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.

January 20, 2021
SGH Insight
Usually a dull affair, this BOJ meeting will include an important discussion on potentially expanding the band within which it allows 10-year Japanese Government Bonds to fluctuate under its Yield-Curve Control policy from the current +/- 0.2% around 0.0%, to +/- 0.3%.

The proposal, floated in the local press on Monday, led to a small pop up in 10-year JGB yields to 0.05%, but has yet to be confirmed or officially adopted. We believe, based on input from Tokyo, that the expansion of the 10-year JGB trading band will indeed be under consideration at this meeting, but that its formal adoption might not come until the March 18-19 MPM meeting, as part of an overall review of the BOJ monetary policy stance.
Market Validation
(Dow Jones 1/21/21)

BOJ Could Tweak 10-Year Yield Target Range at Policy Review

As Bank of Japan Gov. Haruhiko Kuroda says he is looking for more effective ways to control the nation's yield curve, one option could include widening the target range for the 10-year JGB yield, which is currently set between minus 0.2% and plus 0.2%, according to people familiar with the BOJ's thinking. Mr. Kuroda said Thursday the central bank had no plan to change the overall framework of the yield curve control policy, but would examine the side effects of such measures, including the impact on
market functions, at its next policy-setting meeting in March.

Policy Validation
(National Post 1/29/21)

BOJ drops more hints of bigger yield moves ahead of March review
TOKYO - Bank of Japan policymakers discussed the merits of allowing long-term yields to move more flexibly around the bank's target, a summary of opinions at their January meeting showed, a sign the idea will be a key element of its policy review in March.
As the coronavirus pandemic forces it to maintain a massive stimulus program for a prolonged period, the BOJ plans to announce in March ways to make its tools more sustainable.
"With our monetary easing steps to be prolonged, allowing the 10-year government bond yield to move upward and downward to some extent ... will contribute to financial system stability," said one member, according to the summary released on Friday.
Allowing 10-year yields to move more widely likely won't hurt the economy much, because most money raised by households and companies aren't directly affected by long-term rate moves, another opinion quoted in the summary showed.
The comments are the strongest hints to date that the BOJ will allow long-term rates to deviate further from its 0% target in its March policy review.
Read full report
January 19, 2021
SGH Insight
** The exact impact of the lockdowns, which are not being applied consistently between countries, and which are expected to run now through March, is however difficult to gauge, with ECB officials waning agnostic between the economic impact of more severe, but shorter lockdowns, and softer, but more drawn-out ones.

** But as it impacts policy, they will point to the explicit linkage that was already drawn by the ECB between the extended, “at least through March of 2022” envelope of the topped off 1.85 trillion euros PEPP (Pandemic Emergency Purchase Program), and Covid vaccination roll outs, with the program designed to safely cover at least one quarter beyond the again, conservatively, estimated expectation for vaccines to have reached a broad swathe of the Eurozone population by the end of 2021.

** Indeed, ECB officials believe they have provided easily enough room for PEPP purchases that, if anything, it may raise the question of whether they would need to continue to buy a last hundred or so billion euros of bonds in the first quarter of 2022 if the economy performs as expected. While a question for another day, that view is in and of itself telling.

Market Validation
(Bloomberg 1/21/21)

Euro Rises to One-Week High on Hint of ECB Easing Life Support

German, Italian bonds slip; ECB seen easing pace of purchases
Implicit yield curve control could be temporary, says Robeco
The euro climbed and bonds across the region slid on signs that the European Central Bank’s level of stimulus may slow over the coming months.

The common currency rose as much as 0.6% to touch $1.2173, the highest level in a week, and both German and Italian bonds declined. The moves came after the policy statement said that its pandemic-bond purchase program need not be used in full should favorable financing conditions be maintained.

With the ECB having ramped up its bond-buying plan to 1.85 trillion euros last month, market expectations for any change going into this meeting were low. While the region’s risks are to the downside, President Christine Lagarde highlighted the vaccine rollout, the Brexit deal and the bloc’s joint bond issuance as positive economic drivers.

(Dow Jones 1/21/21)

ECB Comments Accelerate Eurozone Government-Bond Selling -- Market Talk

Selling in eurozone government bonds accelerates after the European Central Bank flagged the possibility of not using the EUR1.85 trillion Pandemic Emergency Purchase Programme in full if favorable financing conditions can be maintained. Ten-year German Bund yields trade 3.5 basis points higher at -0.524%, and yields of other core and semi-core 10-year bond yields are up by a similar magnitude. Peripheral government bonds, in particular those of Italy, come under greater pressure, with the yield on the 10-year Italian BTP 6 basis points higher at 0.675%, according to Tradeweb.
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December 24, 2020
SGH Insight
At a panel discussion of the recently concluded Central Economic Work Conference, Yi Huiman, Chairman of the China Securities Regulatory Commission (CSRC), delivered a bullish outlook for China’s A-share and IPO market for 2021.

But that bullish outlook did not extend to China’s behemoths in the tech sector, and, as we had warned, last night regulators launched an anti-monopoly investigation into tech giant Alibaba and summoned its fintech Ant affiliate in for regulatory review (see SGH 11/13/2020; “ China: Breaking the Internet Monopolies”).

** At that CEWC meeting, Premier Li Keqiang also added context to Beijing’s efforts to rein in these monoliths, saying, “Financial innovation must be carried out under the premise of ample prudent administration. If a single digital financial technology (fintech) platform takes up too large of a market share, it may eventually lead to a large number of bad loans. We have to avoid allowing financial platforms from becoming too-big-to-fail and prevent the monopoly of a winner take all in the market.”

** A senior policymaker added the following comments – including his own views -- on background. “It is time to strengthen anti-trust regulations in the financial technology sector. Based on what we know so far, the problems of large financial platforms are more serious than we had previously known. Finance is the lifeblood of our country. We need to stop fintech giants, such as Alibaba, Tencent, JD and Meituan, which were already fighting off rivals that were taking their market share, [from gaining monopoly position]. Frankly, [I do not believe regulators] will allow Ant Group and similar companies to IPO in 2021.”
Market Validation
(Bloomberg 12/28/20)

Alibaba Antitrust Fears Drive $200 Billion Chinese Tech Selloff
Alibaba Group Holding Ltd. led a second day
of frenetic selling among China’s largest tech firms, driven by
fears that antitrust scrutiny will spread beyond Jack Ma’s
internet empire and engulf the country’s most powerful

Alibaba and its three largest rivals -- Tencent Holdings
Ltd., food delivery giant Meituan and JD.com Inc. -- have shed
nearly $200 billion over two sessions since Thursday, when
regulators revealed an investigation into alleged monopolistic
practices at Ma’s signature company. That marked the formal
start of the Communist Party’s crackdown on not just Alibaba but
also, potentially, the wider and increasingly influential tech

Policy Validation

(Bloomberg 12/27/20)
China Orders Ant to Return to Its Roots in Payments Services (3)

Chinese regulators ordered Jack Ma’s online
financial titan Ant Group Co. to return to its roots as a
provider of payments services, threatening to throttle growth in
its most lucrative businesses of consumer loans and wealth

The central bank summoned Ant executives over the weekend
and told them to “rectify” the company’s lending, insurance and
wealth management services, the People’s Bank of China said in a
statement Sunday. While it stopped short of directly asking for
a breakup of the company, the central bank stressed that Ant
needed to “understand the necessity of overhauling its business”
and come up with a timetable as soon as possible.

Read full report
December 06, 2020
SGH Insight
Tim Duy's Fed Watch:

Bottom Line: I don’t have some secret source that is telling me what is going to happen next week and I understand the inclination to think more easing is coming but I really don’t like predicting something that is the exact opposite what multiple Fed speakers are saying. It seems to me that the Fed is telling us they are going after the low-hanging fruit of putting some guidance on the asset purchase program at this next meeting. The Fed did discuss in November potential changes such as the duration mix or the size of asset purchase but this discussion regarded policy beyond the current surge of Covid-19 cases. With financial conditions currently easy and the Fed literally unable to impact near-term economic outcomes, there doesn’t seem any reason to change policy next week. Of course, an unexpected tightening of financial conditions would be something that the Fed could address should that occur between now and the meeting.

Market Validation
(CNBC 12/16/20)

The Federal Reserve on Wednesday made a key adjustment to its efforts to support the economy, while upgrading its outlook for growth.
As expected, the Fed held benchmark interest rates near zero following the conclusion of its two-day meeting.
Investors were watching whether the Fed would present outcomes-based guidance in which it would state the conditions necessary for a reversal in policy.
The Fed delivered in that respect, saying it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” the post-meeting statement said.
“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Federal Open Market Committee added in a statement that gained unanimous approval.
The committee, however, did not say it would extend the duration of those purchases.
Read full report
December 03, 2020
SGH Insight
*** ECB sources indicate the consensus next week appears to lie in expanding the 1.35 trillion euro PEPP (Pandemic Emergency Purchase Program) by 500 billion euros and to extend its term from June 2021 to “at least” through the end of 2021, although there is an outside chance they might choose to double that commitment to a full-year extension. ***

*** We believe the ECB will also revamp and extend the -1.0% bonus TLTRO-III (Targeted Longer-term Refinancing Operations) lending rate, a subsidy, in effect, offered to banks that meet certain lending criteria beyond its current June 2021 expiration. They could lower that subsidy rate even more, but we would put that on balance at perhaps even odds, and there will be consideration of a new round of five-year TLTRO loans to expand on the current three-year TLTRO-III program. ***

*** We continue to expect the ECB to hold pat on its -0.5% benchmark deposit rate. But a rate cut will probably be discussed at this meeting and wielded as an option in the Governing Council tool kit if needed, especially to try and counter the relentless strength in the euro. ***
Market Validation
(CNBC 12/10/20)

ECB expands and extends its bond buying as coronavirus resurgence weighs on the recovery

The European Central Bank on Thursday expanded its massive monetary stimulus program by another 500 billion euros ($605 billion), as a second wave of lockdown measures weigh on the euro area’s economic recovery.

Markets had largely expected the central bank to add to its bond buying, having vowed back in October to “recalibrate its instruments” as a resurgence in coronavirus cases across the continent led to further national shutdowns.

The ECB held interest rates on its main refinancing operations, marginal lending facility and deposit facility at 0.00%, 0.25% and -0.50%, respectively.
The central bank launched its Pandemic Emergency Purchase Programme (PEPP) in a bid to shore up the bloc’s economy in the wake of the pandemic. Following Thursday’s expansion, the total asset purchase value is 1.85 trillion euros, and the ECB extended the horizon for purchases under the PEPP to March 2022.

In a statement following the decision, the ECB said it would conduct net purchases until its Governing Council judges that the “coronavirus crisis phase is over,” and restated that interest rates would remain at their current low levels until it the central bank sees the inflation outlook “robustly converge” to its target of “close to, but below” 2%.

The Governing Council also opted to “recalibrate” the third edition of its targeted longer-term refinancing operations (TLTRO III), which are ultra cheap loans for banks, by extending the current favorable terms to lenders by 12 months until June 2022.
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December 03, 2020
SGH Insight
Senior officials from Poland have indicated to European Union officials that they might be ready to withdraw Warsaw’s veto of the 1.1 trillion euro budget and 750 billion NGEU fiscal package if EU leaders provide a declaration at their summit on December 10 that the disputed “rule of law” conditionality would only be used to safeguard the application of EU funds, and not to prosecute governments for breaches of democratic principles.

To be more precise, the “interpretive declaration” would be a clear statement from the European Council that the conditionality rule would not be used to exert unjustified pressure on individual member states in areas other than the proper use of EU funds.

Market Validation
(Bloomberg 12/9/20)

Poland, Hungary Say Deal Reached on $2.2 Trillion EU Stimulus

Poland and Hungary have agreed on a compromise with Germany to unblock the European Union’s $2.2 trillion budget and pandemic stimulus plan, a senior government official in Warsaw said. The compromise would end a standoff that saw Budapest and Warsaw threaten to torpedo the EU’s 750 billion-euro ($909
billion) pandemic aid fund and the 2021-2027 budget over objections to attaching rule-of-law conditions to cash. Polish Deputy Prime Minister Jaroslaw Gowin said an agreement had been clinched with Germany, which holds the EU’s
rotating presidency, that would now be presented to the rest of the bloc. A deal could be finalized by Friday by the end of a two-day summit of European leaders in Brussels, he said. The zloty jumped to the highest level against the euro
since September on news of the EU deal. The forint also gained.
Read full report
December 01, 2020
SGH Insight
*** First, on the 13-3 facilities, for all the sound and fury over Secretary Mnuchin’s decision to wind down the bulk of the joint programs, we think it unlikely Secretary Yellen will use valuable political capital to seek renewed congressional funding. After all, economic and market conditions may never deteriorate to such a darkening degree that Congress is frightened back into another rush of funding. And Treasury can also tap its Exchange Stabilization Funds to capitalize any new or extended 13-3 Special Purpose Vehicles. What’s more, if the “found money” of the uncommitted CARES Act funding is “returned” to Congress and it helps to boost the probabilities and size of a revived stimulus bill before Congress adjourns, so much the better. ***
Market Validation
(Bloomberg 1/21/21)

Treasury-Fed coordination
Yellen suggested that she won’t mount a fresh fight to revive several Federal Reserve lending facilities that were phased out by her predecessor. “The Federal Reserve will continue to provide support to the economy through its ongoing programs and the use of its available tools but as mandated by Congress, the 13(3) facilities funded by the Cares Act will not be available,” she wrote, referring to a section of the law governing the Fed
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November 23, 2020
SGH Insight
*** The market may be hoping for a December extension in the weighted average maturities of the current $80 billion a month in treasury purchases, but we would caution the Minutes are more likely than not to indicate a fairly wide Committee debate and reluctance over the timing and efficacy of such a shift in balance sheet policy. Our sense is that the FOMC may view QE to be less suited to counter a near term pocket of extended weakness relative to what could be a powerful rebound as soon as spring next year. While the Minutes will not necessarily preclude a shift to a WAM at the December meeting, we think it alters the probabilities to no more than even. ***
Market Validation
(Bloomberg 11/25/20)

Fed to Hold Off With Maturity Extension in December, Maybe 1Q21
RECENT EVENT REACTION: The minutes of the November FOMC meeting suggest any change to the Federal Reserve's asset purchases will be a 2021 action, in our view. The committee noted that its tool kit included both an outright maturity extension while maintaining current purchase sizes, or potentially extending purchases to longer-term securities while cutting total notional value the Fed is buying. We think the former is more likely in a deteriorating economic environment.

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November 13, 2020
SGH Insight
But more tellingly, Li went on to note that the Internet information infrastructure that should have been in the hands of the state is now in the hands of 7-8 Internet technology giants (NB – our emphasis added), and that these 7-8 Internet technology giants control a large amount of data and market share, and form monopolies to curb fair competition.

While these firms have on their side “destructive innovation,” once a monopoly is formed, he said, it is bound to suppress innovation. They have the unfair ability to adopt different trading prices based on privacy information, transaction histories, individual preferences and consumption habits that are obtained by their respective platforms’ big data and algorithms. Therefore, the data-based Internet information infrastructure must be firmly controlled by the state, and the status quo of several giants monopolizing the national Internet market must be changed.

To implement that policy directive, the State Administration for Market Regulation released a draft “Guidelines for Anti-Monopoly in the Field of Platform Economy” report on Tuesday.

A senior official in Beijing then went on background to emphasize that these guidelines aim to strengthen the regulation of China’s large online service platforms, and will most certainly have a huge impact on “Internet monopolies” that will not make as much profit in the future as they do now.
Market Validation
(Bloomberg 12/1/20)

China plans to impose “special and innovative regulatory measures” on financial technology behemoths such as Jack Ma’s Ant Group Co. to eliminate monopolistic practices and strengthen risk controls.
Advances in technology have brought tremendous change to
the financial sector, Guo Shuqing, chairman of the China Banking
and Insurance Regulatory Commission and Party Secretary of the
central bank, wrote in an article outlining regulations over the
next five years. It was cited in the official Shanghai
Securities News.
Read full report
October 30, 2020
SGH Insight
** More specifically, President Xi is said to have called for an average annual net increase of 7 trillion yuan (roughly $1.0 trillion) in GDP over the next 15 years, with the goal of hitting an aggregate income level of 200 trillion yuan by 2035, roughly double the current level. The plenum furthermore boasted that China will become the world's largest economy within the next 10 years, expecting to cross the threshold of "high-income countries" by 2022 as classified by the World Bank. Incidentally, the WB currently defines high-income countries as those with a per capital gross national income of greater than $12,535, a threshold that may perhaps seem a tad modest to most traders.
Market Validation
(Bloomberg 11/3/20)

Xi Says Economy Can Double as China Lays Out Ambitious Plans

Chinese President Xi Jinping said the economy can double in size by 2035 and the country can reach high-income status in the next five years as the Communist Party outlined ambitious plans for the nation’s future. “It is entirely possible to reach the high-income country status by current standards by the end of the 14th Five-Year Plan, and to double the total economic output or per capita income by 2035,” Xi said in a speech to the party’s Central Committee, according to state media Xinhua.
Read full report
October 29, 2020
SGH Insight
** Our understanding is that a comprehensive deal could finally fall into place by next week or the week after, with Poland and Hungary appearing to move close to acceptance of some form of the “rule-of-law” conditionality they have to date opposed for the 750 billion euro Recovery Fund that was referenced multiple times today by European Central Bank President Christine Lagarde under its formal moniker of the “Recovery and Resilience Facility.”

** The European Parliament and EU governments are also approaching a compromise deal on 39 billion euros in additional spending that is being demanded by parliament, possibly allocating around 10 billion euros to their proposed projects now, with an agreement to redirect money from future fines and other assorted EU revenue sources for the balance.
Market Validation
(Bloomberg 11/10/20)

EU Clears Hurdle to Unlock 1.8 Trillion-Euro Budget, Stimulus

European Union negotiators reached a deal on the bloc’s long-term spending plans, moving a step closer to finalizing its landmark 1.8 trillion-euro ($2 trillion) budget and stimulus accord.

The EU is under pressure to wrap up the emergency package so that it will be operational next year, as the continent contends with a surge in coronavirus cases and the worst recession in its history. The recovery plan is expected to add 2% to the EU’s economic output in the coming years, according to European Commission projections.

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October 23, 2020
SGH Insight
The resurgence and spike in COVID cases across Europe over the last couple of weeks has been considerably more severe than expected and has raised the alarm bells at the European Central Bank and in capitals across the region.

ECB officials confirm that next week’s Governing Council meeting will be too soon for additional monetary policy measures, as the next six weeks will provide more clarity on the magnitude of the COVID wave, as well as on the magnitude of fiscal support that can be expected to supplement their monetary policy stimulus – particularly at the national level.

*** But come December, the Governing Council will review and, as needed, adjust both the current “envelope” of the Pandemic Emergency Purchase Program as well as the parameters of its standing bond buying Asset Purchase Program. With forecasts looking to be dropped further, a commitment to extend bond purchases beyond the middle of 2021 is highly likely then, even as ECB officials note that the central bank, having conducted “only” 600 billion of its 1.35 trillion PEPP purchases as of last week, has plenty of money to cover purchases for now. ***
Market Validation
(Bloomberg 10/29/20)

ECB Signals December Stimulus Likely Amid European Lockdowns

The European Central Bank gave a strong indication that it will likely boost its emergency bond-buying program to stabilize the euro-area economy after governments imposed a spate of new restrictions to control the coronavirus.

For now, Governing Council held its pandemic bond-buying program at 1.35 trillion euros ($1.6 trillion), reiterating that it will run until at least June 2021 and won’t be stopped until the “crisis phase” of the pandemic is past. The ECB’s deposit rate stayed at -0.5%.
The policy statement also said though that new economic forecasts in December will set the stage for more support.

“The new round of Eurosystem staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks. On the basis of this updated assessment, the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation.”
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October 06, 2020
SGH Insight
In his virtual keynote speech before the National Association of Business Economics later this morning, Federal Reserve Chairman Jerome Powell can be expected to elaborate on the Fed’s new policy framework. And while he may also note the resilience of the US economy in its rebound so far from the depths of March, he is also likely to warn in grave tones the easiest part of the recovery is now behind us.

** More to the point, with the negotiations for the Phase IV fiscal legislation between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin now nearing a critical make or break moment this week, we think the Fed Chairman is likely to adopt a significantly harder edge in making the case for more fiscal policy as soon as politically possible.

** And while it is highly doubtful Chairman Powell would publicly make an explicit link, we also think a fiscal deal this month would make it far more likely if not near certain that the Federal Open Market Committee Fed will complete its shift to a more accommodative monetary policy stance at its December meeting, with a weighting in its current asset purchases to the longer term treasuries.
Market Validation
Policy Validation

(Bloomberg 10/6/20)

Powell Warns of Weak U.S. Recovery Without Enough Government Aid
‘Risks of overdoing it’ are smaller than too little stimulus
GOP opposition to larger fiscal package has hampered a deal
Federal Reserve Chair Jerome Powell warned of a weak U.S. recovery without sufficient government aid and said providing too much stimulus wouldn’t be a problem.

Powell’s remarks Tuesday came amid Republicans’ opposition to a larger relief package that’s kept talks with Democrats at a stalemate in Congress since aid to jobless Americans and small businesses expired in July and August.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said in the text of a speech for a virtual conference hosted by the National Association for Business Economics. “By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”

(Bloomberg 10/7/20)

Fed to Debate Bond-Buying Program at Future Meetings

Some U.S. central bankers sought further debate on the future of the Federal Reserve’s asset-purchase program when they met last month, signaling they’d be open to altering or increasing bond buying going forward.

Minutes of the Federal Open Market Committee’s Sept. 15-16 meeting released Wednesday showed that some participants “noted that in future meetings it would be appropriate to further assess and communicate how the committee’s asset-purchase program could best support” the Fed’s dual-mandate objectives.
Policy makers agreed at the meeting to hold rates near zero until the labor market reached maximum employment, and inflation reached 2% -- and was on track to moderately exceed that goal for some time. Forecasts also released on Sept. 16 showed officials didn’t expect the economy to reach those targets until 2023 or 2024, as it gradually recovers from the steep recession inflicted by the coronavirus pandemic.

U.S. central bankers, gathering virtually as a precaution against Covid-19, agreed to keep purchasing Treasury and mortgage-backed bonds at a combined pace of about $120 billion a month.

At upcoming meetings in November and December, officials could seek to give the economy more monetary policy support by increasing the amounts of Treasuries and mortgage-backed securities they buy in an attempt to lower borrowing costs for households and businesses.

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September 21, 2020
SGH Insight
First and foremost, the primary intended messaging takeaway likely to run through testimony and speeches alike will be a lofty emphasis on how forcefully committed the Fed will be to an extremely dovish reaction function going forward. A key objective of the Committee was to enshrine the new consensus “flexible average inflation targeting” and redefined “maximum employment” of the longer run statement into the September post-meeting policy statement, and on that they mostly succeeded. Even the rate dot plots, in being mostly flat right through 2023, were supportive this time that a long period of essentially negative real rates are on the near horizon, even as the economic rebound gathers momentum...

...But as we wrote previously (SGH, 9/3/20, “Fed: On September’s Guidance and QE”), our sense was that the FOMC would not be ready, or able, to commit to changes in its balance sheet policies at the September meeting. Short term fixes could come through liquidity operations if financial conditions tighten prematurely. But we understand that before going to the “next stage” of the pivot to monetary policy. the Fed is seeking a clearer sense of fiscal policy and the outlook, but more fundamentally, it is reviewing the efficacy of asset purchases and looking into all the potential channels of balance sheet transmission, their potential effects on bank lending constraints, as well as possible effects on financial stability...
Market Validation
Policy Validation

(WSJ 9/23/20)

The Fed last week said it was committed to holding rates near zero until the labor market is strong, inflation reaches 2%, and Fed officials believe inflation will run slightly above 2% for some interval. Mr. Clarida said the Fed would need to reach all three conditions before considering any move to raise rates. Simply reaching 2% inflation wouldn’t on its own satisfy the central bank’s new criteria, he said.

Projections released after last week’s rate-setting committee meeting showed most officials expect it will take three years for inflation and employment indicators to return to levels seen earlier this year, before the pandemic disrupted the U.S. economy.

Mr. Clarida said that would represent a stronger rebound than the one that unfolded over the decade following the 2008 financial crisis. Nevertheless, the Fed’s three-year projection window isn’t long enough for Fed officials to project an overshoot of their 2% inflation target given the severity of the current downturn, he said.

(Bloomberg 9/23/20)

Powell: Fed Studying Treasury Market Performance During Crisis
“What we’re doing is, we’re going back now, as we did after the financial crisis, and we’re looking at where were the stress points, how did all the work we did for the last 10 years, how did it hold up?” says Fed Chair Jerome Powell.
“What happened that was new? And we’re going to be doing a lot of work on that”
“We are doing a lot of work on that and a central part of that will be the Treasury market and what changes do we need to make in and around the Treasury market so that we don’t have this happen again”
Powell answers questions Wednesday before House select sub committee on the coronavirus pandemic.

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September 14, 2020
SGH Insight
** First, so we don’t bury the lede, we do not believe there will be any adjustments in the amount or maturities of the current $80 billion a month in treasury purchases this week. A Committee majority seem perfectly happy with the current policy guidance, and we would take at their word the half dozen or more Committee members who went out of their way in the week before the pre-meeting blackout to lower expectations for a burst of new accommodation this week, none of which saw any pushback or correction from Chairman Jerome Powell in his closing remarks to the week in his lengthy NPR interview.

** Instead, we think the September meeting will mark the first of what is likely to be at least a two-step transition from “stabilization to monetary policy.” This week will largely revolve around aligning the post-meeting statement with the language of the “Statement on Longer-Run Strategy and Monetary Policy,” namely replacing the current symmetric inflation language with the new “average” 2% inflation “over time,” as well as putting inflation expectations at the center of the new inflation ambitions; likewise the FOMC is likely to note how “maximum employment” has been redefined, perhaps by clarifying the dovish distinction between “shortfalls” versus “deviations’ in the unemployment mandate.

** Some of that, as well as a potential reinforcement to the current policy guidance may become apparent in the quarterly Summary of Economic Projections and the rate dot plots, especially in their being extended out to 2023. For one, the rate dot projections are all but certain to remain flat as a pancake, validating the market pricing for a highly accommodative, lagged Fed reaction function for what is highly likely to be years to come.

** Otherwise, the 2020 growth forecasts are all but certain to be improved from June’s -6.5% year-end projection, with some momentum carrying over into 2021, while the median headline unemployment will likewise be lower and healthier looking than June’s 9.3% median estimate. Indeed, that better than expected labor market rebound brings to mind the Fed’s labor market projections were similarly underestimating the gains during the 2015-2018 policy normalization period. And there is still an upside surprise the staff projections will have to incorporate into their forecasts – an early vaccine for instance would undoubtedly trigger a swell of spending.
Market Validation
Policy Validation

(Washington AP 9/16/20)

Federal Reserve Sees Rates Near Zero At Least Through 2023

The Federal Reserve expects to keep its benchmark interest rate pegged near zero at least through 2023 as it strives to accelerate economic growth and drive down the unemployment rate.
The central bank also said Wednesday that it will seek to push inflation above 2% annually. The Fed left its benchmark short-term rate unchanged at nearly zero, where it has been since the pandemic intensified in March.
The Fed's statement formalized a change in its policy toward inflation. Fed chair Jerome Powell first said last month that the Fed would seek inflation above 2% over time, rather than just keeping it as a static goal.
The Fed also said Wednesday that it will continue purchasing about $120 billion in Treasurys and mortgage-backed securities a month, in an effort to keep longer-term interest rates low.
Read full report
September 08, 2020
SGH Insight
** This Thursday’s Governing Council meeting will include quarterly forecast revisions that would typically help pave the way for policy action, but the changes from last quarter’s baseline forecasts will not be enough to warrant even more monetary stimulus from the ECB -- at least not yet.

** Indeed, while the ECB will continue to flag downside risks, the growth numbers for 2020, while brutal, are not quite as bad as initially feared, and will be tweaked up.

** The mere mention of the impact of the rising euro on inflation forecasts by ECB Chief Economist Philip Lane nevertheless caught the market’s attention, if anything for the timing of the comments as the currency approached 1.2000 US dollars. But that comment was more a verbal “speedbump” in an attempt to throw a little two-way pricing into the currency markets after a bout of dollar weakness fueled by an increasingly dovish message from the US Federal Reserve, rather than anything even remotely resembling a line in the sand.

** Furthermore, while there is little question about the disinflationary impact of a strong or strengthening euro, the run up in July and August from 1.1200 to 1.2000 is seen as not just about Fed policy, but also as a reflection of a relatively more positive outlook from investors, at least at that time, on Europe’s management of the pandemic and its prospects for a return to more “normal” economic activity.

Market Validation
(MarketWatch 9/10/20)

European stocks edge lower, euro rises as ECB lifts forecasts without talking down currency

European stocks edged lower and the euro rose on Thursday, as the European Central Bank kept interest rates unchanged and offered a slightly more optimistic view of the economy.
Up 1.6% on Wednesday, the Stoxx Europe 600 declined 0.3%.
The ECB lifted its estimate for the eurozone economy this year, now seeing a contraction of 8% versus its previous estimate of an 8.7% drop, as it left 2021 and 2022 forecasts mostly unchanged.
During her introductory comments, ECB President Christine Lagarde did not mention the recent strength in the euro as a matter for concern.
Asked by a reporter, Lagarde said the ECB's governing council discussed the euro appreciation but said it doesn't "target the exchange rate." Lagarde said the ECB will have to "monitor carefully" the rate since it impacts inflation.
The euro traded at $1.1891, vs. $1.1804 on Wednesday.
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August 31, 2020
SGH Insight
The LDP will meet tomorrow Tokyo time (tonight Eastern time) to determine one of two possible procedures to elect their new leader, and that will have a significant bearing on the odds of a total continuity successor, who is shaping up to be Chief Cabinet Secretary Suga himself, or a “change candidate,” embodied in former Defense Minister Shigeru Ishiba.

** In other words, tonight’s meeting may mean more for markets than the LDP election itself, and despite reports that the general polling favors Ishiba over all the other candidates, the LDP is suspected to be leaning towards a selection process that heavily favors greater continuity in Suga, at least for the remainder of Abe’s term.

** But whichever election process the LDP chooses, Ishiba, it is just being reported in Tokyo, has said he will not bow out, contrary to earlier rumors, a clever political move that in effect puts additional heat on the LDP establishment, and on tonight’s decision.

** As things stand, we believe Suga appears most likely to take over as Japan’s next prime minister, with the solid support of LDP Diet members, although Ishiba is still refusing to bow out. That is especially the case if the General Council of the LDP determines to elect the new leader via a “Joint Plenary Meeting of Party Members of Both Houses of the Diet.”
Market Validation
Policy Validation
(Bloomberg 9/14/20)

Japan’s Suga Wins Ruling Party Race to Replace Premier Abe

Japanese Chief Cabinet Secretary Yoshihide
Suga was elected leader of the ruling Liberal Democratic Party
by an overwhelming majority, ushering in the country’s first
change of prime minister in almost eight years.

(Bloomberg 9/1/20)

Japan’s Suga Favorite to Succeed Abe After Party Limits Vote

Japan’s ruling Liberal Democratic Party adopted a structure for a vote to
replace outgoing Prime Minister Shinzo Abe that could help the premier’s
right-hand man, Yoshihide Suga, take over. Party officials decided on a
system Tuesday that would give more weight to lawmakers in the party
over rank and file members, LDP General Council Chairman Shunichi Suzuki
told reporters.

The move comes as Suga appears to be picking up enough
support among powerful factions of lawmakers, which put him far
ahead of any contender. The system decreases the influence of
regional voters, who have previously shown support for a top
rival, former Defense Minister Shigeru Ishiba, who on Tuesday
officially declared his candidacy.
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August 26, 2020
SGH Insight
** While we are unsure how detailed Chairman Powell will get in previewing the revamp to the framework and the revisions to the longer run statement, we do expect him to confirm the widely expected revisions to the 2% inflation target, formally in place since 2012, with new language that the central bank will seek an “average” of the 2% target “over time” or some such phrasing that will affirm the Fed is tolerating, if not seeking to engineer, an overshoot of the 2% target to ensure it is truly symmetrical rather than a ceiling.

** Equally important, we believe Chairman Powell will go into some length to note the Fed’s changing definition of its employment mandate, namely in expanding on its definition of “maximum” employment to make it clear the Fed is willing to tolerate a headline employment rate below the estimated longer run unemployment level. Indeed, we would be impressed if the Chairman goes some way to acknowledging monetary policy does have an impact on employment levels, especially in expanding its definition to include participation rates or unemployment levels among minorities and other groups.

Market Validation
(Bloomberg 8/27/20)

Treasuries Extend Gains After Fed Unveils New Inflation Approach

Treasury futures rise to session highs after Fed Chair Powell confirms a new approach to policy that takes a more relaxed stance on inflation and on its view of how low U.S. unemployment can go.
Gains are led by long-end of the curve, pushing 5s30s onto lowest levels of the session; yields richer by 1bp to 3bp across the curve
Move is accompanied by sliding inflation breakevens with 10-year tenor dropping around 4bp from near highs of the day
S&P 500 E-mini futures jump to session highs, advancing 0.2% on the day.

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August 17, 2020
SGH Insight
*** We are less certain, however, whether the Minutes will provide all that much clarity on the timing to a new policy guidance and changes to asset purchases. The July meeting three weeks ago was certainly far too early for a decision on policy guidance changes still two months away. At most, the Minutes may lay out the trade-offs in unveiling a strategic framework and a tactical guidance shift at the same meeting. In any case, guidance changes in the upcoming post-meeting statement will be largely data-driven, and are likely to be signaled only as the September 17-18 meeting draws nearer. ***

Market Validation
(Bloomberg 8/19/20)
Treasuries Fall After FOMC Minutes Are Silent on Asset Purchases
By Elizabeth Stanton
-- Treasuries erased gains and fell to session lows after minutes of the FOMC’s July 29 meeting were largely silent on the prospect of changes to the size or composition of the central bank’s purchases of Treasury securities.
Yields across the curve reached session highs, led by the long end, steepening the curve; 10-year yield erased what remained of an earlier decline of as much as 2.4bp and climbed as much as 1.8bp on the day to reach 0.687% before stabilizing
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August 10, 2020
SGH Insight
China’s Vice-Premier Liu He and US Trade Representative Robert Lighthizer are scheduled to review the implementation of the Phase One trade agreement between the US and China by videoconference this coming Saturday, August 15.

** On the heels of the recent escalation in tensions between Washington and Beijing, highly placed sources in Beijing suggested over the weekend that a “temporary cancellation or postponement” of the high-level virtual meeting “cannot be completely ruled out.”

** Such a decision, which would mean the trade deal is being pulled, even if gently, into broader bilateral disputes, would be highly disruptive to markets who to date have operated on the assumption that Phase One, for both sides, is on an independent track from all other disputes. But, warn sources who are vested in continued economic dialogue with the United States, if the administration of President Donald Trump were to “continue” to provoke China over these next few days, the talks will have to be temporarily canceled or postponed.
Market Validation
Policy Validation

(Bloomberg 8/14/20)

U.S.- China Six-Month Trade Agreement Review Delayed: Reuters

The six-month review of the trade agreement
between U.S. and China slated for Saturday has been delayed due
to scheduling issues, Reuters reports, citing sources familiar
with the plans.
* A new date has not been agreed to: Reuters
* NOTE: U.S. Trade Rep. Robert Lighthizer, Treasury Sec. Steven
Mnuchin and Chinese Vice Premier Liu He had been expected to
meet via videoconference on Aug. 15, the six-month anniversary
of the agreement entering into force
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