SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

November 01, 2022
SGH Insight
...Xi stressed that the most important task in the next six months is to ensure economic stability, financial market stability, the stability of the RMB exchange rate, and the stability of attracting foreign investment. He particularly stressed that it is necessary to strive for economic growth in the current fourth quarter of 2022 to return to the “normal” level, that is, 5.0%.
Xi particularly emphasized the need to take corresponding measures to stabilize the stock market, to ensure that the RMB does not depreciate in a disorderly manner, and to make foreign investors have confidence in China, as well as help Hong Kong to stabilize its financial market...
Market Validation
Bloomberg 11/2/22

People’s Bank of China Governor Yi Gang gave
an optimistic outlook for the economy on Wednesday, saying it
remains “broadly on track” and he hoped the property market can
achieve a “soft landing.”
We follow a flexible and, by and large, market-determined
exchange rate regime with reference to a basket of currencies.
Since the beginning of the year, thanks to sound long-term
fundamentals of China’s economy, the RMB remained relatively
stable against a basket of currencies, with some depreciation
against the USD and somewhat appreciation against other major
currencies. In the future, we will keep on with the market-
determined exchange rate regime. The RMB exchange rate will
continue to remain relatively stable at a reasonable and
appropriate level, maintaining its purchasing power and keeping
its value stable.


I should say that the Chinese economy has remained broadly
on track, despite some challenges and downward pressures. The
Chinese economy has proved to be quite resilient. In Q3 the GDP
grew by 3.9%, up by 3.5 percentage points over the second
quarter. The job market remains stable with the surveyed
unemployment rate posting 5.5% in September.
Thanks to a bumper grain harvest and stable supply of coal
and electricity, inflation remained subdued. The CPI increased
by only 2.8% year-on-year in September and PPI increased by 0.9%
I expect China’s potential growth rate to remain in a
reasonable range. China has a super large market, as there is
still much room for urbanization and demand of middle-class
consumers is still on the rise. Thanks to a large group of
engineers and skilled workers, China has built a full-fledged
modern industrial system, and a high-quality infrastructure
Read Full Report
November 01, 2022
SGH Insight
On tomorrow’s FOMC meeting, our baseline hasn’t changed. The Fed will discuss the pace of rate hikes at upcoming meetings, and Federal Reserve Chair Jerome Powell will acknowledge the discussion, but will most likely claim that the Fed makes policy decisions on a meeting-by-meeting basis with nothing decided in advance.

At issue is how much guidance Powell provides regarding the path of monetary policy. We believe he will retain the option of 75bp in case the Fed needs to respond to upside surprises to the inflation outlook. That said, we don’t think he will leave us flying completely blind; we think he will need to define the Fed’s reaction function more carefully...

...We don’t think Powell will embrace the idea of a pause at the SEP-implied terminal rate. Although a group of presidents has been unusually vocal in their desire to find a place to pause, that’s still too far in the future to commit to, and could easily change with the December SEP. Indeed, our expectation is that the dots move higher again in December, albeit a nudge rather than another leap...
Market Validation
That's why I've said it's appropriate to slow the pace of increases. So that time is coming. And it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we'll have a discussion about this at the next meeting, a discussion. To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive which will be our principle focus.

That's meant to put that question really as the important one now going forward. I've also said that we think that the level of rates that we estimated in September, the incoming data suggests that that's going to be higher. That's been the pattern. I would have little confidence that the forecast, if we made a forecast data, if we did SEP today, one after another that will go up. That will end when it ends. There's no sense that inflation is coming down. If you look at the -- I have a table of the last 12 months of 12-month readings, there's really know pattern there. We're exactly where we were a year ago. Okay. So I would also say it's premature to discuss pausing. It's not something that we're thinking about. That's really not a conversation to be had now. We have a ways to go. The last thing I'll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. I control those messages. That's my job.

Read Full Report
October 31, 2022
SGH Insight
...The Fed will follow through with another jumbo-sized rate hike this week but will signal a high likelihood that this will be the last 75bp rate hike in the cycle...

...I repeat my mantra that it is ill-advised to bet against the consumer in the absence of substantial job losses. To be sure, we get a fresh read on the labor market this week, but initial unemployment claims clearly tells us that the labor market is not coming unglued:
Market Validation

Following is the FOMC statement released today by the Federal Reserve in Washington:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Bloomberg 11/1/22

Job Openings in US Unexpectedly Rise, Keeping Pressure on Fed
Vacancies climbed by 437,000 to 10.7 million in September
Quits rate held at 2.7%, while number of hires eased

US job openings unexpectedly rose in September, highlighting enduring tightness in the labor market and risking sustained upward pressure on wages that will likely keep the Federal Reserve on a path of steep interest-rate increases.
The number of available positions increased to 10.7 million in September from a revised 10.3 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Tuesday. The median estimate in a Bloomberg survey of economists called for a drop to about 9.8 million.
The surprise pickup in vacancies highlights unrelenting demand for workers despite mounting economic headwinds. The persistent imbalance between labor supply and demand continues to underpin robust wage growth, adding to widespread price pressures and reinforcing expectations for yet another large rate hike on Wednesday.

Read Full Report
October 27, 2022
SGH Insight
...That said, as with US rates, European rates traders have also latched on to a deceleration story to aggressively drop their estimates for the terminal rate for this cycle. While reporters kept pressing Lagarde on whether she agreed with the market’s expectations of a 3% peak, that bird flew some time ago, and markets have already dropped well below that, to a bit over 2.5%.
As to where markets are today, color us skeptical that the cycle will end at 2.5%. Barring the materialization of a deeper geopolitical shock, for which we must of course always be on alert, we suspect that is a view that is shared by many ECB officials...
Market Validation
Bloomberg 11/3/22


Read Full Report
October 27, 2022
SGH Insight
A resurgence in Australia’s inflation rate rate to a 32-year high will challenge the Reserve Bank of Australia (RBA) to weigh another large rate hike when it meets next week though it will probably settle on 25 basis points.
Consumer prices rose 7.3% in the 12 months through the September quarter, following a 6.1% rise in the prior quarter and marked its highest annual rate since 1990. The data reflected higher prices for food, fuel and housing and showed a broadening into services.
The latest outcomes will prompt more serious consideration of 50bp than a slower inflation outcome would have required at the November 1 board meeting. The RBA however will not panic and reverse last month’s step-down to a slower pace of moves in response to one, albeit important, data point...

...The Bank will use next week’s interest rate announcement that accompanies the monetary policy decision to reiterate its option to resume larger hiking increments if necessary.
RBA deputy governor Michele Bullock said in a speech on October 17 that the RBA’s schedule of 11 board meetings a year provides it more flexibility on the size and timing of rate increases than most other major central banks.
“It also means that if we increase interest rates at every meeting, we can potentially move much faster than overseas central banks,” she added.
The latest inflation spike demonstrates why the RBA’s October 4 step down was accompanied by language that retained a clear and stridently hawkish hue, just as it will again next week.
It almost certainly locks in at least another 25bp hike in December to 3.10%, and likely more moves through the first quarter of 2023...

...More important to RBA thinking will be how the report impacts its forecast path for inflation through 2024. A higher inflation peak would require a higher peak in the cash rate, beyond 3.50% next year.
That elaboration probably will come in upward adjustments to the inflation path in the quarterly Statement on Monetary Policy (SMP) that follows this meeting by a few days, on November 4...
Market Validation
AAP 11/1/22

RBA hikes interest rates 25 basis points
The Reserve Bank of Australia has hiked rates by another 25 basis points on Melbourne Cup day, adding to the pressure already felt by mortgage holders.

The central bank has pulled the trigger on another 25 basis point rate rise and upgraded its peak inflation forecasts off the back of a surprise surge in the cost of living.
The seventh hike in the Reserve Bank of Australia's policy tightening cycle brings the official cash rate to 2.85 per cent.

Bloomberg 11/1/22

“If we need to step up to larger increases again to secure
the return of inflation to target, we will do that,” Lowe said,
reiterating the bank isn’t on a pre-set path. “Similarly, if the
situation requires us to hold steady for a while, we will do
The RBA has raised rates by 2.75 points since May and broke
ranks with global peers last month when it surprisingly pivoted
to smaller hikes following four consecutive half-point
“The board judged that it is appropriate to move at a
slower pace while we assessed the data, the economic outlook and
the impact of the rate rises to date,” Lowe said. “The board’s
base case remains that interest rates will need to go higher
still to bring inflation back to target.”

Bloomberg 11/1/22

The RBA also provided headline numbers from its quarterly
update of forecasts that will be released in full on Friday. It
expects inflation to now peak at around 8%, slightly up from a
previous 7.75% and remain above 3% through 2024.

Bloomberg 11/7/22

Australia’s central bank increased its
forecasts for inflation and wages growth and highlighted the
risk of a price-wage spiral emerging among key reasons it
expects to raise interest rates further.
Headline inflation is now seen peaking at 8% this year,
from 7.75% previously, the Reserve Bank said Friday in its
quarterly Statement on Monetary Policy. Both the headline and
core measures are predicted to remain above the RBA’s 2-3%
target over the next two years. The RBA had, in August,
predicted both measures would hit the top of its band in late
Today’s forecasts assume the cash rate will rise to 3.5% by
next June before easing back to around 3% by end-2024. The
exchange rate is assumed to be unchanged at current levels.
Read Full Report
October 24, 2022
SGH Insight
The Fed is poised to raise rates 75bp next week and further rate increases are expected at upcoming meetings. Still, Fed presidents are increasingly vocal in their assessment that the current SEP-implied terminal rate of 4.50-4.75% is not just a near-term goal but an opportunity to pause and assess the impacts of the Fed’s actions. The forthright and consistent nature of their comments suggests they expect the support of their colleagues on the Board. We think there remains upside risk to the terminal rate (it is easy to see the Fed managing market expectations by dropping down to 50bp in December while nudging the terminal rate higher), but the discussion is turning toward the ability to slow the pace of rate hikes and find a terminal rate as long as inflation does not worsen further in the near-term. Even if the Fed follows this road, it will retain a bias toward future rate hikes and argue it can raise rates later in 2023 if inflation doesn’t fall or fall far enough to see a return to price stability with a reasonable forecast horizon.
Market Validation
That's meant to put that question really as the important one now going forward. I've also said that we think that the level of rates that we estimated in September, the incoming data suggests that that's going to be higher. That's been the pattern. I would have little confidence that the forecast, if we made a forecast data, if we did SEP today, one after another that will go up. That will end when it ends. There's no sense that inflation is coming down. If you look at the -- I have a table of the last 12 months of 12-month readings, there's really know pattern there. We're exactly where we were a year ago. Okay. So I would also say it's premature to discuss pausing. It's not something that we're thinking about. That's really not a conversation to be had now. We have a ways to go. The last thing I'll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. I control those messages. That's my job.
Read Full Report
October 20, 2022
SGH Insight
Evolving the Narrative
Bottom Line: Fed presidents increasingly sound like 4.5-4.75% is not just a near-term objective, but also a medium-term objective in that they believe it will be sufficiently restrictive – if held for a long time – to restore price stability. The destination which members agreed to at the September meeting as we have written also appears to be based more on a “feeling” than any type of hard evidence, and such feelings have gotten the Fed in trouble this year.
Market Validation
Bloomberg 10/20/22

Federal Reserve Bank of Philadelphia President Patrick Harker said officials are likely to raise interest rates to “well above” 4% this year and hold them at restrictive levels to combat inflation, while leaving the door open to doing more if needed.
“We are going to keep raising rates for a while,” Harker said Thursday in remarks prepared for an event with the Greater Vineland Chamber of Commerce in Vineland, New Jersey. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year,” before pausing hikes sometime next year, he said.
Read Full Report
October 19, 2022
SGH Insight
...The European Central Bank will hike its benchmark deposit rate by 75 basis points, from 0.75% to 1.50%, when the Governing Council convenes again in Frankfurt next Thursday, October 27 for its monetary policy meeting.
With so many officials having already come out in force to express their strong preference for another 75bp hike, it would indeed, as one official quipped, be truly bizarre if the ECB was not to hike by 75 bps next week...

...Eyeing the Next Two Meetings
The near-term, broad policy consensus among ECB officials beyond the October meeting remains as we laid out in detail in SGH 9/29/22, “ECB: Staying the Course.” If anything, these expectations have been reinforced since by ECB and Eurosystem officials in speeches, and most notably in detail by Banque de France Governor Francois Villeroy de Galhau.
The December 15 meeting will entail a debate between another 75bp hike to 2.25% or a 50bp hike to 2%.
Many officials are leaning to a modest step down in pace from the 75s, to 50, including Villeroy, and we believe it would be fair to say this is a rough, if not rather loosely held, consensus at this time.
But there are many officials also already leaning towards another 75bp in December, and it seems a reasonable bet to us that the continued poor inflation data going into the turn of the year, with core pressures remaining high even if headline stabilizes, will keep our (and the market’s) lean towards 75.
With the usual caveat of considerable uncertainty around the turn of the year, energy prices, growth concerns, and most importantly a true sense of the underlying dynamics behind core inflationary pressures, the strategy as we also laid out in the Sep 29 report is to then decelerate the pace of rate hikes once the ECB gets above a 2% handle, perhaps to 25s (if they can get away with that), as the ECB starts the process of shrinking its balance sheet...

...As to timing, some financial wire services predict that the balance sheet reduction will not start until March 2023, but we believe this is off the mark.
We expect the ECB will know by its February 3 meeting, the first meeting of 2023, what it intends to do, decide, and announce the details at that meeting. With a massive balance sheet clearly working at odds to monetary policy objectives, the ECB will then start the gradual reduction process in the same month — February...
Market Validation
Bloomberg 10/27/22

The following is a reformatted version of the introductory remarks of European Central Bank President Christine Lagarde at a press briefing on Thursday:
“Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, we have made substantial progress in withdrawing monetary policy accommodation. We took today’s decision, and expect to raise interest rates further, to ensure the timely return of inflation to our two per cent medium-term inflation target.

Bloomberg 10/27/22

European equities erased earlier losses as the region’s central bank raised interest rates while its statement was seen as less hawkish, with traders paring bets on longer-term interest-rate hikes.
The Stoxx Europe 600 was up 0.2% by 2:17 p.m. in London after the ECB doubled its key interest rate to the highest level in more than a decade through a 75 basis points hike. At the same time the central bank slightly tweaked its policy guidance to remove reference to “next several meetings.”
Rates-sensitive technology shares trimmed declines after the decision, while real estate and banks outperformed.
While the ECB said that it expects to raise interest rates further, it adopted a slightly less hawkish tone. That led money markets to cut rate-hike wagers by as much as 20 basis points, pricing a peak below 2.75% next year. That compares with above 3.25% seen as recently as last week.
“Markets are happy with the more dovish tone of the ECB, as it indicated the pace of tightening would slow going forward,” said Esty Dwek, chief investment officer at Flowbank SA.

(AFP) 10/27/22

ECB to decide how to trim balance sheet in December: Lagarde

European Central Bank policymakers will determine at their next meeting in December how to start winding down the Frankfurt-based institution's huge pile of public and corporate debt.
The ECB would determine the "key principles" to trim its massive balance sheet, which has swelled to trillions of euros over years of expansionary measures aimed at nudging up stubbornly low inflation.
Read Full Report
October 17, 2022
SGH Insight
...The calendar here seems important. The SEP implies the last hike is in January, a 75-50-25 path, and by extension that the last hike is right in front of us. If Fed speakers keep leaning into the SEP as we move closer to that point, the pause will look more real. Imagine that in the context of the current data flow; it would suggest pausing even with high inflation. Also imagine the possibility that Powell at the next press conference says that the “meeting discussion was in the context of the September SEP.” That will be only two meetings away then. They must have a good idea what they are planning over the next two meetings.
Strategically, the Fed could manage this debate by finding a consensus between those focused on current high inflation and those worried about the risk of overshooting. The Fed can step down to 50bp at the December meeting, thereby acknowledging the more dovish participants’ concerns while at that same meeting raising the SEP-implied terminal rate a notch to reflect the still too-high inflation data. Such a continued upward drift in the terminal rate remains our base case. Rather than shortening the cycle as Bullard suggests, the Fed elongates the cycle with what eventually become 25bp rate hikes. Remember, Waller said that there will be a substantial discussion of the pace of rate hikes at the next meeting; that’s where FOMC participants would develop a consensus around the next stage in the cycle...
Market Validation
Bloomberg 10/21/22

Treasury Yields Jolted From Highs on Prospect of Fed Let-Up
10-year yield still on track for 12th straight weekly increase
Five-year note’s rate topped 4.5% for first time since 2007

The US five-year Treasury yield exceeded 4.5% for the first time since 2007 on Friday on the prospect of unrelenting Federal Reserve rate increases to control inflation. It subsequently slid to the lowest level of the day on a report undercutting that thesis.

Earlier, yields across the maturity spectrum reached multiyear highs led by the 30-year, which rose as much as 14 basis points to 4.36%, the highest since 2011. The five-year yield rose as much as six basis points to 4.504%. By mid-morning, short-dated rates were lower on the day while long-dated ones remained higher.
The reversal in short-maturity yields occurred after the Wall Street Journal reported that some Fed officials are concerned about overtightening, after having raised the policy rate by three percentage points since March, with another three-quarter point increase anticipated next month. The article said policy makers are likely to debate whether to signal that a smaller rate increase is possible in December.

Read Full Report
October 17, 2022
SGH Insight
Chips Ban Retaliation

Our understanding is that five ministries and commissions under China’s governing State Council are jointly studying countermeasures against the latest round of US chips bans against China. The Ministry of Commerce is expected to announce countermeasures against the US shortly after the 20th National Congress at the end of this month or early next month.

In the words of a senior Chinese official:
The move [chip ban] is the toughest measure the US has taken against China’s high-tech sector so far. It does have a serious short-term impact on China, but it will definitely not cause China’s high-tech companies to go out of business or bankrupt. How much impact the latest move has on China’s artificial Intelligence and chip sectors depends on how broadly Washington enforces the restrictions. In the long run, Washington’s extreme export control toward China will be difficult to sustain….
Market Validation
Bloomberg 10/20/22

China’s top technology overseer convened a
series of emergency meetings over the past week with leading
semiconductor companies, seeking to assess the damage from the
Biden administration’s sweeping chip restrictions and pledging
support for the critical sector.
The Ministry of Industry and Information Technology has
summoned executives from firms including Yangtze Memory
Technologies Co. and supercomputer specialist Dawning
Information Industry Co. into closed-door meetings since
Washington unveiled measures to contain China’s technological
MIIT officials appeared uncertain about the way forward and
at times appeared to have as many questions as answers for the
chipmakers, people familiar with the discussions said. While
they refrained from hinting about counter-measures, officials
stressed the domestic IT market would provide sufficient demand
for affected companies to keep operating, the people said,
asking to remain anonymous on a sensitive issue.
Read Full Report
October 14, 2022
SGH Insight
...EU energy ministers also agreed as we had expected to task the Commission to develop a different price benchmark for LNG so that the sector can dump the volatile and no-longer-representative-of-reality Dutch Title Transfer Facility (TTF) that is linked to pipeline gas. That will take time too.

EU energy ministers are to meet in November to approve whatever the Commission produces on October 18th...

...There was still no agreement on Wednesday on introducing any price caps on gas — for all the reasons discussed in our last report.

And while it is unclear yet if any price caps will be presented as an option by the Commission on October 18 or not, we believe that option remains highly unlikely...

...On Wednesday, October 12, European Union energy ministers agreed that the European Commission should present on October 18 a proposal for joint natural gas purchases by the whole EU, just like the bloc did for COVID-19 vaccines, to avoid one EU country outbidding the others.
This is relatively low hanging fruit in political terms, although it does involve a change of heart by Germany and the Netherlands, whose governments some time ago did not support joint purchases as they believed they were in good position to negotiate deals and pay what would be needed if necessary to keep their industries running.
The joint buying, however, would not start before mid-2023, the ministers agreed, so it is not an imminent measure, even if agreed sooner.

Joint Issuance
Despite press reports to the contrary, the idea of new, jointly issued EU debt to deal with the energy crisis does not seem to be happening for now.
The calls for new joint debt issuance have come largely from the Commission and given that it was French and Italian commissioners calling for it, one might reasonably suspect these had the blessing of Paris and Rome. But there is still strong pushback from Germany, and the usual group of fiscally conservative northern countries hiding behind Berlin.
The German case is simple and remains that there is still a lot of unused money from the recovery fund and the RePowerEU project that could finance whatever is needed, and there is therefore no point in borrowing more if the EU has not used what it has.
German officials choose to highlight the bigger figure of 600 billion euros still unspent from the EU recovery plan to make that case – which is the amount of money that has yet to be paid out from the recovery fund since actual disbursements so far have amounted to only around 200 billion euros...

Market Validation
Reuters 10/20/22

European Union leaders ended another debate on the bloc's response to the energy crunch without agreement on whether to cap gas prices, deciding in the early hours of Friday morning to keep examining options to put a ceiling on costs.

Bloomberg 10/17/22

The European Union’s executive arm plans to
propose a mechanism to curb price volatility on the bloc’s
biggest gas marketplace and prevent extreme price spikes in
derivatives trading to rein in the region’s energy crisis.
The temporary mechanism designed by the European Commission
would impose a dynamic price limit for transactions on the Dutch
Title Transfer Facility, whose main index is the benchmark for
all gas traded on the continent.
“This will help avoid extreme volatility and price hikes,
as well as speculation which could lead to difficulties in the
supply of natural gas to some member states,” the commission
said in a draft document seen by Bloomberg News.
The EU executive arm has a policy of not commenting on
documents that haven’t been published and the draft may still
change before adoption scheduled for Tuesday. In the next step,
the package will be discussed by EU leaders at their summit on
Oct. 20-21 in Brussels.
The package of measures would also include a temporary
intra-day price spike cap mechanism to avoid extreme volatility
in energy derivative markets, according to the draft. The aim is
to “ensure sounder price formation mechanism,“ protecting the
region’s energy companies from large spikes and helping them
secure supply in the medium term.

Bloomberg 10/18/22

The commission’s plan will be discussed by EU leaders at a
summit on Oct. 20-21 in Brussels. They may endorse a plan to
“explore a temporary dynamic price corridor on natural gas” that
would be implemented before a new LNG index is in place and are
likely to support joint gas purchases, according to a draft
political statement by the heads of government seen by Bloomberg
News. In the next step, energy ministers will debate the
specifics at a gathering in Luxembourg on Oct. 25.

The common purchase platform would coordinate the filling
of gas reserves. If storage supplies are depleted at the end of
this winter, meeting the 90% filling goal by November 2023 may
be more difficult next winter, according to the commission. The
plan is to mandate member states to jointly purchase enough gas
to account for at least 15% of their storage and allow companies
to form a European consortium to negotiate long-term contracts.
Russian supply sources would be excluded from participation.

The package will also offer tools for member states to use
state aid to mitigate the impact of high energy crisis on
companies and households, with member states offered the
possibility to use as much as €40 billion from the bloc’s
cohesion funds. To boost liquidity in energy markets, the
commission will propose increasing the clearing threshold for
non-financial counter parties to €4 billion and broadening the
list of eligible assets that could be used as collateral for one
Read Full Report
October 13, 2022
SGH Insight
...The 19th Communist Party of China Central Committee concluded its seventh plenary session in Beijing on Wednesday afternoon, local time (October 12).
Xi Jinping Thought Through 2049
As we have written before, the seventh plenum decided to submit the draft amendment to the CPC Constitution to the 20th Central Committee emphasizing “Comrade Xi Jinping” as a “well-deserved” “people’s leader,” and to explicitly write into the CPC Constitution the statement of “Two Affirmations” that says: The Party has established Comrade Xi Jinping’s core position on the Party Central Committee and in the Party as a whole and has defined the guiding role of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era...
Market Validation
Bloomberg 10/20/22

President Xi Jinping has accumulated so many
titles he’s been called the Chairman of Everything. But one
gaining traction among Communist Party elites is raising
concerns of a Mao Zedong-style personality cult.
Lingxiu, or “leader,” is a revered title of praise
previously reserved for Mao, the founder of the People’s
Republic, who was referred to as “the great leader” when the
Cultural Revolution started in 1966. While party officials and
state media have occasionally bestowed the title on Xi in the
past few years -- in the form of renmin lingxiu, or “people’s
leader” -- this week has seen more cadres using the term,
including at least two Politburo members.
Beijing party chief Cai Qi, a close ally of Xi, said Sunday
afternoon that the past decade has proven the Chinese president
is the “people’s leader who has heartfelt love from us.” Wang
Chen, a senior lawmaker, also used the phrase to extol Xi during
a discussion of the Hubei province delegation on Monday morning.
“General Secretary Xi Jinping is the outstanding figure of
our great era, the people’s leader that all people look up to,”
Tian Peiyan, deputy head of the Central Committee’s Policy
Research Office, told a press briefing Monday on the sidelines
of the party congress, at which Xi is expected to secure a third
term in office.

Read Full Report
October 12, 2022
SGH Insight
...We think the more hawkish FOMC participants have the upper hand in these arguments. After so many missed predictions that inflation would soon decelerate, the doves have an uphill battle when arguing for a pause ahead of sufficiently supportive data. But the more restrictive policy becomes, the bolder the doves will become.

Bottom Line: The SEP-implied terminal rate is as little as three meetings away. It is right on top of us. And the Fed will step up the discussion of slowing the pace from 75bp to 50bp, as that too is in the SEP. There will be a push to find a place to pause even if inflation remains elevated. We saw that on display this week. Ultimately though we think the more hawkish FOMC participants will continue to argue that the Fed needs to maintain upward pressure on rates until the data gives up something in the form of sustained softer inflation or weaker labor market outcomes. There is a path to reaching the terminal rate in January, although we think the data won’t allow for that and the hawks will continue to drive policy rates above the current SEP-implied terminal rate...
Market Validation
Bloomberg 10/13/22

Treasury Yields, Dollar Jump on Hot CPI
Treasury yields jumped across the curve, led by the short-end, after US CPI came in hotter than expected. The dollar shot up and erased earlier losses.

Bloomberg -- Traders are now betting the Fed will get even more aggressive than it set out to. Overnight index swaps for March 2023 surged to 4.92%.
(H/t Edward Bolingbroke)
That’s a dramatic shift from just two weeks ago, when investors were betting the Fed won’t even get to its 4.6% median dot plot for 2023.
Read Full Report
October 10, 2022
SGH Insight
...The Fed continues to keep us focused on the current SEP-implied terminal rate. Buried inside that direction is an implied step down in the pace of rate hikes. Eventually the Fed will need to find a time to start gliding to the terminal rate, but the July meeting was too early and left market participants with too little direction on the Fed’s reaction function. After the third 75bp rate hike in September and a fourth in November, rates will be high enough that the Fed can more credibly tell a policy lags/two-sided risks type of story. Still, at some point the data needs to cooperate before the Fed can have any real confidence that the terminal rate is in sight...
Market Validation

FOMC Minutes
Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action. Several participants underlined the need to maintain a restrictive stance for as long as necessary, with a couple of these participants stressing that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation. Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2 percent. A few of these participants noted that this possibility was heightened by factors beyond the Committee's actions, including the tightening of monetary policy stances abroad and the weakening global economic outlook, that were also likely to restrain domestic economic activity in the period ahead.
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October 06, 2022
SGH Insight
...So, having already tightened 250bp since May, the RBA broke ranks with its global peers this week by delivering a smaller rate hike than expected, and instead pitched its cash rate at 2.6%, right around the so-called neutral rate (which neither stimulates or tightens conditions)...
Market Validation
Bloomberg 10/12/22

Australia’s neutral interest rate is probably at least 2.5%, a senior Reserve Bank official said, while adding that the level is more of an aid for policy than a goal to achieve.
RBA Assistant Governor Luci Ellis made the estimate in a speech in Sydney on Wednesday, seeking to shine a light on the central bank’s modeling of the theoretical level where policy neither stimulates or restrains demand.
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October 03, 2022
SGH Insight
...Worse though is that the BLS revised the series higher such that if core inflation continues at the average pace of the last 6 months, 0.38%, it will end the year at 4.9% compared to the 2022 forecast of 4.5% in the Fed’s most recent SEP. This suggests that the underlying momentum in the inflation data heading into 2023 will be higher than the Fed anticipated just a couple of weeks ago, and raises the risk that policy rates will climb above the 4.5-4.75% median dot in the SEP...

Market Validation
Bloomberg 10/13/22

Treasury Yields, Dollar Jump on Hot CPI
Treasury yields jumped across the curve, led by the short-end, after US CPI came in hotter than expected. The dollar shot up and erased earlier losses.

Bloomberg -- Traders are now betting the Fed will get even more aggressive than it set out to. Overnight index swaps for March 2023 surged to 4.92%.
(H/t Edward Bolingbroke)
That’s a dramatic shift from just two weeks ago, when investors were betting the Fed won’t even get to its 4.6% median dot plot for 2023.
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September 30, 2022
SGH Insight
...QT and Balance Sheet Discussions

Putting it all together, the first meeting of 2023 will be the point at which the ECB, having crossed into some sort of neutral policy zone, will as suggested by ECB President Christine Lagarde in a speech earlier this week then decide on the appropriate mix of additional interest rate hikes and balance sheet reduction.
With quantitative tightening as a major policy decision now looming on the horizon, technical work is underway already to map out feasible options, and the Governing Council will start these discussions at the upcoming, October meeting...
Market Validation
Bloomberg 10/12/22

European Central Bank policy makers discussed reducing the size of the institution’s balance sheet at meeting last week, according to Luxembourg’s Gaston Reinesch.

“The Governing Council discussed the merits of its instruments, including interest rate increases and downward balance sheet adjustments,” he said in a blog post published Wednesday. “The pace and schedule of the balance sheet reduction, which will be data-dependent, will be determined in due course.”
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September 26, 2022
SGH Insight
The Fed will retain a hawkish posture until the data breaks in favor of sharply lower, and sustainable, job growth or inflation. We think it is literally impossible to get compelling evidence that the Fed is on a path to price stability by the time of the November FOMC meeting; even getting such evidence by the December meeting feels like something of a stretch. And we can’t emphasize enough how important it is that we see such data before we can expect the Fed to pivot to a meaningfully more dovish stance. It is simply the case that any more dovish voices within the Fed have been proved wrong time and time again during this cycle and those voices can’t gain any traction at this juncture with theories alone. It needs to be hard evidence.
Market Validation
10/6/22 The Economic Outlook with a Look at the Housing Market

Governor Christopher J. Waller

Before the next meeting on November 1–2, there is not going to be a lot of new data to cause a big adjustment to how I see inflation, employment, and the rest of the economy holding up. We will get September payroll employment data tomorrow, and CPI and PCE inflation reports later this month. I don't think that this extent of data is likely to be sufficient to significantly alter my view of the economy, and I expect most policymakers will feel the same way. I imagine we will have a very thoughtful discussion about the pace of tightening at our next meeting.
So, as of today, I believe the stance of monetary policy is slightly restrictive, and we are starting to see some adjustment to excess demand in interest-sensitive sectors like housing. But more needs to be done to bring inflation down meaningfully and persistently. I anticipate additional rate hikes into early next year, and I will be watching the data carefully to decide the appropriate pace of tightening as we continue to move into more restrictive territory.
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September 21, 2022
SGH Insight
...Worse though is that the BLS revised the series higher such that if core inflation continues at the average pace of the last 6 months, 0.38%, it will end the year at 4.9% compared to the 2022 forecast of 4.5% in the Fed’s most recent SEP. This suggests that the underlying momentum in the inflation data heading into 2023 will be higher than the Fed anticipated just a couple of weeks ago, and raises the risk that policy rates will climb above the 4.5-4.75% median dot in the SEP...

Market Validation
Bloomberg 10/13/22

Treasury Yields, Dollar Jump on Hot CPI
Treasury yields jumped across the curve, led by the short-end, after US CPI came in hotter than expected. The dollar shot up and erased earlier losses.

Bloomberg -- Traders are now betting the Fed will get even more aggressive than it set out to. Overnight index swaps for March 2023 surged to 4.92%.
(H/t Edward Bolingbroke)
That’s a dramatic shift from just two weeks ago, when investors were betting the Fed won’t even get to its 4.6% median dot plot for 2023.
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September 20, 2022
SGH Insight
...Asked and Answered

Final thoughts heading in the FOMC meeting, in Q&A format.

Why not just pull the trigger on a 100bp rate hike?

Great question, if you know you are still some distance from where you are going, why not just step up the pace? And wouldn’t a surprise hike be the best way to send a hawkish message? And doesn’t the Fed keep falling behind the curve, so isn’t this a chance to finally make some real progress on catching up to the curve? All these points are accurate, and it’s why we can’t say there is no risk of 100bp this week.

Perhaps the best argument for a 100bp is that this meeting mirrors the choices the Fed faced in November 1994 when then-Chair Alan Greenspan pushed the option of 75bp over 50bp to surprise on the hawkish side.

But Greenspan didn’t have the Summary of Economic Projections to bolster the Fed’s messaging with forward guidance. The communications structure is much more sophisticated now and will be unmitigatedly hawkish. So we still think the Fed opts for 75bp because it already passed on the bigger hike once in July, the last CPI number only tells us that inflation is not decelerating, and a number of FOMC participants were leaning toward 50bp ahead of Federal Reserve Chair Jerome Powell’s Jackson Hole speech which suggests it might be difficult to get a consensus on 100bp. A 100bp hike also aggravates the problem of the step down, the Fed doesn’t like to surprise the markets and induce additional volatility, it really doesn’t know where it’s going despite the SEP, and the Fed probably believes it needs some space to keep hiking until inflation softens...

...Will the Fed really raise the terminal rates 100bp in the SEP?

As we wrote this week, we think a sizeable increase in the terminal dot is the logical conclusion of normalizing 75bp rate hikes, but this is an aggressively hawkish view and would be a big lift for FOMC participants to pencil in. Repeating what we said yesterday, we think the risk for the dots is on the upside of the 50bp minimum increase in the terminal rate that we could expect. It’s probably too hawkish to expect more than a 75bp increase in the terminal rate even if anything less indicates the Fed anticipates the cycle is almost over...

...Will the Fed raise the estimate of the longer-run policy rate?

We heard this question frequently from clients last week. The general view, like we have written, is that the Fed’s estimate of the longer-run rate is an anchor on the long end of the yield curve, and rates can really move higher if the Fed was to cut ties with that anchor.

With the 10-year treasury yield now well above 2.5% and the economy still chugging along, there appears to be some reason to think an upward revision should be considered:

That said, we have yet to hear a Fed speaker say they are revising up their estimate of the long-run real neutral rate. I think the sense is that the factors that grind out an approximately 0.5% real neutral rate have not changed since the pandemic, and consequently it would be premature to raise the estimates.

In my opinion, the potential to raise this estimate is an upside risk for yields, but I am not seeing it just yet. We will keep shaking this tree. Personally, I would very much like to see what happens if they stopped trying to make this estimate...

...What is the terminal rate in this cycle?

I have no defined sense yet of the terminal rate, although I think the odds favor more than 5% and not less than 4.5%. Traditional rules say the Fed is still behind the curve. This is true with even generous interpretations of traditional rules. St. Louis Federal Reserve President James Bullard presented a minimalist Taylor rule in May, concluding the appropriate policy rate at the time was 3.63%. The same calculation now yields 4.5%. But this is an extremely generous rule. It assumes the real neutral rate is -0.5%, compared to the SEP estimate of 0.5%. Making that change alone pushes the appropriate policy rate to 5.5%, and that still might not be enough given that Bullard assigns no impact from unemployment lower than its natural rate. We could be a long, long way from the appropriate policy rate which means that policy remains accommodative and thus the lagged impact of policy is still stimulative. Let that sink in...

Market Validation
Bloomberg 9/21/22

Fed Delivers Third-Straight Big Hike, Sees More Increases Ahead
Federal Reserve officials raised interest rates by 75 basis points for the third consecutive time and forecast they would reach 4.6% in 2023, stepping up their fight to curb inflation that’s persisted near the highest levels since the 1980s.
In a statement Wednesday following a two-day meeting in Washington, the Federal Open Market Committee repeated that it “is highly attentive to inflation risks.” The central bank also reiterated it “anticipates that ongoing increases in the target range will be appropriate,” and “is strongly committed to returning inflation to its 2% objective.”
Chair Jerome Powell will hold a press conference at 2:30 p.m.
The decision, which was unanimous, takes the target range for the benchmark federal funds rate to 3% to 3.25% -- the highest level since before the 2008 financial crisis, and up from near zero at the start of this year.

FOMC Sees Longer-Run Median Fed Funds Rate at 2.5%

Fed Longer-Run Median Fed Funds Rate at 2.5%; prior median longer-run Federal funds rate 2.5%
Longer run Fed funds median at 2.5% compares to previous forecast of 2.5%
2022 median Fed funds 4.4% vs 3.4%
2023 median Fed funds 4.6% vs 3.8%
2024 median Fed funds 3.9% vs 3.4%
2025 median Fed funds 2.9%
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