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June 26, 2023
SGH Insight
If You Don’t Have Time This Morning
We anticipate the Fed will raise rates again at the July FOMC meeting and think it likely that either growth or inflation won’t soften enough to prevent a hike at the Oct/Nov meeting. The Fed tends to remain hawkish for longer than market participants anticipate, and this will especially be the case given the costs of being wrong, again, on inflation.
Market Validation
Bloomberg 5/29/2023
Treasuries fell to fresh lows of the day after revised 1Q GDP numbers were revised higher, with a notable upward revision to personal consumption data. Some losses pared slightly after jobless claims printed lower than estimate for the week.
• Into the selloff, Treasuries curve flattened with front and belly of the curve leading the cheapening of yields in the aftermath of the data — 2s10s and 5s30s spreads were flatter by 2.5bp and 6bp on the day
• On outright basis, 2- to 7-year yields were higher by more than 10bp on the day
• Fed-dated OIS bid following the data with around 22bp of hike premium now priced for the July meeting; policy peak rose to around 5.42% for November FOMC vs 5.375% priced Wednesday close
• Euro-area bonds extended an earlier drop, following the move in the US; the yield on two-year German notes jumped as much as 7bps to 3.18%
Read Full Report
June 14, 2023
SGH Insight
More of a Skip Than a Pause

The FOMC passed on the opportunity to raise rates today, as expected, and issued a hawkish set of projections with a terminal rate of 5.625%, a full 50bp higher than the March projections. We take this projection at face value and are penciling in rate hikes at the July and Oct/Nov. meetings.
Market Validation
Bloomberg 6/16/ 2023

Treasury yields climbed Friday after two Federal Reserve officials echoed the message that additional interest-rate increases may prove necessary to curb inflation.
Short-maturity yields most sensitive to changes in Fed policy led the move, at one point rising more than 10 basis points. Fed Governor Christopher Waller and Richmond Fed President Thomas Barkin spoke two days after the US central bank opted to leave rates unchanged for the first time in more than a year, while also signaling it’s probably not done.
The two-year note’s yield rose as much as 13 basis points to 4.78%, short of Wednesday’s high near 4.80%. Longer-dated yields rose less, the 10-year note’s as much as 9 basis points. The Fed’s target range for its policy rate is 5%-5.25%.
Read Full Report
June 13, 2023
SGH Insight
CPI Report Supports Fed Skip
The CPI report doesn’t have enough juice to keep the Fed from holding policy rates steady when it’s two-day FOMC meeting concludes tomorrow. It’s sufficient, however, to keep the Fed’s focus on hiking again in July, making this meeting a skip rather than a pause. There’s a tension in the data between the measures of underlying inflation which reinforces my suspicion that it will be hard for market participants to price in a rate hike past July even if the Fed more explicitly adopts an “every other meeting” strategy.
Market Validation
Bloomberg 6/14/2023
Treasuries curve pivoted around a near unchanged 7-year sector on the day, in a flattening move that saw front- and belly yields cheaper and the long end richer on the day. Both curve and outright yields ended well off the day’s extreme levels that were reached in an aggressive bear flattening reaction to the Fed’s policy decision and update to summary of economic projections.
• The sharp post-Fed reaction was faded however over Fed Chair Powell’s press conference, following some downplaying of the central bank’s economic projections by saying no decision has been made for the next few meetings
• As swaps settled over the afternoon session, a policy peak of around 5.30% was priced for this year, still well below the Fed’s latest end of year projection of 5.625%
Read Full Report
June 05, 2023
SGH Insight
Fed leadership is going into this meeting looking to hold rates steady. A core group of hawks would like to convince the FOMC that it needs to keep pushing forward and while they still may be successful, they recognize that the best they might accomplish is billing this meeting as a “skip” rather than a “pause.” Making this credible will require clear communications via the statement, SEP, and press conference.

Market Validation
MT Newswires - 06/14/2023

The Federal Open Market Committee held its federal funds rate target range steady at 5% to 5.25%, but revisions to the Summary of Economic Projections suggest that further tightening is expected, the FOMC's statement Wednesday afternoon showed.

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June 01, 2023
SGH Insight
At the latest State Council Executive Meeting, Premier Li Qiang stated that the guiding role of government investment policy and incentives should be to effectively stimulate private investment. He called for a raft of policies to boost the healthy development of the real estate sector to be implemented, while boosting big-ticket consumption like automobiles and home appliances. Supportive policies including tax and fee cuts are still needed to extend the services sector recovery.
Market Validation
Bloomberg 6/2/23

China is working on a new basket of measures
to support the property market after existing policies failed to
sustain a rebound in the ailing sector, according to people
familiar with the matter.
Regulators are considering reducing the down payment in
some non-core neighborhoods of major cities, lowering agent
commissions on transactions, and further relaxing restrictions
for residential purchases under the guidance of the State
Council, the people said, asking not to be named because the
matter is private.
The government may also refine and extend some policies
laid out in the sweeping 16-point rescue package it rolled out
last year, the people added. The plans have yet to be finalized
and may be subject to change, according to the people.
Read Full Report
May 30, 2023
SGH Insight
A divided Fed is sleepwalking into another rate hike at the June FOMC meeting. Fed leadership has directed us to expect the FOMC will stand pat at this next meeting and bill the move as a skip not a pause, but market participants aren’t ready to buy that story. In public appearances, Fed hawks are running circles around the doves and the latter’s’ insistence that they remain data dependent isn’t helping them build a case for not hiking in June. If anything, the opposite is happening as the data reinforce the case for a rate hike.

Tuesday Morning Notes, 5/30/23
Bottom Line: If Fed presidents and Board members continue with the “there is a lot of data to consider between now and the June meeting” theme, market participants will follow that at face value. We should assume that if, as a result, the market assigns high odds to a June hike, the Fed will be forced to follow through. Maybe the doves get “lucky” and nonfarm payrolls prints negative and markets will price out a hike, but then maybe it gets priced back in after CPI. If the Fed hikes under that scenario, the story will be that the hawks overran the doves again. Alternatively, if leadership doesn’t want to take a chance on the data and wants to skip this meeting as part of a policy strategy, which I believe is the preferred option, it will need to put people out in the public to take control of the story. The natural person on the schedule for that is Jefferson. And I think if he owns the skip story, the Fed will tap the press on the shoulder to ensure a signal boost. Either way, as we have said, we don’t think the Fed is done hiking. If not June, then most likely later again this year.
Market Validation
The Financial Times 5/31/2023
A top official at the Federal Reserve said there was no “compelling” reason to wait before implementing another interest rate rise should economic data confirm that more must be done to bring US inflation under control. In an interview with the Financial Times, Loretta Mester, president of the Cleveland Fed, pushed back against recent suggestions from some policymakers who argued the US central bank should forego a rate rise at its next meeting in June. “I don’t really see a compelling reason to pause — meaning wait until you get more evidence to decide what to do,” she said. “I would see more of a compelling case for bringing [rates] up . . . and then holding for a while until you get less uncertain about where the economy is going.”

The agreement this weekend between the White House and Republican congressional leaders on the US borrowing limit “relieve[s] a big piece of uncertainty about the economy”, she added.

Bloomberg 5/31/203
Federal Reserve Governor Philip Jefferson signaled the central bank is inclined to keep interest rates steady at its next meeting in June to give policymakers more time to assess the economic outlook, but such a decision wouldn’t mean hikes are finished.

Philip Jefferson, governor of the US Federal Reserve.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Jefferson, recently nominated to be Fed vice chair, said Wednesday in an online presentation on financial stability and the economy. “Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.”

Jefferson’s speech pushes back against growing expectations by investors that the central bank would raise rates in June, with markets pricing in 69% odds of a hike at the June 13-14 meeting.

Read Full Report
May 24, 2023
SGH Insight
Threading the Needle
Bottom Line: Despite Powell’s guidance, we can’t say there is no chance the Fed will hike again in June. There likely will not be data to convince the hawks that the Fed shouldn’t hike but could be data that forces Powell back to the rate hike camp. But the consensus at the Fed is trying to look through the data, and Powell appears to be in that consensus. In response, the hawks are setting up a fallback position that sets up a rate hike in July. The stronger the data, the more likely they will be successful.
Market Validation
Bloomberg 5/25/2023

Traders fully priced in another quarter-point interest-rate increase by the Federal Reserve within the next two policy meetings and a more than one-in-two chance that hike could arrive as soon as next month.
The shift came as US yields rose, with the policy sensitive two-year rate rising nearly 15 basis points to 4.5%. That’s the highest level since early March, around the time when US bank failures roiled markets and spurred haven buying in government debt.
Front-end yields have moved higher for 10 straight trading sessions and the latest leg was fueled by increased optimism about a potential debt-ceiling deal and resilient economic data that could pave the way for additional Fed tightening.

Bloomberg 5/26/2023
Federal Reserve Bank of Cleveland President Loretta Mester said she wouldn’t rule out raising interest rates again next month after disappointing progress on inflation.
“Everything is on the table in June,” Mester, who doesn’t vote on rate decisions this year, said Friday in an interview on CNBC. “Inflation is still too high and it’s stubborn.”
Data released earlier Friday showed the personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose a faster-than-expected 0.4% in April and was up 4.4% from a year ago — more than double the central bank’s 2% target.
“The data that came in this morning suggests we have more work to do,” she said.
Mester repeated that she doesn’t think the economy is in a place where it’s equally probable that the next move in the fed funds rate could be an increase or decrease.

Read Full Report
May 17, 2023
SGH Insight
Challenging Fedspeak
This leads me to suspect this next meeting is really not about the data. Sure, maybe some blowout numbers can influence the debate either way, but this meeting is about the ability of the dovish contingent to persuade the Committee that it should pause on the back of the policy lags story. The Fed has been floating the policy lags for months, the now is highlighted by banking stress. It’s getting to be time to fish or cut bait with that story. Either stick with the hawkish position of waiting for the inflation data to roll over, which given that inflation is a lagging indicator raises the risk of a hard landing, or make a play at the soft-landing by pausing while inflation remains elevated. That’s the choice here.

I think the consensus is moving in the direction of the doves. Dovish speakers are obviously emboldened, and I see signs that leadership leans in that direction as well. For example, when I see New York Federal Reserve President John Williams emphasize the lagged effects of policy and that supply and demand are in better balance and moving in the right direction, as he did in his comments to at the University of the Virgin Islands, I hear that he is ready to pause, and I don’t think Williams is going to go off-script. And I hear Federal Reserve Governor Phillip Jefferson giving the same message:

“…my reading of this evidence is that we are "doing what is necessary or expected" of us. Furthermore, monetary policy affects the economy and inflation with long and varied lags, and the full effects of our rapid tightening are still likely ahead of us.”

I think we need to pay attention to Jefferson as he is slated to be the next Vice Chair. He isn’t going to go off-script either.
Market Validation
Bloomberg 5/18/2023
Federal Reserve Governor Philip Jefferson suggested he is willing to be patient to see how an aggressive rise in interest rates over the past year filters through the economy, citing the delayed effects of policy and uncertainty around tighter lending standards.

“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates,” Jefferson said Thursday in the text of remarks to the National Association of Insurance Commissioners in Washington.

He said he is uncertain how tighter lending standards resulting from recent turmoil in the banking sector will impact growth. “I intend to consider all these factors in the coming weeks as I contemplate the appropriate stance of monetary policy going forward,” he said.

Jefferson emphasized that inflation is still too high, even though growth is showing signs of slowing.
“Inflation is too high, and we have not yet made sufficient progress on reducing it,” he said. “Outside of energy and food, the progress on inflation remains a challenge.’

President Joe Biden has nominated Jefferson to serve as the Fed Board’s next vice chair. He is awaiting Senate confirmation.

His remarks suggest he is leaning toward a pause to give the monetary restraint in place time to work through the economy. However, he said he is also going to take new data on inflation and the labor market on board over the coming weeks.
Read Full Report
May 15, 2023
SGH Insight
If You Don’t Have Time This Morning

The Fed will likely hold rates steady at the June meeting as it weighs the impact of banking stress on credit creation. Still, the Fed retains a hawkish bias, and the risk is that the Fed hikes again. Indeed, I suspect the Fed is happy if market pricing for June reflects this bias. Still, even if the Fed expects another hike is more likely than a cut, and very much doesn’t think it will be cutting rates this year, the risk that the Fed will need to cut rates sharply to stabilize the banking sector dominates market pricing after June. There is little the Fed can do about this situation other than wait for the market to move in its direction.
Market Validation
Bloomberg 5/16/2023
One of the Federal Reserve’s more hawkish policymakers suggested it will need to keep raising interest rates, while two others stressed watching the impact of their tightening so far.The remarks on Tuesday by Cleveland Fed President Loretta Mester, New York Fed chief John Williams and Richmond’s Thomas Barkin reveal ongoing internal debate over a pause on rate hikes next month.Investors bet the Fed will hold fire at its June 13-14 meeting as policymakers assess the impact of the five percentage points of rate increases they’ve delivered in little over a year and strains in the banking sector. Federal Reserve Bank of Richmond President Tom Barkin says demand is cooling “but not yet cold” during an interview with Mike McKee on “Bloomberg Markets.”Williams, who is vice chair of the policy-setting Federal Open Market Committee, didn’t spell out what he favored doing next month — but left the impression that he was comfortable with a wait-and-see approach.

Bloomberg 5/19/ 2023

Federal Reserve Chair Jerome Powell gave a clear signal he is open to pausing interest-rate increases next month and said that tighter credit conditions could mean the policy peak will be lower.
“We’ve come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Powell told a Fed conference Friday in Washington. “Having come this far we can afford to look at the data and the evolving outlook to make careful assessments,” he added, reading from prepared notes.
Officials raised rates by a quarter percentage point earlier this month to a target range of 5% to 5.25% and signaled they could pause. They next meet June 13-14.
“While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Powell said. “As a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain,” he said.

Read Full Report
May 02, 2023
SGH Insight
Monday Morning Notes, 5/1/23
If You Don’t Have Time This Morning
The Fed will push policy rates up another notch this week to 5.125%. Although the Fed will likely keep the option for another hike in June open, there is growing pressure from the doves to bring this cycle to an end. The hawks are still trying to keep the Fed on notice that inflation has not yet been vanquished, but they are working against growing concerns of an emerging credit crunch. With policy rates likely in restrictive territory at the end of this meeting, any further moderation in demand or inflation will help make the case that policy is now “sufficiently” restrictive to restore price stability.

... We don’t think the Fed will decisively signal an upcoming pause at the June meeting. We think the tone of the meeting statement and presser will send the signal that policy rates are in restrictive territory but might not yet be sufficiently restrictive to return inflation to 2% over a reasonable time horizon. Given the tendency of the inflation data to surprise the Fed on the upside, Fed Chair Jerome Powell gains little by taking a June hike off the table when he can just lean on the March SEP and say, “seven participants believed in March that rates still needed to move higher, and those projections will be revised in June.” That would put the odds in favor of a pause but leave open a non-trivial probability of a rate hike.

...Any further rate hikes will be heavily dependent on the data flow and the Fed’s assessment of credit conditions. Whereas even last fall one could say that the Fed still had a long way to go before rates were in restrictive territory, that is no longer the case. Appetite for additional rate hikes is waning among FOMC participants, and even the hawks will eventually embrace the policy lags argument. We are likely seeing the last gasps of the hawks as we circle around the end of this cycle.

Market Validation
Bloomberg 5/3/2023

The Fed decision is out, and duly entails a 25 bp hike. Notably, the statement omits the comment that “some additional policy firming may be necessary,” noting instead that “the Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time.”

That leaves the door open for more hikes, but it also leaves it open for a pause/end to the cycle.

...Federal Open Market Committee 5/3/2023
CHAIRMAN POWELL: So taking your question, today was the raise the federal fund rate by 25 basis point. A decision on a pause was not made today. You will notice in the statement for March we had a sentence that said the committee anticipates that some additional policy firming may be appropriate. That sentence is not in the statement anymore. We took that out. Instead we are saying that in determining the extent to which policy affirming, the committee will take in to account certain factors. So that's a meaningful change that we we're no longer saying that we anticipate. And so we will be driven by incoming data meeting by meeting and we will approach that question at the June meeting.

...Federal Open Market Committee 5/3/2023:
CHAIRMAN POWELL: That's an ongoing assessment. We are going to need data to accumulate. That would mean we think we've reached that point. It is not possible to say that with confidence now. Nonetheless you will know that the summary of economic projections from the March meeting showed that in -- at that point in time, that the meeting participant thought that this was the appropriate level of the ultimate high level of rates. We don't know that. We'll revisit that at the June meeting.
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April 18, 2023
SGH Insight
With Japan’s wages continuing to lag prices and core CPI likely to slow to 1.6% over the next year, newly minted Bank of Japan (BOJ) governor Kazuo Ueda will be looking beyond his first meeting on April 27-28 to change policy.

The upcoming forecast round by the BOJ will feature fresh quarterly growth and inflation forecasts extending through fiscal 2025.The update may plot a path back to the 2% goal in 2025.

The BOJ expects Japan’s current 3% inflation rate to slow to below its 2% target in the latter half of this coming fiscal year.

CPI data due out April 21 is expected to show core inflation around 3%, little changed from February and with global growth set to pick up after a period of slowdown, and Japan’s wages to continue to rise.

Against that backdrop Ueda is eying an appropriate time to make a move on exiting the BOJ’s yield curve operations.

The sequence will likely be a tweak to yield curve control (YCC) in June as the technocrats simultaneously work on a framework that allows them to review, and then exit YCC, altogether thereafter.

The BOJ’s rates outlook is an entirely different contemplation, and we don’t see the BOJ raising its official rate this year.
Market Validation
Bloomberg 4/28/23

The yen fell and government bond futures
reversed losses after the Bank of Japan said it would maintain
its ultra-loose monetary policy but announced a review, in its
first meeting under new governor Kazuo Ueda.
The yen weakened 0.7% against the dollar to 134.90, while
government bond futures reversed losses to trade higher.
Japanese bank shares fell. The central bank will keep its 0.5%
ceiling for 10-year government bond yields and maintain its
short-term policy rate at minus 0.1%, it said.
The BOJ will conduct a “broad-perspective review” of
policy, with a planned time frame of around one to one-and-a-
half years. It scrapped its guidance on future interest rate

Read Full Report
April 17, 2023
SGH Insight
The doves are going to be pushing to stop after May and may even look to get some kind of language like that in the statement. We think that Fed Chair Jerome Powell will not be willing to give a “one and done” signal at the next meeting. Even if he were leaning in that direction, it strikes us as almost a foolish choice given the repeated blindside hits the Fed has taken on inflation. The path of least resistance for Powell is to retain the language of the March meeting and point to the SEP and say the median terminal rate might have to go up at the June meeting but FOMC participants don’t know that yet.
Market Validation
Reuters 4/18/2023

The U.S. central bank should continue raising interest rates on the back of recent data showing inflation remains persistent while the broader economy seems poised to continue growing, even if slowly, St. Louis Federal Reserve President James Bullard said.

The bulk of Fed policymakers as of March felt one more rate increase, which would raise the benchmark overnight interest rate to a range between 5.00% and 5.25%, was all that would be needed. That could come at the Fed's May 2-3 meeting.

While agreeing that the tightening cycle may be close to the finish line, Bullard feels the policy rate will need to rise another half of a percentage point beyond that level, to between 5.50% and 5.75%.

Some policymakers and analysts worry it is those final steps that could push the economy into a recession. And beyond the rate hike decision next month, the Fed will have to send some signal about what happens next - whether to keep the language in the current policy statement that "some additional policy firming may be appropriate," or point to a pause.

Given how inflation and the economy are behaving, Bullard said, the fewer promises made the better.

"You want to be responsive to incoming data through the summer into the fall," he said. "You wouldn't want to be caught giving forward guidance that said we're definitely not doing anything and then have inflation coming in too hot or too sticky."
Read Full Report
April 13, 2023
SGH Insight
Quick Notes Heading into Friday
Federal Reserve Governor Christopher Waller is on the calendar tomorrow. Waller is also on the calendar for next week ahead of the blackout period, but he likely has enough information at this point to provide guidance for the May FOMC meeting, and tomorrow’s topic is the economic outlook, a good opportunity to provide that guidance. As of today, market participants have 70% odds of a rate hike, and Waller can push back on that if he wants. I don’t think he will.

As a reminder, this is what Waller was thinking prior to the SVB collapse:

Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4 percent. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.

This was a two-part test. If job creation fell AND CPI inflation moderated significantly, then the projected terminal rate could remain at 5.1 to 5.4% rather than be revised higher in March. Of course, SVB changed that, but the overall first quarter job growth came in at a faster pace than the fourth quarter, and while there has been improvement in headline inflation, core inflation remains quite elevated.

By his test, absent SVB there would still be room to raise the expected terminal rate. Now, I don’t expect him to say that post SVB, and Fed officials don’t need to make any decisions about the terminal rate until June. But he can say that banking stress has eased and reaffirm the March SEP, which like in December has a projected terminal rate range of 5.1 to 5.4%. That would point toward another rate hike in May and a possible hike in June. I mention the latter because that’s not on anybody’s radar.
Market Validation
Bloomberg 4/14/2023
Federal Reserve Governor Christopher Waller said he favored more monetary policy tightening to reduce
persistently high inflation, although he said he was prepared to adjust his stance if needed if credit tightens more than expected.

“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday in a speech in San Antonio, Texas. “How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”
Read Full Report
April 10, 2023
SGH Insight
Bottom Line
The incoming data will likely support another rate hike at the May meeting. The Fed wants to avoid pausing prematurely as that would open the door for an easing of financial conditions that would threaten to undo the progress it has made on slowing activity. Evidence that stress in the banking sector will place a substantial drag on the economy in the near term, however, would push the Fed toward a more cautious outcome. It’s wait and see on that point. Although market pricing anticipates a May hike would be the last and the Fed will soon start cutting rates, I caution that even if a recession happens over the next year, those dynamics will likely play out more slowly than current pricing.
Market Validation
Bloomberg 4/11/2023
Federal Reserve Bank of New York President John Williams said the March outlook of policymakers for one more interest-rate hike this year, followed by a pause, is a “reasonable starting place” though the path will depend on incoming economic data.
“We need to do what we need to do in order to make sure we bring inflation down,” Williams said Tuesday in an interview with Yahoo! Finance. He said inflation is coming down but but remains well above the Fed’s 2% goal, adding that a key underlying measure of prices has barely budged recently.
“We’ve seen the data come in consistently strong” and inflation has remained very high, Williams said. The economic impact of recent bank turmoil is uncertain, he said.
Read Full Report
April 04, 2023
SGH Insight
We think it will be difficult for the Fed to pause this month with inflation elevated and job growth likely still exceeding 200k.
Bottom Line: While market participants pulled down the odds of a May rate hike below 50% after the JOLTs numbers, a solid labor report for February could quickly reverse that move. If the decision is based on the level of the data, the Fed would most likely hike rates again. While the Fed already has communicated the policy lags story, and the shift in the language in the FOMC statement toward less certainty about future rate hikes signals the Fed is strategically thinking about when to operationalize that story, it will be hard to operationalize that story just yet with strong job growth and elevated inflation. We emphasize that the Fed’s perception of the extent of banking stress will be a key issue in its next rate decision. If the Fed sees evidence that banking sector stress is likely to create a substantial drag on activity later in the second quarter, it will lean toward a pause.

Market Validation
Bloomberg 4/10/2023
Traders upgraded the odds of another quarter-point rate increase by the Federal Reserve in May in the wake of strong employment data released Friday during a holiday-shortened session. Swap contracts referencing Fed meeting dates repriced to levels indicating more than 80% odds of the US central bank raising its policy rate range to 5%-5.25% on May 3.

After the US central bank set its policy band at 4.75%-5% on March 22, the odds of a May rate hike almost vanished amid a collapse in bank shares that began after several institutions failed. Since March 24, the sector has stabilized.
Read Full Report
April 03, 2023
SGH Insight

Von der Leyen, who represents the 27-nation EU in all trade matters, will go a step further on this trip than repeating the West’s warnings to Beijing not to deliver weapons to Russia. She will say that how China positions itself regarding Russia’s invasion of Ukraine will determine EU-China relations in the future.

Intended to make clear that China will have to strike a balance between its drive to enhance its role as a global superpower on the back of an increasingly dependent Russia, while keeping key economic partners like Europe close, that message has been consulted at least with Paris and Berlin, if not more capitals, according to sources in Brussels.

With daily trade between the EU and China rising to 2.3 billion euros in 2022 from 1.9 billion in 2021, both sides stand to lose a lot if trade falls victim to political tensions.

The EU, reeling from its bad experience with excessive dependence on Russian fossil fuels, is already talking about “de-risking” in its relationship with China, while admitting a full “de-coupling” is simply not possible because of the level of integration between the two economies.

The “de-risking” is to take the form of diversification away from China in various sectors where Beijing has near monopoly in dealing with Europe, including solar panels, rare earths, magnesium, and lithium. Europe will be looking to find alternative suppliers lest it be left helplessly stranded in the future should China decide to cut it off to exert pressure, like it did with rare earths sales to Japan a decade ago over tensions in the East China Sea.
Market Validation
Bloomberg 4/4/2023
Ursula von der Leyen, president of the European Commission, is urging China to play a “constructive”
role in bringing peace to Ukraine, she says in an interview with the Financial Times.
*EU “concerned” by China’s position of friendship with Russia
** Beijing should use its ties with Moscow to rein in war
* “China is in a position to influence Russia in a constructive way, and therefore they have a responsibility”
* Stressed the importance of maintaining open diplomatic channels with Beijing
* When asked about von der Leyen’s remarks at a regular press briefing Tuesday in Beijing, Foreign Ministry spokeswoman Mao Ning said that “China is not a party to the Ukraine crisis.”
* She added that China hoped the EU “will display strategic independence and political wisdom, and take concrete steps towards lasting peace in Europe.”
Read Full Report
March 21, 2023
SGH Insight
Last Minute Thoughts Ahead of the FOMC Meeting
Quick reminders as we head into this week’s FOMC meeting:

The Fed will likely leave QT unchanged. The regulatory response to the banking stress is not “undoing” QT. The current expansion of the balance sheet is temporary and will reverse on its own as institutions exit from the programs. QT is about the amount of money in the economy on a permanent basis, and the Fed is determined to “normalize” the permanent component of the balance sheet. The Fed expects that the regulatory response allows for it to use its monetary policy tools to manage inflation; QT is one of those tools, along with interest rates.

...Last Minute Thoughts Ahead of the FOMC Meeting

The rate cuts priced into markets make no sense if the economy does not experience a sudden stop. This isn’t 2008. The economy was already in recession when Lehman collapsed, and the banking sector is not vulnerable in the same way. The pattern of borrowing at the discount window indicates the challenges are largely contained to regional-specific banks with a common business model. If there is no sudden stop, these rate cuts will need to be priced out quickly. This could happen quickly if the “risk off” mood in fixed income reverses. The Fed is not going to validate that pricing in the dots tomorrow. As noted above the Fed will predict more rate hikes in the SEP.

...Last Minute Thoughts Ahead of the FOMC Meeting

Quick reminders as we head into this week’s FOMC meeting:

We expect the Fed to hike rates 25bp. The Fed is caught between managing elevated inflation and pressures on the banking system. Persistent inflation and faster than expected growth were pushing the Fed into a 50bp rate hike prior to SVB. It will likely be compelled to adapt to the financial situation by scaling that hike down to 25bp. It will be hard-pressed to walk away entirely. The risk is that the Fed responds as it has in the past to financial market instability and pauses to assess the impact of its cumulative tightening.
Market Validation
Bloomberg 3/22/2023
FOMC continues pace of balance-sheet runoff, also known as quantitative tightening, leaving in place monthly caps of $60 billion for Treasuries that are allowed to mature without being reinvested and $35 billion for mortgage-backed securities

Powell FOMC Press Conference 3/22/2023
>> KYLE: Hi, Chair Powell. Thanks for taking the question. Kyle Campbell with American Banker. I have a couple questions about the balance sheet. First of all, I'm curious, at what point the financial supports that the Fed is extending through the discount window and through its enhanced lending facility might be at odds with the objective of reducing the balance sheet? I'm also curious what your thoughts are on not just the availability of reserves, but the distribution of them throughout the banking system. And at what point you might be concerned about it being scarce for certain banks. >> JEROME POWELL: So, people think of QE and QT in different ways. Let me be clear about how I'm thinking about these recent developments. Recent liquidity provision increased the size of our balance sheet. The intent and effects of it are very different from when we expand our balance sheet through purchases of longer-term securities. Large-scale purchases of long-term securities are really meant to alter the stance of policy by pushing down -- pushing up the price and down the rates, longer -term rates, which supports demand through channels we understand fairly well. The balance sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions. It's not intended to directly alter the stance of monetary policy. We do believe it's working. It's having its intended effect of bolstering confidence in the banking system. And, thereby, forestalling what might otherwise have been an abrupt and outsized tightening in financial conditions. So that's working. In terms of the distribution of reserves, we don't see ourselves as running into reserve shortages. We think that our program of allowing our balance sheet to run off predictably and passively is working. And, of course, we're always prepared to change that, if that changes. We don't see any evidence that that's changed.

...Chair Powell FOMC Press Conference 3/22/2023

>>MICHAEL: Michael McKee from Bloomberg Radio and Television. You've said the Fed would be raising interest rating and holding them there for some time. The markets priced in one more increase in May. Every meeting the rest of this year, they're pricing in rate cuts. Are they getting this totally wrong From the Fed? Or is there something different about the way you're looking at it given that you're now thinking that moves might be appropriate as opposed to ongoing. >> JEROME POWELL: We published an SEP today. It shows that basically participants expect relatively slow growth, rebalancing of supply and demand in the labor market, with inflation moving down gradually. In that most likely case, participants don't see rate cuts this year. They just don't.

Bloomberg 3/22/2023
The Federal Reserve raised interest rates by a quarter percentage point and signaled it’s not finished hiking, despite the risk of exacerbating a bank crisis that’s roiled global markets.
The Federal Open Market Committee voted unanimously to increase its target for the federal funds rate to a range of 4.75% to 5%, the highest since September 2007, when rates were at their peak on the eve of the financial crisis. It’s the second straight rise of 25 basis points following a string of aggressive moves starting in March 2022, when rates were near zero.
“The U.S. banking system is sound and resilient,” the Fed said in a statement in Washington after a two-day meeting.
At the same time, officials warned that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.”
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March 06, 2023
SGH Insight

Monday Morning Notes, 3/6/23

If You Don’t Have Time This Morning

Powell will be on Capitol Hill this week for his semi-annual monetary policy testimony. He will present to the House on Tuesday and the Senate on Wednesday. Powell will stick to hawkish themes, but will he be more hawkish than what’s already priced into rates? Powell will reiterate that inflation remains too high and emphasize that even after the series of rate hikes this cycle there is still more work to be done. I expect he will add that if inflation or growth data continue to surprise on the upside, the Fed will hike higher and remain at that level longer than it currently expects.
Market Validation
Dow Jones 3/7/2023

Federal Reserve Chair Jerome Powell said strong and sustained economic activity to start this year could prompt central bank
officials to accelerate interest-rate increases and will likely lead them to lift rates more than they expected to combat high inflation.

We will continue to make our decisions meeting by meeting," Mr. Powell said. "Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy."

Since officials last met on Feb. 1, several economic reports have revealed hiring, spending and inflation were hotter in January than expected, and data revisions showed inflation and demand for labor didn't slow as much as initially reported late last year.

Mr. Powell said data on hiring, spending, factory production and inflation partly reversed softening trends seen just a few weeks ago. Some of the upswing could reflect unseasonably warm January weather that can interfere with seasonal adjustments to economic data, he said.

"Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [policy-setting] meeting," Mr. Powell said.

Read Full Report
February 21, 2023
SGH Insight
Tuesday Morning Notes
Whereas the Fed expected the economy would continue slowing this year, incoming data indicates that first quarter activity firmed. Worse though for the Fed, inflation also firmed, and now it threatens to decelerate more slowly than the Fed, and markets, expected. Both point to a higher terminal rate, and Fed officials increasingly recognize that they will not be able to pause as quickly as they anticipated. We think there is enough momentum in the economy to bring policy rates to a peak of 5.625%. If the Fed continues with 25bp rate hikes, that takes us out to the July meeting, but of course the actual outcome, as well as the pace, are data dependent. July is a long way off still; at this juncture, we are waiting for the next round of data to give the Fed additional direction.
Market Validation
Bloomberg 2/24/23
The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates.
The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.
US stock futures fell and Treasury yields rose as traders firmed up bets that the Fed will raise interest rates by a quarter-point at each of the next three meetings. Investors also expect a higher terminal fed funds rate.
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February 14, 2023
SGH Insight
We think the Fed will need to raise the terminal rate, and market participants increasingly think the same. Markets have priced in a roughly 50% chance of a June rate hike. This helps the Fed in that it puts upward pressure on long rates, but only if the Fed follows the markets. We remind readers that while the Fed acknowledges it could continue to hike rates, it has not yet concluded that it needs to guide the terminal rate higher. I think the Fed does not want to raise rates past 5.125%, it leans toward the idea that “longer for higher” will be good enough and sees the SEP inflation forecast as “aspirational” in that, although unsaid, it thinks it can settle for an optimal control-type outcome with ongoing elevated inflation (see our Monday 2/13/22 note). All that said, we think stronger growth will eventually force the Fed’s hand, and we look forward to this week’s numbers on housing and retail sales to see if they will fall in line with our expectations.

Market Validation
Bloomberg 2/15/ 23

US retail sales rose in January by the most in nearly two years, signaling robust consumer demand that could bolster the Federal Reserve’s resolve to keep raising interest rates in the face of persistent inflation.
The value of overall retail purchases increased 3% in a broad advance — the most since March 2021 — after a 1.1% drop in the prior month, Commerce Department data showed Wednesday. Excluding gasoline and autos, retail sales rose 2.6%, also the biggest increase in nearly two years. The figures aren’t adjusted for inflation.
The median estimate in a Bloomberg survey of economists called for a 2% advance in total retail sales.
All 13 retail categories rose last month, led by motor vehicles, furniture and restaurants. The report showed vehicle sales climbed 5.9% in January. The value of sales at gasoline stations were unchanged.
The report showed US consumers got off to a good start in 2023, rebounding from a spending slowdown at the end of last year. A resilient labor market marked by historically low unemployment and solid wage gains has allowed many Americans to keep spending on goods and services even as borrowing costs rise and inflation remains elevated.

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