ colleagues held fast to their position that preconditions for changing interest rates had not yet been met, they have been less clear about what might prompt the BOJ to again widen the control cap on 10-year Japanese government bonds (JGBs).
The Bank reiterated that rates would stay put until inflation is stably and sustainably at 2%, and accompanied by wage rises.
Its July 27-28 forecast round will likely raise the fiscal 2023 (Apr-Mar) inflation projection above 2% from 1.8% in the April round, yet continue to show inflation slowing from fiscal 2024.
Market Validation
Bloomberg 7/28/23

The central bank kept the target for 10-year yields at 0.5%
but said it would actively buy bonds to maintain a 1% hard cap.
The central bank upgraded its overall assessment for the
economy, and signaled upside risks for prices for this fiscal
year, forecasting core inflation will be 2.5%
* However, the main price trend hasn’t reached the 2% target
(core CPI is forecast to drop to 1.9% next year and 1.6% the
year after), so there’s still a long way to go to raising the
negative interest rate, according to Ueda.

Bloomberg 7/24/2023

Bank of Japan officials meeting this week
will probably consider a sharp increase to their inflation
forecast for this fiscal year, while also discussing concerns
about whether the upward trajectory is sustainable, according to
people familiar with the matter.
The central bank’s policy board is likely to mull raising
the consumer inflation projection to around 2.5% for the year
ending in March, up from 1.8% in the April estimate, according
to the people. They expect projections for the following fiscal
years to be largely unchanged to reflect a lack of confidence
the bank can achieve its 2% inflation goal in a stable manner,
the people said.
Read Full Report