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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2025
January 05, 2025
SGH Insight
The Fed believes that its 100bp of rate cuts in 2024 provides it room to hold policy steady for an extended pause as it assesses the likely impact of Trump 2.0 policies. This is likely a forecast dependent outcome that will not be impacted by small deviations of the data from expectations. In the near term, the Fed is likely to react only to data that substantially changes the forecast. That pushes any rates cuts into the back half of the year, which implies fewer cuts than if the Fed maintained a quarterly pace of cuts throughout the year. That means the Fed needs worse labor market outcomes than we expected to bring about a more rapid return to a more neutral policy stance.

Following the pattern of late 2022 and 2023, the Conference Board labor differential has risen from its September low:
Given that we have seen a similar pattern three years running, as well as the relative weakness in employment PMIs, we are wary to conclude that the labor market has persistently inflected higher. That said, last year there was seasonal strength in the employment numbers that helped push back rates cuts until September. A reoccurrence of that pattern would help put an end to speculation that the Fed could return to rate cuts as early as March.
Market Validation
Fed Rate-Cut Bets Get Pushed Into Second Half of 2025
By Kristine Aquino
Bloomberg 1/7/25
The stronger-than-expected services data just gave traders the green light to push their expectations for a rate cut into the second half of 2025.

Prior to Tuesday’s releases, traders were leaning toward a quarter-point reduction from the Federal Reserve by the June meeting. Yet growth and inflationary signals from the data suggest the US economy is accelerating.

That leaves the prospect of a rate cut as a theme for the second half of this year, for now. Yet if more signs of economic strength emerge, particularly from Friday’s nonfarm payrolls report, there’s every possibility that the notion of even just one cut this year becomes more far-fetched.

Bloomberg 1/10/25
US Treasuries plunged as evidence of a resilient labor market pushed traders to shift their expectations for the Federal Reserve’s next interest-rate cut to the second half of the year.
The selloff pushed yields higher across the curve on Friday after US employment in December advanced by the most in nine months, sending 10-year yields to the highest since 2023. Yields on notes maturing in two to seven years were all higher by more than 10 basis points, while the 30-year approached the 5% level.
Swaps traders are pricing in about 28 basis points of total Fed cuts this year, compared to about 38 basis points before the data release. A full quarter-point reduction isn’t seen until around October, from around June before the report.
Read Full Report
2024
December 18, 2024
SGH Insight
We will move quickly through the easy parts of today’s FOMC meeting:

· The Fed cut rates 25bp and used the statement to signal that it would not cut rates in January or possibly thereafter. Specifically, the “timing and extent of additional adjustments” language has been used previously to signal the possibility of an extended pause. While a notch more hawkish that we thought, it matches our overall expectation that the Fed would leave open the possibility of a pause rather than signal a skip. We didn’t think the Fed would skip January without anticipating a greater-than-even chance that it would skip March as well, and that appears to be the case.

· Powell declared policy now sits at a more neutral setting and is “significantly” less restrictive. FOMC participants have signaled for weeks that after this week’s cut rates would be sufficiently close to neutral, and at that point they were comfortable slowing the pace of additional cuts. This is another signal of a January skip.

· The Fed edged up the estimate of neutral. FOMC participants now think the neutral rate is 3%, in line with our expectations.

· Hawks didn’t want to cut. We thought that there would be resistance to a rate cut from Fed hawks, and they were only willing to go along with it on strong assurances the Fed would not cut in January. That resistance became evident with Cleveland Federal Reserve President Beth Hammack’s dissent (we thought that Bowman would be the most likely to dissent).

· Powell indicated the Fed would strongly resist a January rate cut. We thought that a January skip would be forecast dependent rather than data-point dependent and speculated that Powell could front run a weak employment report by resetting the unemployment baseline to this summer. Powell did exactly that:
Market Validation
Fed Minutes Suggest Officials Will Hold Rates Steady for Now
By Nick Timiraos
Wall Street Journal 1/8/25
The "vast majority" of the 19 officials who participated in that meeting thought a quarter-point rate cut was appropriate, the minutes said. But some officials thought there was merit in keeping rates unchanged last month, and a majority had indicated the decision to cut rates was a close call, according to the minutes.
The minutes further suggest officials were broadly comfortable holding rates steady at their upcoming meeting at the end of this month. "Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing," the minutes said. Officials thought under their current outlook for economic activity, the Fed could continue to cut rates at a slower pace than they had in recent months.
"Almost all participants judged that upside risks to the inflation outlook had increased," the minutes said.
The economic forecast prepared by the Fed's staff of economists also incorporated some initial assumptions about changes to tariffs that would lead inflation to be somewhat higher than previously anticipated in 2025 before resuming its recent decline after that.
In addition to the uncertainty over potential policy changes by Trump, who takes office on Jan. 20, Fed officials aren't sure what constitutes a "normal" or neutral interest rate that neither spurs nor slows the economy. For much of last year, their benchmark interest rate sat near a two-decade high, at 5.3%, and nearly all officials thought rates were in restrictive territory.
But after cutting interest rates at their last three meetings by a cumulative percentage point since September, they are less certain over where rates sit relative to an unobservable "neutral" level. At a news conference after last month's meeting, Fed Chair Jerome Powell said officials were ready to slow down cuts because of uncertainty over how restrictive their policy stance would be after having lowered rates by one percentage point.
Read Full Report
December 17, 2024
SGH Insight
Having failed to adequately signal plans for a near term rate hike, the Bank of Japan (BOJ) is highly unlikely to surprise markets and so will hold rates steady when the Board meets this week.

A last-minute media leak to revive rate hike expectations for the December 18-19 meeting would now be destabilizing for markets and prompt another backlash over sub par communications, so the window for shifting market expectations has all but closed, with the BOJ poised instead to signal its next move will come in early 2025.

Governor Kazuo Ueda will use this week’s meeting to tee up a 25 bps hike at the January 23-24 meeting. He and other Board members will build on that message through the intermeeting period to try to arrest the slide in the yen and manage market expectations into the next forecast round meeting.
Market Validation
Bloomberg 1/24/25
The Bank of Japan raised its key policy rate
Friday to the highest level in 17 years, as Governor Kazuo Ueda
continues his mission to return to central bank orthodoxy.
Ueda and his fellow board members lifted the overnight call
rate by a quarter-percentage point to 0.5% at the end of a two-
day meeting, according to a statement from the central bank. The
decision to hike was in line with market expectations. The BOJ
said it will continue to raise rates if its economic outlook is
realized.
Read Full Report
December 15, 2024
SGH Insight
The Fed will cut policy rates 25bp this week and signal an expectation to slow the pace of cuts in 2025. We expect that between the statement, SEP projections, and the press conference, the Fed will send the message that barring a sudden slowing of the labor market, it anticipates not cutting rates in January and that while FOMC participants generally still anticipate further reductions in policy rates, it’s possible that a January skip becomes a pause. Our expectations for the meeting outcomes follow below.

Another place to signal a slower pace of rate cuts is in the policy guidance. This guidance:

In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Could evolve to something like:

In considering the timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Monday Morning Notes, 12/16/24

The press conference

We anticipate that Powell will send a strong signal that the Fed does not anticipate cutting rates in January.

Powell will likely indicate that this week’s rate cut will bring policy sufficiently close to estimates of neutral that the Fed can approach further adjustments more cautiously.

Powell will emphasize that the Fed is in no hurry to return to a neutral policy setting. He will praise the resilience of the economy and labor markets. The recent GDP data indicate less downside risks to the economy than believed earlier in the quarter and allow for the Fed to move at a slower pace as it probes for the neutral policy rate. We anticipate Powell will remain confident that inflation will continue to return to target. Moreover, he will reiterate that the Fed still anticipates additional rate cuts as policy remains above most estimates of neutral but could highlight the uncertainty in those estimates.
Market Validation
US Fed cuts key rate a quarter point, signals fewer cuts ahead
AFP 12/18/24
The US Federal Reserve cut interest rates by a quarter point Wednesday and signaled a slower pace of cuts ahead, as uncertainty grows over inflation and President-elect Donald Trump's economic plans.
Policymakers voted 11-to-1 to lower the US central bank's key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement.
The sole holdout, who supported keeping rates where they were, was Cleveland Fed President Beth Hammack.
In updated economic forecasts published alongside the decision, members of the Fed's rate-setting committee penciled in just two quarter-point rate cuts in 2025, down from an earlier prediction of four, and hiked their inflation outlook for next year, from 2.1 percent to 2.5 percent.

FOMC Statement
In support of its goals, the Committee decided to lower the
target range for the federal funds rate by 1/4 percentage point
to 4-1/24 to 4-3/41/2 percent. In considering the extent and
timing of additional adjustments to the target range for the
federal funds rate, the Committee will carefully assess incoming
data, the evolving outlook, and the balance of risks.

FOMC Press conference
So remember that we coupled this decision today with the extent timing language in the post-meeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments.

BBG *POWELL: STATEMENT SIGNALS AT OR NEAR PLACE TO SLOW, PAUSE CUTS

BBG 12/18/24
*POWELL: FED HAS BEEN MOVING POLICY TOWARD MORE NEUTRAL STANCE
*POWELL: OUR POLICY STANCE IS NOW SIGNIFICANTLY LESS RESTRICTIVE
*POWELL: CAN BE MORE CAUTIOUS AS WE CONSIDER MORE ADJUSTMENTS
*POWELL: WOULD SAY TODAY'S RATE DECISION WAS A CLOSER CALL

FOMC Press conference
>> CHAIR POWELL: There are countless models of what a neutral rate might be. Empirical models, theoretical models. And they have as many different answers as you would like. There's no real certainty. And it's a good thing to know that we don't know exactly where it is. So you're not tempted to think, oh, thing model or this estimate is right. You just have to be open to, you know, the empirical data that are coming in and how it's affecting the outlook. And it's not made easier by the fact that our policy works with long and variable legs. Nonetheless, that is the job we have so we're, I think we need -- it's appropriate for us now to proceed cautiously now that we're a hundred basis points closer to neutral. And we'll do so. Meanwhile, the economy seems to be in good shape. And these cuts will certainly help to support economic activity and the labor market while we can still make progress on inflation because policy is still meaningfully restrictive.
Read Full Report
December 08, 2024
SGH Insight
The Fed will almost certainly cut rates at next week’s FOMC meeting. Employment rebounded in November as expected but not to an extent that would elicit concerns from Fed officials, especially considering the soft household survey results. Moreover, we doubt this week’s inflation data will derail a rate cut.
Market Validation
Bloomberg 12/11/24
US Treasuries gained and traders boosted their bets on a Federal Reserve interest-rate reduction this month after a report showed consumer prices last month accelerated in line with expectations.
Yields on two-year notes, which are most sensitive to two central bank’s policy, reversed earlier increases to fall as much as three basis points to 4.12% on Wednesday. Traders priced in about 23 basis points worth of easing at the Fed’s December meeting, compared to 20 basis points prior to the report. Markets now see a roughly 92% probability the Fed will lower its benchmark by a quarter-point next week.
Read Full Report
December 06, 2024
SGH Insight
The Bank of Canada (BOC) is tilting toward another 50-basis-point rate cut next week after the latest unemployment data saw a large jump in the unemployment rate, reflecting downside momentum in underlying economic weakness.

Fearful that holding rates at an overly restrictive level would cause demand destruction that leads to inflation falling too far and fast, the Bank used its October 23 forecast round meeting to deliver a jumbo rate cut to 3.75%, largely declaring its inflation battle won and pivoting to concerns about downside risks.

The Bank’s dovish posture was evident following its last meeting with Macklem saying at his press conference that if the economy tracked broadly to the Bank’s projections it would be reasonable to expect more easing.

Macklem said the timing and pace of further reductions would be assessed meeting-by-meeting.

While that guidance did not signal another large cut might be in the offing in December, we view the data since on balance, as likely to have disappointed the Bank’s expectations.
Market Validation
Dow Jones -- OTTAWA 12/11/24
For the second time in a row, the Bank of Canada cut its main interest rate by a half-percentage point, saying lower rates are needed to address weaker-than-expected growth and a softening labor market.
In its final decision of 2024, the central bank lowered its target for the overnight rate to 3.25% from 3.75%, marking the fifth straight reduction in interest rates. The benchmark interest rate sat at 5% at the start of 2024. This also marks the first time excluding either a recession or extraordinary events -- notably the Covid-19 pandemic, the 2008-09 financial crisis, and the Sept. 11, 2001 terrorist attacks -- that the central bank has delivered back-to-back half-point cuts.
Read Full Report
December 01, 2024
SGH Insight
We expect Fed speakers will firm up expectations for the December FOMC meeting this week ahead of the blackout period. We anticipate speakers will guide toward another 25bp rate cut this month before slowing down the pace of rate cuts with a January skip that could become a pause if the labor market firms and inflation stalls.

The highlight of the week is the November employment report. Expectations are low with market participants anticipating only a 200k increase in nonfarm payrolls which when averaged with October would be a gain of only about 100k per month, not disastrous but not exciting either. A downside surprise would push the run rate of job growth below 200k, which would call into question the strength of the labor market and raise the risk of more rate cuts in 2025 than market participants currently anticipate. Also watch the unemployment rate for an upside surprise; the unemployment rate was 4.14% in October, very close to being rounded up to 4.2%.
Market Validation
Bloomberg 12/2/24
Rates traders are heeding the message from Fed Governor Christopher Waller and have boosted the expected probability of a quarter-point rate cut this month to around 68%, from 59% at the end of last week. What’s more, the outlook for three reductions over the next year on a cumulative basis has once again firmed up.
Image
Remember that Waller has been regarded as an important bellwether for the central bank since late November last year, when he indicated a shift in his usually-hawkish stance to a more dovish one. That change kicked off a wave of bets that the Fed’s next move would be to lower borrowing costs, which were proven prescient.

( BBG) 12/06 13:30 *US NOV. UNEMPLOYMENT RATE 4.2%; EST. 4.1%
Read Full Report
November 24, 2024
SGH Insight
Bottom Line

The Fed has positioned itself to slow the pace of rate cuts, and we think tactically it is anticipating that slowing will occur after the December FOMC meeting. We can’t guarantee that outcome; the direction is such that the momentum could build in favor of a December skip, although that outcome seems to require more confidence that the Fed is done cutting rates whereas speakers seem confident in the need for further rate cuts. Speakers won’t leave market participants completely in the dark going into the blackout and will likely firm up the guidance in early December.
Market Validation
Bloomberg 12/2/24
Federal Reserve Governor Christopher Waller said he’s inclined to vote for another reduction in interest rates when officials meet later this month, though data due before then could make the case for holding them steady.
“At present I lean toward supporting a cut to the policy rate at our December meeting,” Waller said in prepared remarks at a conference on the Fed’s framework review in Washington sponsored by the American Institute for Economic Research. “But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”
Waller said recent data had raised concerns that inflation may be stalling above the 2% target but added “there is no indication” that prices in key service categories should remain at their current levels or increase.
“I believe the evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren’t pressing on the brake pedal quite as hard,” Waller said in the text of his remarks. “Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way.”
Read Full Report
November 17, 2024
SGH Insight
Monday Morning Notes, 11/18/24

I am back from vacation and catching up on last week’s slew of Fedspeak. We focus this week’s note on that Fedspeak given the waning confidence among market participants in the Fed’s willingness to deliver another 25bp rate cut at the December FOMC meeting.

Bottom Line: It’s very clear the Fed is paving the way to a skip or a pause. The crux of the debate now is whether the Fed believes policy rates are already close enough to the neutral rate to skip at the December meeting, or is the Fed saying after it brings policy down another 25bp it will be in the range to slow the pace of rate cuts. We think it’s the latter given that speakers still anticipate multiple rate cuts and state that policy rates remain restrictive. Powell’s September 30 guidance on cuts in November and December likely still stands, and what appears to be hawkish rhetoric is setting the stage for a January skip.
Market Validation
Bloomberg 12/6/24
US Treasuries rallied and traders boosted
their bets on a Federal Reserve interest-rate reduction this
month after a mixed November employment report.
Yields on two-year notes, which are most sensitive to the
central bank’s policy, slid four basis points on 4.10% on Friday
after data showed both nonfarm payrolls and the unemployment
rate increased last month. Traders are pricing in about 21 basis
points worth of easing at the Fed’s December meeting, from about
16 basis points before the data.
Read Full Report
November 13, 2024
SGH Insight
Australians are feeling better about the economic outlook including the prospects for lower rates, and while we are ruling out a pre-Christmas rate reduction, the Reserve Bank of Australia (RBA) will likely pivot away from its hawkish rates stance at an upcoming meeting.
Separate consumer and business surveys released Tuesday showed Australian confidence has been rising on increasing expectations the RBA is done with rate hikes.

This was despite markets pushing rate cut pricing out to mid next year after the RBA held its cash rate at 4.35% at its November 5 meeting and signaled it was still worried that persistence in underlying inflation posed an upside risk and it was not ready to move.

That said, we view the market response to RBA Governor Michele Bullock’s post meeting comments as an overreaction and continue to think the RBA will not shy from easing early in 2025 if the economy and inflation continue to slow.

Market Validation
Bloomberg 12/10/24
Australia’s central bank said it’s “gaining
some confidence” that inflation is moving sustainably toward
target, prompting traders to boost bets on interest-rate cuts
starting as early as February.
The Reserve Bank left its cash rate at 4.35% on Tuesday in
a widely anticipated decision, marking more than a year at that
level. The rate-setting board said “some of the upside risks to
inflation appear to have eased” and scrapped a longstanding line
that it wasn’t ruling anything in or out on policy.
The Australian dollar fell as much as 0.9% and policy-
sensitive three-year government bond yields dropped 8 basis
points following the statement. Swaps traders boosted bets on a
February easing to almost 70% from 50% the previous day, with
contracts now fully pricing two rate reductions by May.

Bloomberg 1/29/25
The annual trimmed mean gauge of consumer prices, which shaves off volatile items, rose 3.2% in the three months through December, compared with an expected 3.3% gain, data from the Australian Bureau of Statistics showed Wednesday. On a quarterly basis, core consumer prices rose 0.5% versus a forecast 0.6%.

The Reserve Bank, which aims for the midpoint of a 2-3% CPI target, is focused on core inflation because government subsidies are suppressing headline prices. Trimmed mean CPI hasn’t been inside the band since the end of 2021.

The currency slid and the yield on policy sensitive three-year government bonds declined as much as 7 basis points. Stocks extended gains as money markets boosted bets on a February rate cut to better than 90%.
Read Full Report
November 11, 2024
SGH Insight
Bottom Line: The near-term data, not speculation about Trump’s economic agenda, drives Fed policy, and the Fed sees that data as sufficient to start searching for an opportunity to slow the pace of rate cuts. Assuming the job market stabilizes, we think this more likely will occur in January rather than December, and we assign a 75% chance of a December cut. If post-election animal spirits drive activity and job growth, a skip will become a pause as the Fed will likely find it difficult to cut in March if the economy gains steam during the first quarter.

Typically, the Fed reaches consensus on policy changes over the course of more than one meeting, which implies a shift after the December meeting.Powell said the Fed is now only just beginning to think about slowing the pace of rate cuts. That suggests an expectation to follow through with the September SEP and cut rates in December, at which time it will have a more concrete discussion about likely skipping the January meeting.

We can’t at this juncture rule out that the Fed may opt to skip in December. The cleanest path for the Fed remains to cut rates in December and then use a combination of the press conference and a fresh SEP to guide to a skip in January. Still, last week we highlighted three reasons the Fed could use to pass on another rate cut at next month’s FOMC meeting, including either higher realized inflation, a firming of the labor market in the context of still strong growth (Powell sees growth as a driving factor in the run up in rates), or quickly rising market-based inflation expectations.
Market Validation
Bloomberg 11/13/24
Traders have grown more certain of a quarter-point Fed rate cut in December after inflation data came in line with economist estimates. They’re now pricing more than a 60% chance of a reduction next month, from a 50-50 probability seen on Tuesday.

Wall Street Journal 11/15/24
A Federal Reserve official said the central bank
could eventually need to slow down the pace at which it is lowering rates and
said it was too soon to say whether that should happen at the central bank's
meeting next month.

Another rate cut in December is "certainly on the table, but it's not a done
deal," said Boston Fed President Susan Collins in an interview Thursday.
"There's more data that we will see between now and December, and we'll have
to continue to weigh what makes sense."

The Fed's next meeting is Dec. 17-18. Officials will see data on inflation and
employment for November before that meeting.

Bloomberg 11/25/24
US Treasuries have added to the gains spurred by the late-Friday announcement of Scott Bessent — a Wall Street veteran who investors expect will take the sting out of the administration’s more aggressive trade and economic policy proposals — as President-elect Donald Trump’s Treasury secretary choice.
Monday’s rally trimmed yields by more than 10 basis points across five- to 30-year maturities, gaining momentum in New York trading amid a drop in oil. The dollar slumped by the most in more than two weeks before paring the loss.
“Bessent is viewed as a potentially moderating influence on the incoming administration’s policies,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “Favoring gradualism on tariffs, for example.”

Bessent, who runs macro hedge fund Key Square Group, has called for a gradual approach to implementing trade restrictions and has appeared open to negotiating the exact size of tariffs championed by the president-elect. In an interview with the Wall Street Journal, Bessent said his priority will be to deliver on Trump’s various tax cut pledges, while also cutting spending and “maintaining the status of the dollar as the world’s reserve currency.”
Read Full Report
November 07, 2024
SGH Insight
While the BOJ’s policy commentary in October certainly did not tee up a December rate move, it probably shifted the needle enough for the Bank to follow through with more messaging about the timing of another rate hike if it is forced to try to help arrest the yen’s slide.

In other words, the door to a hike in December is ajar.
Market Validation
Bloomberg 11/21/24
Bank of Japan Governor Kazuo Ueda gave the
clearest hint yet that the central bank’s next monetary policy
meeting will involve a live discussion over whether to raise
interest rates.
“It’s impossible to predict the outcome of the meeting at
this point,” Ueda said in response to questions at a Europlace
forum in Tokyo on Thursday. “The next meeting is December, but
there’s still a month to go. The vast amount of data and
information will become available between now and then.”
Read Full Report
November 07, 2024
SGH Insight
The collapse of Germany’s governing coalition on November 6 opens the possibility of less restrictive fiscal policy in 2025. However, over the short term it will not have a major impact on the eurozone’s largest economy.

Chancellor Olaf Scholz’s minority government aims to pass its 2025 budget before the end of the year. It is, however, uncertain whether the Social Democratic Party (SPD) and the Greens will secure enough votes in the Bundestag for passage. If the government fails in those efforts, the 2024 budget would be rolled over into 2025.

This is not uncommon in Germany. Typically, federal elections take place every four years in the fall, which means that protracted coalition negotiations can require extending the previous year’s budget. This mechanism ensures the government does not become insolvent, but it severely restricts its options to implement new investments and, therefore, boost growth in that window.
Market Validation
Bloomberg 11/12/24
Germany’s new finance minister dismissed fears the political turmoil in Berlin will trigger a funding freeze, pledging the federal government will be fully capable of functioning in the weeks before February’s early election.
Joerg Kukies, appointed last week after Chancellor Olaf Scholz fired his predecessor and brought a premature end to the ruling coalition, said it’s still unclear whether Scholz’s minority government can get a supplementary budget for this year and the 2025 finance plan approved in parliament.
To do so, they’ll need the votes of opposition lawmakers. Friedrich Merz, the leader of the center-right CDU/CSU alliance, signaled earlier Tuesday the group may be willing to cooperate on this year’s budget, but Kukies said the situation remained very much in flux.
He conceded that it’s “not realistic” that the 2025 budget will get approval by the end of the year, meaning the government will be forced to resort to a temporary finance planning process to keep funds flowing.
While it’s not an ideal state of affairs and some new projects may face delays, Kukies said it’s not technically problematic and has happened multiple times before, including earlier this year after a constitutional court ruling upended the government’s finances.
The government “can and will fulfill all of its commitments,” he told delegates at a Sueddeutsche Zeitung forum in Berlin. He’s due to attend a meeting of the Bundestag’s budget committee on Wednesday.
Read Full Report
November 07, 2024
SGH Insight
Powell Sets Up For a Pause
Bottom Line: The November FOMC meeting ended as expected with Powell skillfully avoiding making any market moving news. We think Powell is setting the stage for a pause at the January FOMC meeting assuming growth remains solid and the labor market firms, but there is a risk that the incoming data provides enough for the Fed to pull that forward to December.
Market Validation
New York Times 11/15/24
A strong economy is giving Federal Reserve officials room to move “carefully” as they lower interest rates, the central bank chair said.
Jerome H. Powell, the chair of the Federal Reserve, said that a solid economy with low unemployment, robust consumer spending and strengthening business investment gives the central bank room to take its time in cutting interest rates.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Mr. Powell said in a speech prepared for delivery in Dallas on Thursday. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
The Fed’s policy-setting committee meets next in mid-December, and while policymakers are expected to lower rates by a quarter point at that gathering, Fed officials themselves have made it clear that a reduction is not guaranteed.
Mr. Powell did not address December specifically in his prepared remarks. But officials have made it clear that they will be watching incoming data points — including inflation and jobs figures — as they decide what to do.
“The path for getting there is not preset,” Mr. Powell said on Thursday. “In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks.”
Read Full Report
November 06, 2024
SGH Insight
Last week we began highlighting that the Fed can’t skip a meeting without opening the debate about a pause, and market pricing moved further in the direction of a pause even before the economic landscape shifted with last night’s election results. In a sharp rebuke to Democrats and Vice President Kamala Harris, American voters returned Donald Trump to the White House. Voters also likely delivered the Republicans a trifecta with wins in the Senate and the House, although the latter still needs some vote counting to be assured. After winning the trifecta, Republicans can enact a more sweeping and expansionary agenda than expected just a few days ago.
The Fed will still cut interest rates this week, and at this point we think it likely the Fed will follow the September SEP and cut again in December. Even if the Fed follows through with a December cut, and assuming the labor market and the economy hold up, the Fed can respond to increased fiscal policy uncertainty by skipping the January meeting and begin an extended pause.

It would be a challenge now for the Fed to set up a pause without appearing overtly political. We expect Federal Reserve Chair Jerome Powell will reiterate that the Fed does not take politics into account when setting policy and can’t change the policy path ahead of any implementation of tariff, immigration, or fiscal policies. Indeed, even a pause after the December FOMC meeting will be observationally equivalent to a political reaction and may draw the ire of President-elect Trump.

Bottom Line: We hesitate to make sweeping predictions ahead of any policy implementation. One thing is for sure – Trump inherits a growing economy which the Fed has already begun to support by cutting rates. It gives him a tailwind, and it’s up to Trump and his advisors use the tailwind wisely. At the end of the day, Republicans will need to deliver on the campaign promise of a better economy, and that likely won’t happen with reckless tariff, immigration, and fiscal agendas.( nov 6)
Market Validation
Fed cuts rates by 0.25%, Powell deflects questions about Trump policies
By Alex Steger
Citywire 11/7/24
Powell was asked about the impact of the next administration’s policies on inflation and the economy but said that these would not play into the Fed’s immediate decisions.
‘Let me say in the near-term, the election will have no effects on our policy decisions. As you know, many, many things affect the economy and anyone who writes down forecasts in their job will tell you that the economy is quite difficult to forecast looking out past the very near term,’ he said.
‘Here, we don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy would be. Specifically, whether and to what extent those policies would matter for the achievement of our goal variables, maximum employment, and price stability. We don’t guess, we don’t speculate, and we don’t assume.’

Bloomberg 11/25/24
US Treasuries have added to the gains spurred by the late-Friday announcement of Scott Bessent — a Wall Street veteran who investors expect will take the sting out of the administration’s more aggressive trade and economic policy proposals — as President-elect Donald Trump’s Treasury secretary choice.
Monday’s rally trimmed yields by more than 10 basis points across five- to 30-year maturities, gaining momentum in New York trading amid a drop in oil. The dollar slumped by the most in more than two weeks before paring the loss.
“Bessent is viewed as a potentially moderating influence on the incoming administration’s policies,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “Favoring gradualism on tariffs, for example.”
ImageBessent, who runs macro hedge fund Key Square Group, has called for a gradual approach to implementing trade restrictions and has appeared open to negotiating the exact size of tariffs championed by the president-elect. In an interview with the Wall Street Journal, Bessent said his priority will be to deliver on Trump’s various tax cut pledges, while also cutting spending and “maintaining the status of the dollar as the world’s reserve currency.”
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November 03, 2024
SGH Insight
Fed Speak and Discussion

The Fed will cut rates 25bp this week and signal that it anticipates further rate cuts in this cycle, but Powell will add that the exact timing and number of cuts remains data dependent.

There hasn’t been serious conversation about skipping the meeting, and the employment report didn’t give reason for the Fed to have a change of heart during the blackout period. If Trump wins the election this week, we anticipate that Powell will say that outcome does not affect the Fed’s decisions and that the Fed will react as appropriate to fiscal policy as it is implemented.

We think it’s too early to expect the Fed to entertain a conversation of skipping a meeting. If the Fed was to skip or pause in this cycle, we think it more likely to happen in January than December. The Fed expects to bring policy to a more neutral setting, and policy rates at 4.375% after the December meeting would be still well above upper-end estimates of the neutral policy rate. If growth stays elevated and the labor market firms up, at that point the Fed can signal a more gradual pace of rate cuts, thereby deferring a conversation about a pause until 2025.

Moreover, we think market participants are getting too far ahead of the story on the implications of new tariffs for inflation. Not only is the ultimate magnitude of tariffs uncertain but also, they will be at least initially disruptive, and the possibility of trade wars creates additional uncertainty for firms. Moreover, the Fed is likely to view any inflation from tariffs as transitory. Similarly, deportations on a scale significant from a macro perspective will also be disruptive for firms.
Market Validation
*FED LOWERS BENCHMARK RATE 25 BPS TO 4.5%-4.75% RANGE
*Powell: Fed Is Not on Pre-Set Course, Will Continue To Make Decisions Meeting-By-Meeting
*Fed's Powell: We're On a Path To More Neutral Stance, Must See Where Data Lead Us

US election will have no near-term effect on Fed policy: Powell
Nov. 7 (AFP) -- The US presidential election outcome will have "no effects" on central bank policy decisions in the near-term, Federal Reserve Chair Jerome Powell told reporters Thursday, after Republican Donald Trump's victory at the polls.
"We don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy would be," he added after the Fed unveiled its rate decision. "We don't guess, we don't speculate, and we don't assume."
da-bys/acb

Stocks Near Highs as Powell Gives ‘No Skip Signs’: Markets Wrap
Fed cuts rates for second-straight meeting to support economy
Policymakers change language around job market, inflation
By Rita Nazareth
(Bloomberg) -- Stocks hit fresh all-time highs, Treasury yields fell and the dollar dropped the most since August, with Jerome Powell saying that even after Thursday’s rate cut, policy is still restrictive.
The S&P 500 was up 0.8%. Treasury 10-year yields declined 10 basis points to 4.34%. The Bloomberg Dollar Spot Index fell 0.6%. The Fed Chair said he doesn’t rule “out or in” a December rate cut. He said recent indicators suggest the economy keeps expanding solidly. While inflation expectations remain anchored, core prices remain somewhat elevated, he said. Powell added that in the near term, the election will have no effect on policy.

Bloomberg 11/25/24
US Treasuries have added to the gains spurred by the late-Friday announcement of Scott Bessent — a Wall Street veteran who investors expect will take the sting out of the administration’s more aggressive trade and economic policy proposals — as President-elect Donald Trump’s Treasury secretary choice.
Monday’s rally trimmed yields by more than 10 basis points across five- to 30-year maturities, gaining momentum in New York trading amid a drop in oil. The dollar slumped by the most in more than two weeks before paring the loss.
“Bessent is viewed as a potentially moderating influence on the incoming administration’s policies,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “Favoring gradualism on tariffs, for example.”
ImageBessent, who runs macro hedge fund Key Square Group, has called for a gradual approach to implementing trade restrictions and has appeared open to negotiating the exact size of tariffs championed by the president-elect. In an interview with the Wall Street Journal, Bessent said his priority will be to deliver on Trump’s various tax cut pledges, while also cutting spending and “maintaining the status of the dollar as the world’s reserve currency.”
Read Full Report
November 01, 2024
SGH Insight
A November cut has been all but a fait accompli even before this week’s maiden budget from Reeves after Bailey said expected rates to come down gradually following the Bank’s last meeting on September 19.

After cutting Bank rate 25bps in August in response to slower growth and slowing inflation, the BOE held rates steady at 5% on September 19. It was sidestepping the UK government’s planned budget release on October 30, but also to avoid adding to market volatility in the lead up to a 50 bps cut by the US Federal Reserve.

The MPC members in September voted 8:1 to hold rates steady, with Swati Dhingra voting to keep going with another 25 bps rate cut.

A similar vote count may result in the opposite direction as Bailey tables a 25bps cut at next week’s meeting with Catherine Mann against a cut, a position she is likely to repeat through year’s end, and Dhingra, this time, likely to get her rate cut wish.

As we noted in our last report (see 9/19/24; “BOE: Bailey sets Stage For November Cut”) Bailey was careful in his post September meeting remarks not to let easing expectations slip too far despite the Bank holding steady at that meeting.

This upcoming meeting is a fresh forecast round so even if the Bank staff marks up their near term inflation and growth projections on the back of the expected Budget plan impacts, they will continue to chart a course for Bank rate over time to be at least 100 basis points below the current 5% rate.
Market Validation
Bloomberg 11/7/24
The Bank of England cut borrowing costs for
the second time this year but stopped short of signalling faster
easing, warning that the budget will drive up inflation by as
much as half a percentage point.
Eight members of the Monetary Policy Committee led by
Governor Andrew Bailey voted to lower the benchmark interest
rate by a quarter point to 4.75%. Catherine Mann, one of its
external officials, was the lone dissenter, preferring to hold
at 5%. The outcome was widely anticipated by economists.
“We need to make sure inflation stays close to target, so
we can’t cut interest rates too quickly or by too much,” Bailey
said in a statement on Thursday in London. “But if the economy
evolves as we expect, it’s likely that interest rates will
continue to fall gradually from here.”
Read Full Report
October 31, 2024
SGH Insight
Its higher-for-longer strategy appears to be paying off. Third quarter year-on-year headline CPI slowed to 2.8% versus a revised 3.8% in the second quarter and bettered forecasts of a 2.9% outcome.

Though in the right direction the pace of slowing in those price metrics is far from collapsing and will not motivate the RBA to cut rates on November 5, particularly not on the same date as the potentially market moving US elections.

RBA deputy Andrew Hauser, just back from meetings with his international counterparts at the IMF-World Bank meetings last week, is likely to reinforce that holding pattern when members meet next week.


So when will the Bank turn its attention to an easing cycle? As we last wrote (see SGH 10/3/24; “RBA: Hawkish Hauser”), a December 9-10 easing is probably only likely if the economy deteriorates sharply.

The Bank likely wants to see another round of GDP growth data (due out December 4) and the fourth quarter inflation report (due January 29, 2025) ahead of the February 17-18 forecast round meeting before it is willing to take its foot off the policy brake.
Market Validation
Bloomberg 11/5/24
Australia’s central bank held its key
interest rate at a 13-year high on Tuesday, aiming to keep up
the pressure on stubbornly sticky inflation while joining much
of the world in waiting for the outcome of US elections.
As expected, the Reserve Bank left its cash rate at 4.35%,
marking a year at that level, and restated that it isn’t “ruling
anything in or out” on policy. The RBA’s board highlighted the
“high level of uncertainty” about the international outlook.
Underlying inflation “remains too high,” the rate-setting
board said in a statement. “It will be some time yet before
inflation is sustainably in the target range and approaching the
midpoint. This reinforces the need to remain vigilant to upside
risks to inflation and the board is not ruling anything in or
out.”
Read Full Report
October 31, 2024
SGH Insight
Bottom Line: With employee compensation trends still cooling, the Fed will remain confident that inflation can remain on a path to 2% even though economic activity has outpaced potential growth for the past two quarters and job growth surprised on the upside in September. That provides the Fed room to continue cutting rates as it brings policy to a more neutral setting. As we have written, we think it likely the Fed brings rates down a total of 100bp this year.
Market Validation
Bloomberg 11/1/24
Treasury futures push to session highs in a bull-steepening move after October payrolls change fell short of median estimate with September change revised lower. The two-month net revision subtracted a total of 112k jobs.
On the day Treasury yields flip to richer by up to 7bp across front-end of the curve, which leads gains, steepening 2s10s spread by 3.5bp on the day
Fed-dated OIS prices in a combined 45bp of rate cuts over the remaining two meetings this year vs 42bp at Thursday’s close
Read Full Report
October 28, 2024
SGH Insight
A sharply weaker yen could tip the Bank of Japan (BOJ) into a December rate hike after Japanese Prime Minister Shigeru Ishiba’s ruling party failed to hold onto its majority in weekend elections, marking the LDP’s worst defeat in 15 years.

The electoral beating which has plunged the government into disarray as the LDP scrambles to co-opt reluctant coalition partners into helping it cling to power, sent the Japanese currency sharply lower and is testing the BOJ’s preference to sit on the sidelines for the rest of the year.

Had Ishiba won an outright majority the BOJ would have passed not just on a rate hike at the upcoming October 30-31 meeting as expected, but also probably in December as well.

Now, however, fearful a sharply weaker yen will severely damage consumption, the BOJ could be forced to try to help prop up the yen with a rate hike at its December 18-19 policy meeting.
Market Validation
TOKYO, Reuters 10/31/24
The Bank of Japan maintained ultra-low interest rates on Thursday but said risks around the U.S. economy were somewhat subsiding, signaling that conditions are falling into place to raise interest rates again.
The central bank also projected inflation would move around its 2% target in the coming years, stressing its resolve to keep raising borrowing costs if the economy sustains a moderate recovery.
"Looking at domestic data, wages and prices are moving in line with our forecasts. As for downside risks to the U.S. and overseas economies, we're seeing clouds clear a bit," Governor Kazuo Ueda told a news conference.
Ueda's remarks were less dovish than those made before Thursday's meeting that the BOJ can "afford to spend time" scrutinizing the fallout from risks such as U.S. economic uncertainties and volatile financial markets.
The dollar briefly fell to 151.92 yen from levels above 153 yen after Ueda's remarks, which were interpreted as heightening the chance of a rate hike in December.
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