Highlights

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.

2022
March 02, 2022
SGH Insight
Powell Sticks With the Hawkish Script
As we thought, Federal Reserve Chair Jerome Powell confirmed that the Fed is leaning toward beginning the rate hike cycle this month with a 25bp rate hike. The invasion of Ukraine ended debate on the subject. Still, the Fed retains the option to move in 50bp increments in later months. More important is that the Fed remains committed to a series of rate hikes, meaning that the Fed has not backed down from its hawkish pivot. It’s only a matter of time before the Fed explicitly states an expectation that rates rise above neutral.
Powell was unusually clear with his expectation for the March meeting:
I do think it will be appropriate to raise our target range for our funds rate at the March meeting in a couple of weeks, and I’m inclined to propose and support a 25 basis point rate hike.
As we have said, given the diversity of opinions within the Fed on this issue, the decision was always going to come down to what Powell wants, and now we know for certain. Maybe the outcome would have been different in the absence of the Ukraine war, but that is neither here nor there at this point. That does not mean all rate hikes will be 25bp after the first meeting:
Those of us on the committee have an expectation that inflation will peak and begin to come down this year. And to the extent inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by — by raising the federal funds rate by more than 25 basis point, at a meeting or meetings.
That’s hawkish talk. It opens the door to as much as 125bp of tightening by midyear if inflation continues to come in high. Realistically, the thing about that is we know inflation will come in high. I think the Fed knows that too; the inflation forecast will be raised again in this next SEP. This gives rise to our belief that not only is it likely rate hikes will be frontloaded, there are also upside risks to our expectation of 175bp of tightening this year. That seemed like a lot a few weeks ago, but the inflation situation keeps getting further ahead of the Fed.
Market Validation
Bloomberg 3/18/22

After raising interest rates by a quarter point and
signaling six more increases this year, Powell told reporters
that inflation is too high, the labor market is over-heated and
price stability is a “pre-condition” for the U.S central bank as
it tackles the hottest price pressures in 40 years.

Policy makers voted 8-1 to lift their key rate to a target
range of 0.25% to 0.5% after two years of holding borrowing
costs near zero to insulate the economy from the pandemic. They
forecast a sequence of rate hikes, finishing this year at 1.9%
and then to about 2.8% by the end of 2023, which would be
considered restrictive to growth.

Seven policy makers want an even faster pace of increases
this year, which raises the prospect of a half-point move in
future. Indeed, St. Louis Fed President James Bullard dissented
at this meeting in favor of such an step.
Read full report
March 01, 2022
SGH Insight
As to Beijing, we share below some comments in private by senior officials. We have edited out their blistering criticism of Washington and of US President Joseph Biden’s handling of the crisis, with no such criticism directed at Russia’s Vladimir Putin.

“China must stick to its inherent position on the Ukraine crisis. Following their secret phone talks on Monday night (February 21), President Xi Jinping and President Putin had another phone conversation on Friday (February 25). The immediate release of the Xi-Putin phone talks by both sides was intended to send a clear and strong signal: Sino-Russian relations will not be harmed by the Ukraine crisis; China respects the territorial integrity of all countries, including Ukraine; China supports Russia’s concerns about five rounds of NATO expansion; the US is behind the Ukraine crisis; China will firmly implement the China-Russia Joint Statement, and will support and help Russia deal with sanctions from the West in economy, finance, trade, high-tech and other sectors.”

Regarding the sanctions on Russia:
“Vladimir Putin is the toughest Russian leaders since Stalin. Putin and Russia will certainly retaliate, and the degree of retaliation will be unprecedented.”

“Russia has $640 billion in foreign exchange reserves right now. Also, Russia’s vast holdings of gold and foreign currencies could be used to help offset the impact of sanctions. [The PBoC] estimates that Russia holds about $1.1 trillion of liquid wealth, and a large share of that is held in US dollars, even after the country sold all its US Treasury holdings in 2018. Russia’s central bank and private sector are holding $250 billion in foreign exchange swaps and $130-150 billion in deposits at foreign banks – enough to disrupt financial markets if reserves are frozen and Moscow is forced to suddenly move them due to sanctions.”
Market Validation
Business Insider 4/19/22

China says it'll 'strengthen strategic cooperation' with Russia no matter what

China will "strengthen strategic coordination" with Russia no matter what, the Chinese Foreign Ministry said.

China's Vice Foreign Minister Le Yucheng made the remark to the Russian ambassador to China Andrey Denisov, CNN reported.
"No matter how the international landscape may change, China will continue to strengthen strategic coordination with Russia," Yucheng said.

China will "strengthen strategic coordination" with Russia no matter what, the Chinese Foreign Ministry said on Tuesday as Moscow continues its weeks-long unprovoked invasion of Ukraine.

The Chinese Foreign Ministry said in a statement on Tuesday that China's Vice Foreign Minister Le Yucheng made the remark to the Russian ambassador to China Andrey Denisov during a meeting on Monday, CNN reported.

"No matter how the international landscape may change, China will continue to strengthen strategic coordination with Russia to achieve win-win cooperation, jointly safeguard our common interests and promote the building of a new type of international relations and a community with a shared future for mankind," Yucheng said, according to CNN, which cited the statement.
Read full report
February 25, 2022
SGH Insight
Momentum is building across the European Union to cut Russia from the SWIFT payments system, the “nuclear” option for the financial sanctioning and isolation of Moscow.

Resistance from Germany, Italy, Austria, and Hungary, the EU member states with the closest commercial ties to Moscow, seems to be easing, but it is still there.

The European Central Bank and European Commission are at this moment preparing an analysis of what removing Russia from SWIFT would likely entail, and what the consequences would be for EU countries, which is to be ready within hours.

That will be a significant step forward. The goal is to present this analysis to EU governments as soon as possible so that they can in turn make an informed decision.

Market Validation
Bloomberg 2/27/22

The euro slid and the yen rose Monday amid
heightened market uncertainty after Western nations over the
weekend unveiled harsher sanctions on Russia for the invasion of
Ukraine, including against its central bank.
The euro shed about 1% against the dollar on worries about
risks for Europe’s economy, while the yen -- a traditional haven
in times of stress -- advanced some 0.2%. Commodity-linked
currencies and the pound declined. Bitcoin, the world’s largest
cryptocurrency, dropped below $38,000.
Equity futures for Japan, Australia and Hong Kong climbed
earlier, reflecting a Wall Street rebound Friday, but the fresh
penalties since then have hurt sentiment. Investors are
anxiously awaiting the start of trading in equities, bonds, gold
and commodities such as oil, with Brent still near $100 a
barrel.
The stricter penalties further separate commodity-rich
Russia from global finance by seeking to prevent its central
bank from using foreign reserves to undermine sanctions. They
also exclude some Russian lenders from the SWIFT messaging
system that underpins trillions of dollars worth of
transactions.

Read full report
February 10, 2022
SGH Insight
Deeply Behind the Curve
The Fed is deeply behind the curve on inflation. There is no other story at this point. Our baseline outlook is the equivalent of seven 25bp rate hikes this year. If it waits until March, the Fed will kick off this cycle with a 50bp hike and justify it to open a subsequent meeting for quantitative tightening.
Market Validation
Bloomberg 2/11/22

Traders Pricing Seven Fed Hikes This Year as Global Bonds Tumble

Global bond yields soared as traders wagered
that the Federal Reserve will raise policy rates by 175 basis
points by the end of the year, even as officials pushed back
against expectations of a super-sized hike next month.
Overnight index swaps on Friday showed traders expect the
Fed’s main rate to rise to 1.84% after the December meeting,
from the effective rate of 0.08%.

Read full report
February 09, 2022
SGH Insight
Thoughts Ahead of CPI Number
The BLS releases the January CPI report tomorrow. Wall Street expects core-CPI inflation to be at 0.5%, consistent with the 0.45% prediction from the Cleveland Fed inflation tracking numbers. This will be an influential report given the Fed has us primed to watch the near-term inflation numbers to gauge the direction of policy. Some last-minute inflation thoughts heading into this meeting:
1. 50bp? Inflation at or above expectations will likely trigger market participants to increase probabilities of a 50bp rate hike in March. The Fed has set these dynamics in motion by not dismissing outright the idea of 50bp. If markets price in 50bp then the Fed will need to meet it or there will be an effective easing of monetary policy as market participants adjust to what will be perceived as a less-hawkish reaction function.
Market Validation
Bloomberg 2/10/22

Fed Hike Premium Ramps Up as Six Rate Hikes Priced for This Year

Fed-dated OIS swaps have quickly repriced across the front-end, showing six full 25bp rate hikes priced into the December FOMC in the aftermath of stronger-than-expected January CPI data.
While pricing in six 25bp rate hikes for the December meeting, swaps also briefly priced a 50bp rate hike for the March FOMC as a 50/50 chance -- 100bp, or four 25bp rate rises remain priced into the July meeting
Read full report
February 07, 2022
SGH Insight
Considering that we already anticipated the Fed would hike in the March, May, and June meetings with high probability that one of those would be 50bp, the Fed will be moving in our direction. The minimum number of rate hikes we see in the first half of the year is 75bp. There is plenty of room for upside risk even in the near term. As we argued last week, positioning policy to address higher than anticipated inflation argues for three 50bp rate hikes.
Market Validation
Bloomberg 2/10/22

Fed Swaps Show a Full Percentage Point of Hikes by July

Money markets are betting on one percentage point of Federal Reserve rate hikes by July after the latest U.S. inflation figures for January came in hotter than expected.
Equivalent to a 25-basis-point increase at each of the next four policy meetings, odds are also swirling that the Fed will deliver the largest increase to borrowing costs since the beginning of the century next month. The chances of a 50-basis-point hike in March were briefly priced at more than one-in-two following the inflation data
Read full report
February 03, 2022
SGH Insight
But the real movement was in policy communications, where we had expected the ECB would not definitively rule out 2022 hikes, which would keep markets priced for a full hike by Q4 2022. Lagarde went significantly further than that, and in effect completely tossed out the ECB’s rapidly eroding “base case” scenario of 2023 rate hikes today.

Lagarde did repeat the ECB’s commitment to its sequencing of an end to the Asset Purchase Program first (“shortly”) before hiking rates. But that commitment, as run by some financial newswires, was far from headline news. The real headline is that President Lagarde has all but explicitly opened the door to ending the APP program early once it reassesses the data in March and June.

We will venture to suggest that will translate to an end to the APP bond purchase program in Q4 of 2022 now at the very latest (this was our base case before) – with a more likely base case now of a Q3 end to bond purchases, and liftoff to follow “shortly” after.
Market Validation
Bloomberg 2/18/22

ECB Officials Edge Toward 2022 Rate Hike to Stem Inflation
Debate about ending QE, a prerequisite for liftoff, has begun
Policy makers concerned about widening government bond spreads

More European Central Bank officials are conceding that interest rates will likely need to rise late this year in the face of a stronger inflation outlook.

A consensus is emerging before the March 10 policy meeting to set September as the end-date for asset purchases, according to people familiar with the situation who asked not to be identified as the discussions are private.
Current ECB guidance states bond-buying will continue until “shortly before” rates are increased. That makes December the most likely month for liftoff, the people said, with October considered too soon and policy makers not meeting in November.

Officials stress that any decision will depend on incoming data and forecasts. An ECB spokesperson declined to comment.

Read full report
February 03, 2022
SGH Insight
More to the point, after attending the opening ceremony of the Beijing Winter Olympics, Xi and Putin will witness the signing of nearly 20 contracts and documents between China and Russia, including on financial, energy, space, and military cooperation, and on a new Sino-Russian natural gas pipeline.

Regarding tensions with Ukraine and the West, our understanding is that Xi will give China’s formal backing to Putin’s drive to “develop a legally binding security” agreement for Russia with NATO, something which China has not done yet to date.

In a related move, our understanding is that the two sides will also sign a document on the construction of a Sino-Russian West-Route Natural Gas pipeline (the Soyuz Vostok gas pipeline construction project).
Xi apparently agreed with Putin in principle to build this second Sino-Russian gas pipeline with the stated intention of supporting Putin in his attempts to extract security demands from the United States.

This pipeline will pass across Mongolia and will be an extension of the “Power of Siberia-2” gas pipeline. The full capacity of the 4,000-kilometer pipeline is expected to be 50 billion cubic meters per annum of natural gas, about 1.3 times the capacity of the Sino-Russian East-Route Natural Gas pipeline, and it is expected to be completed by 2025 at the earliest.
Market Validation
Bloomberg 2/4/22

Russia forged new long-term supply deals with China as the Kremlin aims to strengthen ties with the Asian nation amid souring relations with the West.

Energy giants Gazprom PJSC and Rosneft PJSC signed agreements with the world’s largest energy consumer as President Vladimir Putin met his Chinese counterpart Xi Jinping in Beijing ahead of the Winter Olympics. The two leaders are drawing their nations closer together, united by political, military and economic frictions with Europe and the U.S.

“Friendship between the two states has no limits, there are no ‘forbidden’ areas of cooperation,” the Kremlin said in a statement following the meeting.
During Putin’s visit to Beijing, Gazprom signed its second long-term gas deal with China National Petroleum Corp. Under the agreement, the producer will deliver 10 billion cubic meters per year over 25 years via a new pipeline from Russia’s Far East.

“Delivering gas to China’s northeastern tip makes this project strategically attractive for China, as the only real alternative supply would be more expensive liquefied natural gas,” BCS Global Markets analyst Ron Smith said in an emailed note following the agreement.
The deal also has a strategic importance for Gazprom, which expects gas demand in China to grow by almost 50% to 2030 as consumption in Europe, currently its largest market, shrinks by more than 5%.

Russia wins Chinese backing in showdown over Ukraine

Russia won China’s backing in its showdown with the West over Ukraine today, as Beijing agreed with Moscow that the US-led Nato military alliance should not admit new members.

The demand for Nato to stop expanding came after a meeting between Russian President Vladimir Putin and Chinese counterpart Xi Jinping in Beijing that saw Putin hail the two countries’ “dignified relationship”.

In a long strategy document, Moscow and Beijing hit out at what they said was Washington’s destabilising role in global security.

“The parties oppose the further expansion of Nato and call on the North Atlantic Alliance to abandon the ideological approaches of the Cold War era,” the document read, urging respect for the “sovereignty, security and interests of other countries.”

The call echoes demands from Russia that have been at the centre of weeks of intensive negotiations between Moscow and the West, under the shadow of a potential conflict.

Read full report
January 28, 2022
SGH Insight
Having jacked up their 2022 inflation forecasts already last December, these continued elevated inflation readings may not move the needle much for 2022 when the ECB reassesses at its next quarterly review on March 10. At least that is the current thinking.
But for the more critical policy horizon, the ECB will raise its 1.8% inflation forecast in March for 2023 and 2024, already a whisker away from the ECB’s 2% target (more on this below), and ECB communications are already hinting at this shift. That will finally create room for the start to the discussion of a normalization cycle from the still deeply negative policy interest rates.

With that in mind, and continued upside pressure on 2022, it is hard to see markets removing the optionality of a Q4 end to the APP program and a late Q4 rate hike, or for ECB officials to definitively rule that out, even as they continue to stick to their base case scenario. Conversely, under the ECB’s guidance and reaction function it is hard to envision a hike earlier than that, unless the inflation data goes seriously awry.

Most importantly, however, the ECB models also assumed powerful structural forces that for the past two decades have pulled underlying inflation around, if not frustratingly below, the 2% level.

But energy prices, in particular natural gas prices, have not just skyrocketed across the Eurozone, but remain stubbornly high, and are increasingly hard to simply “look through.” These elevated prices we are told are feeding through for example into fertilizer costs, which in turn fuel elevated food prices that could go on into next year. Perhaps even more importantly, they are also feeding into consumer price expectations.
Similarly, ECB officials appear less willing to completely look through what have been skyrocketing, and continued elevated, raw materials prices.

In the past, Euro area retail chains wielded considerable clout in dictating prices and absorbing temporary spikes in raw material prices. But in the words of one official, that is now “more or less over,” and the higher costs are being passed through to consumers. This official goes as far as to say the long period of too low inflation is now over, and the Eurozone is already back in the cycle of “regular inflation.”
Market Validation
Bloomberg 2/3/22

ECB Inflation Comments Escalate Stock Selloff

European stocks are getting hit by the stronger inflation comments by Christine Lagarde that are lifting the euro. The ECB president said risks to the inflation outlook are tilted to the upside and there’s unanimous concern about inflation data -- which unexpectedly hit a record on Wednesday.

The Stoxx 600 tumbled to a session low, now down about 1.3%. Pricey tech, which is sensitive to rising yields, leads declines, followed by travel and industrials, which are pressured by rising input costs. S&P 500 and Nasdaq 100 futures are also dropping to fresh lows, exacerbated by tech misery.

Traders are now betting on a 20bps ECB rate hike by September vs 10bps prior. European bonds have extended declines, led by Italian debt. The Italy 10y yield rises to almost 1.58%, highest since 2020.
Read full report
January 24, 2022
SGH Insight
Foaming the runway for a rate hike will be the key outcome of this week’s FOMC meeting. We anticipate the Fed will use this meeting to signal a March rate hike by declaring the full employment trigger has been or soon will be met. The Fed most likely will not end asset purchases faster than planned. Yes, continued asset purchases stands as a contradiction to the Fed’s planning to begin quantitative tightening soon after the first rate hike. That said, there is little to be gained by ending asset purchases early given that continued asset purchases do not interfere with a March rate hike.
Federal Reserve Chair Jerome Powell will use the press conference to reinforce the current policy narrative. The key element of that narrative is that inflation threatens the health of the job market if left unchecked. A second element of that narrative is that like high unemployment, elevated inflation has equity consequences. In order to ensure that inflation tracks back to target, the Fed needs to begin removing policy accommodation.
Powell likely won’t provide many new details about the Fed’s quantitative tightening plans. FOMC participants will discuss options for the balance sheet but likely won’t reach final conclusions. The Fed typically likes to discuss these kinds of policy decisions for a few meetings to help build a consensus. Powell will likely reiterate the broad outlines of the discussion as already revealed by other speakers and the minutes of the last meeting. Those conversations to date leave the impression that the Fed expects the balance sheet reduction will occur sooner, move faster, and go further than the last cycle.

Our expectation is that along with a rate hike in March, the Fed signals four rate hikes in the March SEP. The first two of those hikes, as well as quantitative tightening, are highly likely to occur. The incoming data will determine whether the Fed delivers an additional one, two, three, or more hikes after those early policy actions.
Market Validation
Policy Validation

Bloomberg 1/26/22

Federal Reserve Chair Jerome Powell said the central bank was ready to raise interest rates in March and didn’t rule out moving at every meeting to tackle the highest inflation in a generation.
“The committee is of a mind to raise the Fed funds rate at the March meeting” if conditions are there to do so, Powell told a virtual press conference on Wednesday, while noting that officials have not made any decisions about the path of policy because it needs to be “nimble.”
He was speaking after the Federal Open Market Committee concluded its two-day meeting with a statement that declared “it will soon be appropriate to raise the target range for the federal funds rate,” citing inflation well above its 2% target and a strong job market.
In a separate statement, the Fed said it expects the process of balance-sheet reduction will commence after it has begun raising rates. Powell said no decision was taken at this meeting on the pace of the runoff or when it would start.
Read full report
January 20, 2022
SGH Insight
Among the series of meetings that were held by China’s State Councilor and Foreign Minister Wang Yi with the foreign ministers of numerous middle eastern countries between January 10 and 15 in Wuxi, China, the most interesting perhaps for markets were his meetings with Saudi Arabia’s Faisal bin Farhan Al Saud on January 10, and with Iran’s Hossein Amir-Abdollahian on January 14.

In Wang’s meeting with Faisal, the two foreign ministers discussed China’s crude oil supplies, and agreed to hold a first ever China-Arab Summit in Riyadh in 2022 (see SGH 1/19/22, “China: Oil Imports and Mideast Politics”).
Our understanding is that the two foreign ministers also agreed to conduct a pilot scheme to promote the use of RMB/Riyal to settle bilateral payments “as soon as possible.” The goal, it was agreed, would be to ensure the partial settlement of crude oil transactions in RMB/Riyal, bypassing the US dollar, by 2025.
Market Validation
Dow Jones 3/15/22

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales

Saudi Arabia is in active talks with Beijing to price its some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar's dominance of the global petroleum market and mark another shift by the world's top crude exporter toward Asia.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.
The Saudis are angry over the U.S.'s lack of support for their intervention in the Yemen civil war, and over the Biden administration's attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China's currency.
Read full report
January 14, 2022
SGH Insight
On Monday, January 8, as per custom, nine economic departments submitted their respective estimates for China’s Q4 and full year 2021 GDP growth rates to the State Council before the release of the official figures this Sunday by the National Bureau of Statistics.
While these submissions don’t always translate into the final NBS figures, Monday’s estimates ranged between 7.9% and 8.2% for the full year 2021 GDP, clustered close to market expectations of about 8.0%. The Q4 2021 estimates ranged between 3.8% and 4.2%, also close to market expectations, but a bit higher than the 3.3% consensus published on Bloomberg that seems a bit of an outlier on the downside.
Officials in Beijing maintain that China’s economy remains “on solid ground” going into the new year, with many still expressing confidence that the economy will grow by more than 5.0% in 2022. That, at least, is the plan.
Market Validation
CNBC 1/16/22

China’s economy grew by 8.1% in 2021 as industrial production rose steadily through the end of the year and offset a drop off in retail sales, according to official data from China’s National Bureau of Statistics released Monday.

Fourth-quarter GDP rose by 4% from a year ago, according to the statistics bureau. That’s faster than the 3.6% increase forecast by a Reuters poll. For the full year, China economists expected an average of 8.4% growth in 2021, according to financial data provider Wind Information.
Read full report
January 13, 2022
SGH Insight
On Ending QE

Importantly, the Fed still has time to change the narrative before the blackout period. Given that the Fed will be discussing QT, it would be reasonable that ending QE immediately would also be discussed at the January FOMC meeting.

Market Validation
Bloomberg 1/14/22

Fed May Hike Rates 4 Times in 2022 on Price Pressure, Evans Says

The Federal Open Market Committee had a median of three interest-rate increases for this year, but it could be four if the data don’t improve quickly enough on inflation, Chicago Fed President Charles Evans says.
Asked whether the FOMC could decide at its January meeting to stop asset purchases earlier than March, he says: “I have to hear the arguments. I am not sure what additional data I have seen since December” would cause favoring a change at the January meeting. “We will have to go to the meeting and talk about it”
Read full report
January 12, 2022
SGH Insight
Bottom Line: Right now, there is nothing in the data that is stopping policy speculation from moving in a hawkish direction. Moreover, Fed speakers aren’t getting in the way of market participants moving in that direction. That does leave us a little nervous about some kind of pushback from Fed officials, but we see additional hawkish surprises as still more likely in that the Fed will add a fourth rate hike to the March SEP and the risks are rising that the Fed will need to come out of the gate with a 50bp hike.
Market Validation
Bloomberg 1/18/22

Traders Are Pricing Risk of First Half-Point Fed Hike Since 2000

Money markets are reflecting increased speculation that the Federal Reserve might opt for its first supersized boost to borrowing costs in more than two decades.
While a quarter-point increase is still the most likely scenario, swap markets are now pricing in more than 25 basis points of tightening by the end of March. With no move anticipated at this month’s meeting, this suggests traders are at least contemplating the possibility of a 50-basis-point move in March. The Fed hasn’t tightened that much in one shot since May 2000, although back then the central bank’s tightening cycle was already well underway.

Read full report
January 10, 2022
SGH Insight
In the near term, the Fed will be raising interest rates and initiating quantitative tightening. I continue to see chatter to the effect that the Fed is only talking hawkish so they don’t actually have to tighten policy. This is wrong. A March hike is basically a slam dunk and the only reason we can’t price it at 100% is the residual probability that something goes sideways over the next two months. Not only is a rate hike imminent, but quantitative tightening is soon to follow. Even former arch-dove San Francisco President Mary Daly agrees, via Bloomberg:
“I would prefer to adjust the policy rate gradually and move into balance-sheet reductions earlier than we did in the last cycle,” she said in a virtual panel discussion at the Allied Social Science Associations conference Friday. “I would not prefer to do it simultaneously,” she said, adding “you could imagine adjusting the balance sheet” after “one or two hikes.”
Most likely, the data is not going to influence this path in a dovish direction. The primary risk is that the Fed adds a fourth rate hike to the March SEP. That’s the direction the data is moving.
Market Validation
Dow Jones 1/10/22

Fed's Bullard: Four Interest Rate Rises in 2022 Now Appear Likely

Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank will need to move more aggressively on rate rises this year as it seeks to stem an inflation surge, amid a job market that could see the unemployment rate fall below 3% by the end of the year.
"We want to bring inflation under control in a way that does not disrupt the real economy, but we are also firm in our desire to get inflation to return to 2% over the medium term," Mr. Bullard said in a Wall Street Journal interview Wednesday.
He spoke just after the release of government data that showed the biggest increase in what consumers pay for goods and services since 1982, with the consumer-price index jumping by 7% in December, compared with the same month in 2020. He said the headline figure was higher than expected but consistent with his expectations, adding he sees price pressures easing over the course of the year toward a 3% reading on the personal-consumption expenditures price index.
To get there, Mr. Bullard, who holds a vote on the rate-setting Federal Open Market Committee this year, said a more hawkish path for monetary policy is needed relative to his recent expectations.
Whereas he recently believed the Fed would need to raise rates three times this year, "I actually now think we should maybe go to four hikes in 2022." He said it is important for the Fed to start raising rates "sooner rather than later" because pulling back on stimulus in the near term and doing so steadily reduces the risk of an even more aggressive path should inflation not moderate back toward the target.
Read full report
January 10, 2022
SGH Insight
The next big data release is the retail sales report. Wall Street is looking for a 0.2% gain in retail sales ex-autos but the Chicago Fed tracker anticipates a 1.3% decline:



The Chicago Fed number has been a good predictor of the direction of the miss relative to consensus.
Market Validation
Bloomberg 1/14/22

U.S. Retail Sales Slide Sharply as Inflation Weighs on Consumers

U.S. retail sales slumped in December by the most in 10 months, suggesting the fastest inflation in decades is taking a greater toll on consumers just as the nation confronts more coronavirus infections.
The value of overall purchases decreased 1.9%, after a revised 0.2% gain a month earlier, Commerce Department figures showed Friday. The figures aren’t adjusted for inflation, suggesting price-adjusted receipts were even weaker than the headline number.
The median estimate in a Bloomberg survey called for a 0.1% drop in overall retail sales from the prior month.
Read full report
January 05, 2022
SGH Insight
Altogether, this conversation indicates the Fed is considering going sooner, faster, and further with QT than in the last cycle. This makes sense if the Fed thinks it needs to unwind the balance sheet to open space to move in the next cycle. That said, it is odd (crazy?) that the Fed is having this discussion about needing to raise rates and initiate QT while it is still engaged in QE. And the fact that we are having this discussion while still buying asset suggests to me that the Fed is gearing up to begin QT soon. The deeper the Fed keeps going at this point – when there is no need for asset purchases and hasn’t been for quite some time – means it is going to have to get out sooner. I still like the idea of QT at the June meeting and rate hikes at the March, September, and December meetings with the risk of adding a rate hike in June and moving QT to May or July.
Market Validation
Bloomberg 1/11/22

The drumbeat for the Federal Reserve to
implement four quarter-point interest-rate hikes this year is
growing -- and with the speed that markets have been moving,
there’s a possibility that traders may soon look to protect
themselves against the risk of even faster tightening.
Swaps are already indicating the central bank’s target will
be 88 basis points higher by the end of this year -- seen by
many as a sign the market is baking in three hikes, plus the
possibility of a fourth in 2022 -- and momentum is building for
the first increase to take place as soon as March. With U.S.
inflation data ahead this week, as well as testimony from top
Fed officials, it could be just the beginning of a bigger
repricing.
Read full report
January 03, 2022
SGH Insight
All Focus on Q1 GDP
Sources continue to stress Q1 of 2022 as the key to ensuring China’s economy can grow above 5.0% or even 5.5% year on year in 2022.
At present, the top priority for governments from the central to local levels is to ensure stable economic growth, and a series of macroeconomic policies and measures will be introduced to stabilize economic growth specifically for Q1. Our understanding is that the goal of the State Council is to achieve economic growth of around 4.0% year on year in Q1.
If Beijing can manage a GDP growth rate of around 4.0% in Q1, it not only means that China’s GDP would likely reach 5.0% or more in 2022, but also that China’s “economic aggregate” would reach 120 trillion yuan in 2022, an increase of about 10 trillion yuan from 2021.
However, already cautious officials point to the challenge of even meeting the base effects of the 18.3 % GDP growth rate of 2021 Q1 and warn that it is not going to be easy to achieve their target of 4.0% year on year growth for Q1 of 2022.
The State Council will send 28 inspection teams and working groups to all 31 provincial-level regions from January 4 to inspect and guide the current economic work and sent 16 inspection teams already to locals between December 15 and 29.

Market Validation
Bloomberg 1/25/22

China’s provincial authorities are expecting
their economies to expand at least 5% this year, providing clues
on where the national government will set its growth target in
coming months.
All but one of the 31 provinces have now announced their
2022 growth goals, with Beijing city the lowest at above 5% and
the southern island of Hainan the highest at 9%. Local
authorities are generally more ambitious in setting objectives
than the central government, which usually publishes a target
for annual gross domestic product growth in March when the
National People’s Congress meets.
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January 03, 2022
SGH Insight
Our baseline is and has been that the Fed begins rate hikes in March. Persistent inflationary pressures in the context of a tight labor market pushed the Fed to accelerate its tapering plans and open up room to pull its first rate hike forward. And the signaling since has if anything confirmed our expectations. Coming out of the December FOMC meeting, Federal Reserve Chair Jerome Powell clearly said the Fed did not need space between the end of asset purchases and the beginning of rate hikes, implicitly putting March on the table. Federal Reserve Governor Christopher Waller explicitly stated that March was a “very likely outcome.” Realistically, the signaling is clear; the only thing standing in the way of a rate hike in March is Omicron.
Our baseline is three rate hikes in 2022 plus quantitative tightening. The Fed penciled in three rate hikes for 2022 in the December SEP. While it seems like the Fed should expect four rate hikes if it anticipates a March hike, I think it expects that one quarter will be used for scaling back the size of the balance sheet. Such quantitative tightening (QT) would reduce the number of rate hikes needed to stem inflationary pressures. Waller suggested that QT should begin by this summer. That suggests a possible timeline of rate hikes in March, September, and December, with QT in June.
The risks tilt toward four hikes in 2022. The Fed’s December SEP projections of 2.7% core inflation and 3.5% unemployment at the end of 2022 appear to be an attempt to finally get ahead of the inflation story. If inflation does not decelerate as expected, the Fed will feel under pressure to add a fourth rate hike. Given the expectation that inflation remains elevated in the near term, the Fed would likely not recognize this until the middle of the year. To be sure, there is a risk that the Fed needs to pull back on its rate hike expectations, but I think that outcome would be more likely if demand were to suffer such that unemployment unexpectedly began to rise. That said, there doesn’t appear to be a big risk of that outcome now. Either way, the situation will evolve as the data rolls in over the course of the year.
Market Validation
Bloomberg 1/5/22

Increasing conviction among investors that the Fed indeed will raise rates at least three times this year has driven up Treasury yields, with five-year rates hitting a pandemic-era high Tuesday. Markets are pricing in 63% odds of a rate hike in March.

Bloomberg 1/3/22

A jump in U.S. Treasury yields helped the dollar post its largest daily gain in nearly two months on Monday, signaling that the currency could extend last year’s rally as markets anticipate the Federal Reserve will initiate a cycle of interest-rate increases this year.
The Bloomberg Dollar Spot Index climbed 0.6% in the first trading session of 2022, erasing last week’s losses, amid an across-the-board selloff in Treasuries. That drop pushed 10-year yields up by as much as 10 basis points, the largest gain since early December.

Eurodollars continue to pressure lower, with the strip dropping as much as 12bp across blue-pack contracts (Mar25-Dec25) in an aggressive bear-steepening move. White-pack contracts outperform, although May liftoff remains priced with a total of three hikes for 2022 continuing to be expected.
Into the front-end selloff,2-year yields rise to 0.80% and highest since March 2020, while further out the 7-year yields rise over 10bp on the day; around 26bp of hikes are now priced into the May FOMC meeting with 77bp priced by end of the year -- or little over three full 25bp rises

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January 03, 2022
SGH Insight
Monetary policy in 2022 will be “prudent, flexible, and appropriate and give full play to both the aggregate and structural functions of monetary policy tools.”

The PBoC will become more proactive in bumping up support for the real economy. Monetary policy will be targeted to further beef up support for high-tech, small, and micro businesses, green development, and other key areas and weak links of the economy.

On the aggregate side, the PBoC will leverage multiple tools to keep liquidity reasonably ample, “strengthen the stability” of credit growth, and reduce the financing costs of enterprises while keeping it all at “an overall stable” level. The PBoC will also actively ramp up structural policy support.

Beijing’s aim is for new loans to reach about 20 trillion yuan in 2022. Officials continue to support expectations that the bank reserve ratio will be cut by another 0.5 percentage points in Q1, and if truly needed, the PBoC will not rule out lowering the one-year loan prime rate (LPR) rate in the next few months.
Market Validation
Bloomberg 1/4/22

PBOC Adopts New Loan Tools to Support Smaller Firms

China’s central bank adopts a new loan
support tool for smaller businesses from Jan. 1 through June
2023 to boost lending to smaller businesses, according to a
statement on PBOC website Jan. 1.
* PBOC will encourage local banks to increase loans to smaller
firms and cut costs, in order to ensure employment and stabilize
the economy
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