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
June 18, 2024
SGH Insight
The timing of the BOJ’s strategy for continued removal of accommodation may be impacted by the political upheaval as the central bank tries to plan its next moves.
The pressure on the governing LDP will not only result in an extension of the recently expired government subsidies on electricity and gas costs to households, but also a new LDP leader installed who will reshuffle the Cabinet and announce other fiscal measures that the party hopes will shore up its standing to win the next election.
Market Validation
Bloomberg 6/21/24
Japanese Prime Minister Fumio Kishida
announced extra utility assistance and an extension of gasoline
subsidies to help households cope with inflation.
Subsidies for power bills are to start in August and stay
in place for three months, Kishida said at a news conference
Friday, adding existing gasoline subsidies would be extended
until the end of this year
Read Full Report
June 14, 2024
SGH Insight
Ultimately, we expect the relief in French bond markets will not come through any intervention mechanisms, but if and when the markets “normalize” the possibility of an RN victory that might come with perhaps less dire results than feared.

One can think of that scenario as perhaps more of the “Meloni effect” in Italy, where the markets and economy did not collapse on a right-wing populist victory, as opposed to a “Truss effect” in the UK that blew up markets. And to be frank, the euro area is substantially more capable of absorbing errant policy than the smaller UK economy and markets.

Our prediction of markets “normalizing” an RN premiership may not sit well with many who are concerned about the political fall-out of a Le Pen victory, including certainly the current constellation of G7 leaders, all under pressure now after years in power except for Italy’s Georgia Meloni.

But we will go so far as to predict that markets will soon enough do just that, and internalize the impact of what may, after all, simply be a reaffirmation of the win already in France by Le Pen on July 7, rather than continue to spiral in panic.

Even if French spreads settle at a higher level than before last week’s elections, the stress is of course a far cry from the European debt crisis of 2010-12.
Market Validation
Bloomberg 6/17/24

French stocks clawed back some losses and
bonds steadied as traders weighed assurances from far-right
leader Marine Le Pen that she’d work with President Emmanuel
Macron should she prevail in national elections later this
month.

France’s CAC 40 benchmark bounced 0.2% higher by late
morning, after tumbling last week to the lowest since January.
The moves helped lift the main European stock measure, while
French government bond yields steadied across the curve. In a
broader sign that last week’s risk-off sentiment was easing, the
Italian 10-year bond spread over Germany retreated.
Traders are seizing on Le Pen’s appeal to moderates and
investors that she won’t try to push Macron out. On Monday,
European Central Bank Chief Economist Philip Lane said policy
makers see no reason to be overly concerned about the financial
turbulence in France. Concern about the nation’s political
volatility spurred a flight to haven assets last week while
wiping out $258 billion from the market capitalization of the
country’s stocks.
Read Full Report
June 11, 2024
SGH Insight
The Bank of Japan (BOJ) will likely announce plans this week to scale back government bond purchases and lay the ground for another rate increase as early as next month.

The BOJ is looking to increase the top end of its 0.0% to 0.1% policy target band to as high as 25 basis points and that could come as soon as at its July 30-31 meeting (see SGH, 5/7/24, “BOJ: Ramping Up Hawk Talk”).

In that same report, we flagged our expectation that the BOJ would announce plans to start gradually scaling back its bond purchases from its June 13-14 meeting, and we expect the BOJ to increase its target range to 15-25bps in July and we expect another move in October.

Following its first rate hike to zero-10 bps in the overnight short-term target range in March from negative 10 bps, we reiterated our expectation that the Bank is targeting a 1% peak policy rate by the end of next year.

It is important to flag for this week how timidly the BOJ will present its plans to reduce purchases. The Bank will tread softly with language that speaks to an extended timeline while retaining an option to raise or lower future purchase amounts depending on market conditions and the economy’s performance.
Market Validation
Bloomberg 6/14/24

The Bank of Japan is making investors wait until its July meeting for details on its paring of bond buying, sparking renewed weakness in the yen.

Traders were surprised by the BOJ’s decision on Friday to flag a cut in debt purchases without laying out any figures or timeline. That’s being seen as a delay in the normalization of policy, given that more than half of economists surveyed by Bloomberg had expected the central bank to begin cutting its purchases.

Friday’s announcement that the benchmark rate will remain in a range between 0% and 0.1% was in line with consensus.

The yen slumped versus the dollar to its lowest level since April, before trimming its decline, while benchmark 10-year government bonds rose, sending yields lower. Swaps markets pricing showed traders reducing bets for a rate hike next month. Japanese stocks closed 0.5% higher, defying a broader decline in Asian equities.
Read Full Report
June 10, 2024
SGH Insight
Monday Morning Notes, 6/10/24
If You Don’t Have Time This Morning
We don’t expect the language in the opening remarks will shift back toward an explicit expectation of rate cuts this year, though Powell will welcome softer inflation in April and May, assuming of course the latter occurs. He will add that the Fed still needs additional inflation data that continues a softer pattern before it obtains the confidence to cut rates.

Market Validation
FOMC Press Conference 6/12/24
So far this year, the data have not given us that greater confidence. The most recent inflation readings have been more favorable than earlier in the year however and there has been modest further progress toward our inflation objective. We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.
Read Full Report
June 10, 2024
SGH Insight
As to potential retaliatory measures, the message from Beijing is that China will take all measures to defend its interests, but that said, it will not seek to escalate tensions beyond a calibrated tit-for-tat.

If the EU imposes 25% tariffs on Chinese EVs, China will also impose a 25% tariff on certain EU products. If the EU tariffs affect about 4 billion euros of China’s exports, the measures taken by China will also affect 4 billion euros of EU exports.

Sources in China say there are plenty of options available if needed (and which have been floated in the public domain). In the words of one official:

We can raise temporary tariffs on imported cars with engines larger than 2.5 liters. Such a move would have a major impact on car imports from the EU, especially Germany. We can impose temporary tariffs on EU alcoholic beverages, especially brandy. Such a move would have a significant impact on brandy imports from the EU, especially France. We can launch anti-dumping investigations on certain agricultural products, including pork. We can also temporarily suspend ongoing negotiations with Airbus to buy aircraft. However, China will not escalate the situation. But make no mistake, its response will be sufficient and felt by the EU side.
Market Validation
Bloomberg 6/13/24
China is working towards raising tariffs on large engine vehicles, in retaliation against EU’s plan to raise tariffs on electric vehicles from the Asian nation, according to a post by Yuyuantantian WeChat account, which is affiliated with China Central Television.
• The report, which cites an unidentified person, doesn’t offer any timetable or other details of the planned retaliation
• China is also expected to make an announcement before end-August over European brandy imports after an anti-dumping probe started in January, the report says

Bloomberg 6/13/24
China’s pork industry has the right to file
investigation application to maintain normal market competition
order and defend their own legitimate rights and interests,
Chinese Commerce Ministry’s spokesman He Yadong says in a
regular briefing, in response to questions on dumping probe of
EU pork.
Read Full Report
June 04, 2024
SGH Insight
Though the Reserve Bank of Australia’s (RBA) patience may be starting to wear thin on inflation following another round of higher-than-expected readings, we expect that slower growth and the Bank’s desire to preserve jobs, on balance, will forestall a resumption in rate hikes this month.

The Bank is leaning into its higher-for-longer policy strategy and that, as we last wrote, a restrictive 4.35% cash rate nixes any consideration of easing before the November 4-5 or December 9-10 meetings (see SGH 4/24/24; “Hawky Talk Now, easing Later”).

But there is no denying the Bank’s policy considerations have been complicated by a third successive inflation outcome in the wrong direction which has raised the risk of another rate hike by the RBA when the Board meets on June 17-18.

Another strong inflation print from the second quarter CPI inflation data which is due out on July 29 alongside the monthly data for June would put a hike to 4.6% in play for the Bank’s August 5-6 projection round meeting. July’s monthly data is due out on August 26 prior to the Bank’s September 23-24meeting.
Market Validation
6/18/24 Dow Jones

The Reserve Bank of Australia continued to warn about
ongoing inflation risks at its policy meeting on Tuesday, leaving open the
potential for a further interest-rate increase if price pressures remain
stubbornly high over coming months.

As expected, the board of the RBA chose to keep the official cash rate steady
at 4.35%, where it has sat since November.

"Inflation is easing but has been doing so more slowly than previously
expected and it remains high," the RBA's policy-setting board said in a
statement.

"The board expects that it will be some time yet before inflation is
sustainably in the target range. While recent data have been mixed, they have
reinforced the need to remain vigilant to upside risks to inflation," it
added.

"The board is not ruling anything in or out," according to the statement.

The commentary suggests the RBA remains extremely cautious about Australia's
inflation outlook and that second-quarter inflation data due out at the end of
July has the potential to trigger a further tightening of policy.
Read Full Report
May 24, 2024
SGH Insight

That May 9 meeting held Bank Rate at 5.25%, a 16-year high with Bailey suggesting at his post meeting press conference that even after the Bank decided to ease in future, that policy would likely be restrictive.
Persistence in domestic inflation may be fading slower than some on the committee previously assumed, but Bailey himself, will likely still see a path to easing rates on August 1.
In the meantime, as much as Bailey was at pains to flag the prospect of an easing at his last press conference and even touted the two inflation reports due prior to the June meeting that he hoped would set the stage for a rate cut, the negative optics of a move next month put it out of his reach.


Market Validation
Bloomberg 6/20/2024
The Bank of England hinted that more policymakers may be close to backing interest rate cuts, keeping alive hopes of a loosening by the end of the summer. The UK central bank left its benchmark lending rate on hold at a 16-year high of 5.25% on Thursday. But minutes of the meeting said the decision not to cut rates was “finely balanced” for some of the nine members of the Monetary Policy Committee. Traders saw the statement as a signal that the BOE was willing to cut in coming months and moved to price more than a
50% chance of a reduction in August, from 32% before the meeting. Markets also increased the amount of easing expected for the year to 48 basis points from 43 basis points previously.
Read Full Report
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
April 10, 2024
SGH Insight
Progress on the next two Canada inflation readings will likely be enough to convince the Bank of Canada (BOC) to cut rates at its June 5 meeting, in the first such move in four years after it held policy at 5% for a sixth consecutive meeting this week.
Right out of the gate in his post meeting press conference, Governor Tiff Macklem, when asked about the possibility of a June rate cut, said: “Yes, it’s within the realm of possibilities.”
“We need to see that progress continue. And if things evolved broadly in line with the outlook that we published today, we will be becoming more confident that we’re clearly on a path to 2% inflation and it will be appropriate to cut our interest rate.”
Having moved to an easing bias at its March 6 meeting, the Bank used this latest forecast round meeting to polish its economic projections in a way to set the stage to ease rates 25bps in June.
Market Validation
Dow Jones 6/5/2024 0952 ET - Bank of Canada cuts interest rates for the first time since early 2020. It lowered its target for the overnight rate to 4.75%, from 5%, and Governor Tiff Macklem says "it is reasonable," to expect additional cuts so long as inflation continues to ease. In prepared remarks, Macklem cites four CPI data points to bolster the rate-cut argument: inflation has slowed from 3.4% in December to 2.7% in April; BOC's preferred measures of core have, on average, slowed over 5 months to 2.75% from 3.5%; 3-month rates of core CPI are now running under 2%; and the share of components climbing 3% or faster in the CPI basket is closer to historical averages. "Monetary policy no longer needs to be as restrictive," he says.
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 19, 2024
SGH Insight
Final Thoughts Ahead of the FOMC
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.

Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
Market Validation
Bloomberg 3/20/24

Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.

Investor's Business Daily 3/20/24

Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.

Read Full Report
March 18, 2024
SGH Insight
(1) Monday Morning Notes, 3/18/24

We forego our usual Monday morning format to focus on the FOMC meeting and market implications.

We expect the FOMC will conclude its two-day meeting this week with few new signals about the direction of monetary policy. The Fed isn’t cutting rates this week, very likely isn’t cutting in May, and although the Fed is circling around a June cut, uncertainty around the inflation outlook leaves a June cut still up in the air. Given the time remaining before the Fed needs to decide on a June cut and that they don’t yet have a complete picture of the first quarter, FOMC participants are likely not in a rush to make substantial changes in the SEP projections.
To be sure, the balance of risks to our expectations are on the hawkish side for the SEP projections. And Federal Reserve Chair Jerome Powell can be something of a wildcard. Overall, though, we think the objective for the Fed is to get out of this meeting without making fresh waves in the financial markets.

(2) 3.Published on March 18, 2024
Inflation: Elevated January and February inflation readings create fresh base effects for the core-PCE forecast, but speakers have tended to see this as a bump in the road rather than reason to fundamentally reassess the inflation story. At least not yet. And recall that in December, monthly inflation readings were running below a 2% annualized rate and implied that the Fed would need to lower the inflation forecast in March. Recent numbers are in that sense a validation of the Fed’s December projections. Still, the clear risk is that the Fed pencils in a 2.6%, and either outcome will be considered hawkish as it indicates a direction of travel toward fewer than 75bp of rate cuts.

(3) Monday Morning Notes, 3/18/24

We think FOMC participants will reveal some increased hawkishness via an increase in the 2026 median dot. It is possible that the 2025 dot could rise as well, although the Fed’s models likely deliver a smooth transition toward normal via 25bp rate cuts each quarter. That means that the resilience of the economy and possibly an elevated neutral rate will lead to an earlier end to rate cuts than expected in December. Of course, if the 2025 median dot were to rise, the 2026 dot likely would as well, making the 2026 dot a safer hawkish bet. The risks are weighted toward the long run dot rising as well, but we can’t make this a high conviction base case. A higher 2026 dot would signal a de facto increase in neutral rate estimates without needing to commit to such an increase.

(4) Monday Morning Notes, 3/18/24
If questioned, Powell may need to explain his “not far” comment from Humphrey-Hawkins, and his explanation will make it sound further away than it first appeared because he can’t commit to June.

(5) Monday Morning Notes, 3/18/24
Pressed on the inflation outlook, we expect that we will restate the “bumpy path” story while adding that continued elevated inflation readings would imply that progress on inflation goals has stalled. He won’t kill a June cut, but he can’t credibly commit to it either.

(6)Monday Morning Notes, 3/18/24

The Fed will begin developing a plan for tapering quantitative tightening that will set guidance on the Fed’s longer run intentions for the size and composition of the balance sheet but won’t announce any such plans this week. The minutes of the January FOMC meeting foreshadowed this outcome:
In light of ongoing reductions in usage of the ON RRP facility, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff.
Typically, the Fed begins these kinds of deliberations with staff presentations the first meeting, discussion of those presentations among FOMC participants at the following meeting, and a decision at the next meeting which might be guidance for future meetings or immediate implementation. That puts June as the likely earliest meeting for the Fed to announce a plan for the balance sheet, with the actual implementation likely later.

(7)Final Thoughts Ahead of the FOMC
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.
Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
Market Validation
(1) Bloomberg 3/20/24

Federal Reserve officials maintained their outlook for three quarter-point rate cuts this year but forecast fewer cuts than before in 2025 following a recent uptick in inflation.
Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25% to 5.5%, the highest since 2001, for a fifth straight meeting. Policymakers signaled they remain on track to cut rates this year for the first time since March 2020, but they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.
Policymakers also lifted slightly their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.
Policymakers updated their projections for inflation and economic growth for 2024, raising their forecast for underlying inflation to 2.6% from 2.4%, and boosting the growth forecast to 2.1% from 1.4%. They also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.

(2) Bloomberg 3/20/2024

Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
o 2024 median PCE inflation 2.4% vs 2.4%
o 2025 median PCE inflation 2.2% vs 2.1%
o 2026 median PCE inflation 2.0% vs 2.0%
• 2024 median core PCE inflation 2.6% vs 2.4%
• 2025 median core PCE inflation 2.2% vs 2.2%
2026 median core PCE inflation 2.0% vs 2.0%

(3) Bloomberg 3/30/34

Median assessment of appropriate pace of policy:
• 2024 4.625% (range 4.375% to 5.375%); prior 4.625%
• 2025 3.875% (range 2.625% to 5.375%); prior 3.625%
• 2026 3.125% (range 2.375% to 4.875%); prior 2.875%
• Longer Run 2.5625% (range 2.375% to 3.750%); prior 2.5%

(4) FOMC Press Conference Transcript 3/20/24

>> Thank you, Chair Powell. Not to harp too much more on confidence and inflation but you did say earlier in this press conference that the recent inflation data hasn't raised confidence but when you testified before the senate a couple weeks ago you told lawmakers you are not far from cutting rates. Are you still in that belief or not? What are we to take by those words? Not far. >> My main message in those days is that the committee needs to maintain confidence and we don't expect it will be appropriate to begin to reduce rates until we're more confident than that. I said that any number of times. Those are the main part of the message we repeated today in that statement. To the language you mentioned, I really pointed out that we had made significant progress over the past year and what we're looking for was confirmation that that progress will continue. We had a series of inflation readings over the second half of last year that were really much lower. We didn't over-react as I mentioned. But that is what I had in mind.

(5) FOMC Press Conference Transcript 3/20/24

CHAIRPERSON: It certainly hasn't raised anyone's confidence, but I would say that the story is really essentially the same. And that is of inflation coming down gradually toward 2% on a sometimes-bumpy path as I mentioned. I think that is what you still see. We've got 9 months of 2.5% inflation now. We've had 2 months of bumpy inflation. It's going to be a bumpy ride. We've consistently said that. Now we have bumps. We can't know that. That is why we are approaching this question carefully. It is very important for everyone that we serve that we do get inflation sustainably down. Every situation is different but the historical record is you need to approach that carefully and not have to come back and raise rates again if you cut it prematurely.

(6) FOMC Press Conference Transcript 3/20/24
At this meeting we discussed issues related to slowing the pace of decline in our securities holdings. While we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of run-off fairly soon. Consistent with the plans we proefsly issued. The decision to slow the pace of run-off does not mean our balance sheet will shrink but allows us to approach that ultimate level more gradually. In particular, slowing the pace of run-off will help ensure the transition reducing the possibility of money markets and facilitating the ongoing decline in security holdings, increasing the ample reserves.

(7) Bloomberg 3/20/24
Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.

Ivestor's Business Daily 3/20/24
Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.


Read Full Report
March 14, 2024
SGH Insight
Reserve Bank of Australia (RBA) governor Michele Bullock is set to reprise her mantra that the central is not ruling out either direction for the next move in monetary policy when the Bank meets March 18-19, as it holds the cash rate steady at 4.35% and tries to keep the market from pricing in overly aggressive easing.

Like its peers, the RBA is balancing how long to keep rates restrictive to wring out residual sticky inflation from the economy without causing excessive damage to the labor market.

Though markets are pricing a first easing from June, the Bank is keen to keep rates higher for longer to stamp out the tendency for underlying inflation to become embedded above target.

Unless a string of inflation prints that confirm the path to target is accompanied by a sharp slowing in the broader economy, and in particular a deterioration in the labor market, all by the end of the second quarter, June may prove too early for a first move.
Market Validation
Financial Review 3/14/24
A sharper-than-expected fall in inflation could lead the RBA to deliver interest rate cuts sooner than expected, as the central bank shifts to a more neutral stance on the outlook for monetary policy.
Announcing the cash rate had been left on hold at 4.35 per cent, RBA governor Michele Bullock said data suggested the central bank was “on the right track” in its battle against inflation, but stressed the outlook for the cash rate remained uncertain.
In a shift that economists widely viewed as dovish, the RBA board’s post-meeting statement pivoted toward a more neutral policy stance, saying “the board is not ruling anything in or out” on the next rate move. In February, the RBA board said, “a further increase in interest rates cannot be ruled out”.
Ms Bullock said, “if a number of things conspire, and we end up actually moving more quickly than the forecasts, then we might need to think about interest rate cuts”.
“But at the moment, we’re in the position where I don’t want to say either way. It’s basically not ruling it in, not ruling it out,” Ms Bullock said at the first press conference in the RBA’s temporary headquarters at 8 Chifley Square.
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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.
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March 12, 2024
SGH Insight
We expect the ECB to unveil tomorrow a system along the lines of the proposal first framed by Executive Board Member Isabel Schnabel almost a year ago, on March 27, 2023, in an event hosted in New York by SGH Macro Advisors and Columbia University, with some features added since .
That will include the official adoption of a demand-driven floor system (as opposed to the old corridor system), with the deposit facility rate (DFR), which became the de facto policy rate through the aggressive pre-Covid easing and bond purchasing cycles, officially adopted as the key reference for the market.
This “demand-driven” floor framework will include central elements of the Bank of England’s framework, a short-term collateralised standing lending facility to provide banks with adequate liquidity when needed (ergo, demand-driven). This will allow the central bank to keep standing reserves leaner than for example under the Fed’s “ample supply” reserves system.
Under the new framework, the ECB is certain to narrow the corridor between its three policy rates. It may even scrap one entirely.

The ECB has also considered the option of setting up a new structural portfolio on the asset side of its balance sheet. This would be intended to help the ECB address fragmentation risks in the sovereign debt market, but it is likely to have been resisted by a sizeable number of officials.

That said, in a speech in November ECB Chief Economist Philip Lane noted that a long-term lending facility would likely be needed.

“However, an over-reliance on short-term refinancing poses operational risk challenges, while investors and regulators may prefer banks to have a healthy proportion of longer-term refinancing in the overall liquidity profile. Moreover, from a macroeconomic perspective, seven-day funding does not necessarily provide sufficiently-durable liquidity to support longer-term commitments such as bank loans or the acquisition of illiquid assets.”

The ECB will likely include a new permanent LTRO in the framework. This could offer liquidity with a 1-year maturity at the average DFR over that year.

This facility, or a new structural portfolio of high-quality assets, could contribute to reducing once more the availability of high-quality collateral from the eurozone’s repo market. The scarcity of collateral became a particularly acute problem in 2022, when ECB asset purchases had a similar effect on the market.

We have long maintained that if the MRR were to be increased, it would be by a small amount, and certainly nowhere near the vicinity of the 5-10% area once suggested by Holzmann.

Recent media reports indicate the MRR is likely to remain at 1%.

Market Validation
Bloomberg 3/12/24
The European Central Bank presented a new framework for how it implements monetary policy, preserving the current system of steering interest rates while giving lenders more of a say over how much cash they need to operate.
The review acknowledges the “significant changes in the financial system and monetary policy in recent years,” President Christine Lagarde said in a statement. “The framework will ensure that our policy implementation remains effective, robust, flexible and efficient.”

Here are the main announcements from the ECB:
• Formalization of floor system, under which the lowest of the ECB’s three policy rates is the key lever to shift short-term borrowing costs
• Existing bond holdings to continue running off but ECB will provide liquidity through a new structural portfolio
• Refinancing operations to play central role in ensuring banks have sufficient cash
• Spread between the deposit rate and the main refinancing rate to be narrowed to 15 basis points — from 50 currently — on Sept. 18
o This will be done by reducing the MRO by 35 basis points
• Minimum reserve requirements for commercial lenders to stay at 1% but may still be adjusted down the line

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March 04, 2024
SGH Insight
The Fed highlight for the week is Chair Jerome Powell’s semi-annual Congressional testimony. Powell testifies to the House on Wednesday and the Senate on Thursday. We anticipate that Powell will remain true to the now firmly entrenched consensus that the Fed sees rate cuts in the future but is in no rush to cut rates.
Market Validation
Bloomberg 3/4/24

Federal Reserve Chair Jerome Powell reiterated to lawmakers that the US central bank is in no rush to cut interest rates until policymakers are convinced they have won their battle over inflation.
In prepared testimony to a House panel Wednesday, the Fed chief said it will likely be appropriate to begin lower borrowing costs “at some point this year,” but made clear they’re not ready yet.
The remarks echoed a consistent message from nearly every Fed official in recent weeks: The economy and labor market are strong, meaning policymakers have time to wait for more evidence that inflation is headed back to their goal before cutting interest rates.
“The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” Powell said in brief prepared remarks to the House Financial Services Committee, where he is set to testify at 10 a.m. Wednesday.

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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

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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.

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