Highlights

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

2022
January 20, 2022
SGH Insight
Among the series of meetings that were held by China’s State Councilor and Foreign Minister Wang Yi with the foreign ministers of numerous middle eastern countries between January 10 and 15 in Wuxi, China, the most interesting perhaps for markets were his meetings with Saudi Arabia’s Faisal bin Farhan Al Saud on January 10, and with Iran’s Hossein Amir-Abdollahian on January 14.

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

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

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

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

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

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

Market Validation
Bloomberg 1/14/22

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

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

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

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

Read full report
January 10, 2022
SGH Insight
The next big data release is the retail sales report. Wall Street is looking for a 0.2% gain in retail sales ex-autos but the Chicago Fed tracker anticipates a 1.3% decline:



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

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

U.S. retail sales slumped in December by the most in 10 months, suggesting the fastest inflation in decades is taking a greater toll on consumers just as the nation confronts more coronavirus infections.
The value of overall purchases decreased 1.9%, after a revised 0.2% gain a month earlier, Commerce Department figures showed Friday. The figures aren’t adjusted for inflation, suggesting price-adjusted receipts were even weaker than the headline number.
The median estimate in a Bloomberg survey called for a 0.1% drop in overall retail sales from the prior month.
Read full report
January 10, 2022
SGH Insight
In the near term, the Fed will be raising interest rates and initiating quantitative tightening. I continue to see chatter to the effect that the Fed is only talking hawkish so they don’t actually have to tighten policy. This is wrong. A March hike is basically a slam dunk and the only reason we can’t price it at 100% is the residual probability that something goes sideways over the next two months. Not only is a rate hike imminent, but quantitative tightening is soon to follow. Even former arch-dove San Francisco President Mary Daly agrees, via Bloomberg:
“I would prefer to adjust the policy rate gradually and move into balance-sheet reductions earlier than we did in the last cycle,” she said in a virtual panel discussion at the Allied Social Science Associations conference Friday. “I would not prefer to do it simultaneously,” she said, adding “you could imagine adjusting the balance sheet” after “one or two hikes.”
Most likely, the data is not going to influence this path in a dovish direction. The primary risk is that the Fed adds a fourth rate hike to the March SEP. That’s the direction the data is moving.
Market Validation
Dow Jones 1/10/22

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

Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank will need to move more aggressively on rate rises this year as it seeks to stem an inflation surge, amid a job market that could see the unemployment rate fall below 3% by the end of the year.
"We want to bring inflation under control in a way that does not disrupt the real economy, but we are also firm in our desire to get inflation to return to 2% over the medium term," Mr. Bullard said in a Wall Street Journal interview Wednesday.
He spoke just after the release of government data that showed the biggest increase in what consumers pay for goods and services since 1982, with the consumer-price index jumping by 7% in December, compared with the same month in 2020. He said the headline figure was higher than expected but consistent with his expectations, adding he sees price pressures easing over the course of the year toward a 3% reading on the personal-consumption expenditures price index.
To get there, Mr. Bullard, who holds a vote on the rate-setting Federal Open Market Committee this year, said a more hawkish path for monetary policy is needed relative to his recent expectations.
Whereas he recently believed the Fed would need to raise rates three times this year, "I actually now think we should maybe go to four hikes in 2022." He said it is important for the Fed to start raising rates "sooner rather than later" because pulling back on stimulus in the near term and doing so steadily reduces the risk of an even more aggressive path should inflation not moderate back toward the target.
Read full report
January 05, 2022
SGH Insight
Altogether, this conversation indicates the Fed is considering going sooner, faster, and further with QT than in the last cycle. This makes sense if the Fed thinks it needs to unwind the balance sheet to open space to move in the next cycle. That said, it is odd (crazy?) that the Fed is having this discussion about needing to raise rates and initiate QT while it is still engaged in QE. And the fact that we are having this discussion while still buying asset suggests to me that the Fed is gearing up to begin QT soon. The deeper the Fed keeps going at this point – when there is no need for asset purchases and hasn’t been for quite some time – means it is going to have to get out sooner. I still like the idea of QT at the June meeting and rate hikes at the March, September, and December meetings with the risk of adding a rate hike in June and moving QT to May or July.
Market Validation
Bloomberg 1/11/22

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

Market Validation
Bloomberg 1/25/22

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

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

Bloomberg 1/3/22

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

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

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

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

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

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

PBOC Adopts New Loan Tools to Support Smaller Firms

China’s central bank adopts a new loan
support tool for smaller businesses from Jan. 1 through June
2023 to boost lending to smaller businesses, according to a
statement on PBOC website Jan. 1.
* PBOC will encourage local banks to increase loans to smaller
firms and cut costs, in order to ensure employment and stabilize
the economy
Read full report
2021
December 20, 2021
SGH Insight
It is increasingly recognized that Covid isn’t going away and consequently the focus needs to shift from cases to outcomes. President Biden ran on a campaign of bringing back “normality” and that isn’t going to happen with a nonstop media focus on the number of cases regardless of the degree of severity. The narrative must change, and I suspect will be changing in such a way that further lessens the negative domestic economic impact of the repeated waves of Covid. From what we are seeing now, the lack of vaccine durability, the potential for vaccine-evading variants, both of which mean ongoing breakthrough infections and create the need for a never-ending vaccination campaign, and the unwillingness of a percentage of the population to be vaccinated, suggests the administration will always appear to be fumbling the ball until it develops a strategy that acknowledges those factors and Covid as an endemic disease.
Market Validation
Policy Validation

Politico 12/21/21

ANOTHER COVID SPEECH — At 2:30 p.m., President JOE BIDEN will once again address the nation and outline another new plan to tackle another new, more highly transmissible variant of the coronavirus that threatens to once again push America’s health care system to its breaking point. The emphasis of the latest Biden plan, according to the White House, is to “mitigate the impact unvaccinated individuals have on our health care system, while increasing access to free testing and getting more shots in arms to keep people safe and our schools and economy open.”

It’s a plan that recognizes a few hard-earned truths about the two-year-old pandemic in America: Vaccine holdouts are here to stay, and with every new Covid-19 wave they will overload hospitals, which will need extra government support. For everyone else, widespread testing and boosters are the only alternative to lockdowns and recession.
Read full report
December 16, 2021
SGH Insight
Additional Thoughts on the Fed Pivot

Last night at dinner I gave my daughter the choice of either reviewing the latest issue of Fine Woodworking magazine or working through the SEP projections and re-watching Powell’s press conference. She chose the latter (kids these days, right?). Between that review, questions from clients overnight, and some other chatter that has crossed my desk, I have some additional thoughts on the results of the FOMC meeting.

Last night’s note had a short-term focus, primarily on the timing of the first rate hike. I think Powell set the stage for a March hike. The bar for a hike is pretty low at this point, just getting the Fed to reach consensus on full employment. That might sound like a big hurdle but note how many times Powell emphasized “rapid progress toward maximum employment.” We are not talking about “ground to cover” anymore. And, critically, note the absence of this line from the November press conference:

"The unemployment rate was 4.8 percent in September. This figure understates the shortfall in employment,
particularly as participation in the labor market remains subdued."

That second line isn’t in the December press conference. Why not? There is no hidden unemployment anymore now that the Fed views labor force participation as a lagging indicator. The unemployment rate is now taken at face value and the current 4.2% is just a hair over the Fed’s longer run projection of 4%. The Fed can and will dress up the full employment story with all sorts of labor market indicators, but the short version is that the economy is right on top of it already.

The Fed has plenty of time to telegraph a March rate hike. The January statement can clear the way for a rate hike and declare full employment or an expectation to meet full employment by March barring an Omicron disaster. In addition, we will have the Humphery-Hawkins testimony and even Powell’s confirmation hearings to bring everyone up to speed. Plenty of opportunities to get the word out. Powell made clear that tapering would be complete by the time of the March meeting, and any time after asset purchases end the Fed can hike. And this from Powell is about as close as he can get to autopilot without outright saying “March”:

"…so we've been calling out the fact that those were becoming longer and more persistent and larger and now
we're in a position where we're ending our taper within the next, well, by March, in two meetings and we'll be in a
position to raise interest rates as and when we think it's appropriate and we will, to the extent that's appropriate."

Because of Omicron, the debate is March versus May. If Omicron wasn’t a concern, then it would be March. And Omicron might not warrant any delay at all – see today’s move by the Bank of England.

Importantly, note that the Fed has repeatedly surprised on the hawkish side since June, so a March hike absolutely must be in play. The June dots, pulling forward the taper into 2021, the September dots, the September validation of a November taper, the acceleration of the taper, the December dots, and I think Powell all-but-validated a March hike yesterday, which I didn’t expect. Simply put, I have been on the hawkish leading edge of the curve for months and yet the Fed has still been a notch ahead of me. And, to Powell’s credit, that hawkish evolution has been accepted by the markets without disruption.

I expect the Fed will begin unwinding the balance sheet soon after rate hikes commence. That said, the Fed has just begun to struggle with this topic. Back to Powell:

"So, you know, with the balance sheet, we did have a balance sheet discussion as sort of a first discussion of
balance sheet issues today at our meeting this week. We'll have another at the next meeting and another at the
meeting after that, I suspect. These are interesting issues to discuss. Didn't make any decisions today. We
looked back at what happened in the last cycle and people thought that was interesting and informative, and
but to one degree or another people noted that this is just a different situation, and those differences should
inform the decisions we make about the balance sheet this time so haven't made any decisions at all about
when runoff would start but we'll be continuing to, in relation to when either liftoff happens or the end of the
taper but those are exactly the situations we'll be turning to in coming meetings."

The first key takeaway in that paragraph is that the last cycle is at best only a rough guide to how the Fed will manage the balance sheet this cycle. The second key takeaway is that the Fed will be considering options in the next few meetings (end of taper or liftoff). The primary difference between this cycle and the last is the strength of the rebound. As such, the Fed isn’t going to wait nearly two years after the first rate hike before it begins reducing the balance sheet. More likely is that it will happen soon after the first rate hike, within 6 months at the most. Arguably, that comparison with the last cycle also argues for a faster unwind as well.

Finally, thinking about how this year evolves, have we reached “peak hawkishness?” I think the key is the 2.7% core inflation forecast for 2022. That feels to me like the Fed is trying to get ahead of the inflation numbers after being behind all year. In other words, the Fed might think that between that forecast and the three rate hikes, it won’t have to get more hawkish in 2022. But why not just go all the way and predict four hikes if there is a high likelihood the Fed will go in March? First, going from zero to four hikes when the market anticipates two would risk sending a message that the Fed was so far behind the curve it needed to shift to a restrictive policy more quickly. Second, three hikes leaves open the possibility of using one quarter to initiate quantitative tightening (this would follow the 2017 playbook), so they already have four policy moves in mind for 2022. That leaves open the possibility of a March rate hike yet still holding the 2022 dots at three.

For the Fed to get more hawkish early in the year, we should be looking for signs that the inflation forecast is already in jeopardy. Remember, there is a widely held expectation that the Fed will get helped by the base effects pulling inflation lower after the first quarter. I would be cautious here as the Fed should look through the base effects to the monthly numbers; the Fed should clarify this distinction. The Fed could be waiting for that inflation decline before becoming more hawkish. So, my advice is to watch the month-over-month inflation numbers. The second thing to be watching is wages. The Fed is betting that wage pressures don’t intensify (note that Powell talked about wages as a signal of tightness in the labor market). That’s an obvious implication of the sustained 3.5% unemployment forecast starting next year in the context of declining inflation throughout the forecast horizon. If wage pressures become more obvious or it looks like unemployment will be sinking below 3.5% by the end of the year, the Fed will turn more hawkish. Third, of course, is watching measures of long-term inflation expectations.

That’s all for today. A lot to process after a busy week.
Market Validation
Policy Validation

Bloomberg 12/17/21

*WALLER: NO NEED TO DELAY BALANCE SHEET ADJUSTMENT
*WALLER: CAN START BALANCE SHEET SHRINKING SOONER AFTER LIFTOFF
*WALLER: CAN START B/S RUNOFF WITHIN ONE/TWO MEETINGS OF LIFTOFF
*WALLER FAVORS STARTING TO SHRINK BALANCE SHEET BY EARLY SUMMER
Read full report
December 15, 2021
SGH Insight
The ECB will not change the sequencing of rate hikes to follow the end of asset purchases, and the Governing Council has repeatedly pushed back on the likelihood of 2022 rate hikes. That is probably even more so the case given the likely dampening effect of the surging Omicron variant on travel, hospitality, and economic activity at least in the very near term. But importantly, sources have also stressed that this push back does not extend to 2023, and there are no “guarantees” of no hikes beyond 2022. Frankly speaking, even the late 2022 pushback, while seen as extremely unlikely, is not 100% ironclad.

This means the ECB will not commit to asset purchases beyond 2022, and will, as we stated in our November 22 report, very likely seek flexibility to start the year higher, but gradually unwind the Asset Purchase Program through the course of the year. Flexibility of course can go both ways, resulting in higher as well as lower purchases, but the maneuverability that is sought is to end QE by the end of 2022 if all pans out as expected.
Market Validation
Policy Validation

Bloomberg 2/7/22

European Central Bank Governing Council
Member Klaas Knot said he expects an interest-rate increase as
early as in the fourth quarter.
Borrowing costs are typically tightened in 25 basis-point
steps and “I don’t have reason to think differently this time,”
he said in a Buitenhof interview on Sunday.
Read full report
December 15, 2021
SGH Insight
The ECB will not change the sequencing of rate hikes to follow the end of asset purchases, and the Governing Council has repeatedly pushed back on the likelihood of 2022 rate hikes. That is probably even more so the case given the likely dampening effect of the surging Omicron variant on travel, hospitality, and economic activity at least in the very near term. But importantly, sources have also stressed that this push back does not extend to 2023, and there are no “guarantees” of no hikes beyond 2022. Frankly speaking, even the late 2022 pushback, while seen as extremely unlikely, is not 100% ironclad.

This means the ECB will not commit to asset purchases beyond 2022, and will, as we stated in our November 22 report, very likely seek flexibility to start the year higher, but gradually unwind the Asset Purchase Program through the course of the year. Flexibility of course can go both ways, resulting in higher as well as lower purchases, but the maneuverability that is sought is to end QE by the end of 2022 if all pans out as expected.
Market Validation
Policy Validation

Bloomberg 12/16/21

The European Central Bank expanded regular bond purchases for half a year to smooth the phasing out of its emergency debt-buying program and revamped the latter tool to combat future market turmoil, shifting its stimulus away from crisis settings.

Officials in Frankfurt confirmed their 1.85 trillion-euro ($2.1 trillion) pandemic measure, known as PEPP, will wind down as planned in March. To cushion that halt in emergency purchases, they temporarily boosted their conventional bond-buying tool.

The so-called Asset Purchase Program will double to 40 billion euros a month, starting in the second quarter. Policy makers will then taper to 30 billion euros in the following three-month period, before returning to the existing pace of 20 billion euros in October.

Italian bonds led declines in the region, lifting the 10-year yield eight basis points to 1% and widening the premium over bunds by four basis points to 131. German yields also climbed led by the long-end where 30-year rates rose above 0% for the first time since November. Money markets kept bets on a first 10-basis-point rate hike by end of next year.

The decision is an acknowledgment that emergency policy settings must come to an end in the face of the euro area’s fastest inflation since the single currency was created and as economic output nears pre-crisis levels.
Read full report
December 14, 2021
SGH Insight
On the credit front, the CEWC pledged to stabilize credit growth, keeping total social financing growth broadly in line with nominal GDP growth.

That means next year’s credit target will be basically the same as this year, or slightly increased. That too will be front loaded — new loans are expected to reach about 20 trillion yuan in 2022, with the first quarter likely to be close to 8 trillion yuan, up about 300 billion yuan from 7.7 trillion over the same period last year.
Market Validation
Policy Validation

Bloomberg 12/15/21

China to Offer More Loans to Small Businesses, Manufactuers: TV

China will increase financial support for
smaller businesses who face huge difficulties amid new economic
downward pressure, the state TV network reports, citing a State
Council meeting chaired by Premier Li Keqiang.
* China will give priority to manufacturers in tax, fee cuts
* China will offer more longer-term and credit loans to
manufacturers
* China welcomes foreign investment in high-end manufacturing
and R&D centers

Read full report
December 14, 2021
SGH Insight
Last Minute Thoughts Heading into the FOMC Meeting

Policy must adjust accordingly, but what exactly does that mean? At minimum, the Fed’s pivot will be immediately operationalized in an acceleration of tapering. The Fed will also raise the expected path of policy rates such that participants expect two rate hikes in 2022 with a risk of more. The Fed will adjust language in the FOMC statement to remove “transitory” and may also signal the economy has made “further progress towards” or is “on track to meet” the Fed’s goals.
Market Validation
Policy Validation

Bloomberg 12/15/21

Here are the key takeaways from the December FOMC meeting:
Taper acceleration effective mid-January: A reduction in the pace of asset purchases by $20 billion (vs. $10 billion prior) in Treasuries and $10 billion (vs. $5 billion prior) in mortgage-backed securities per month, with the wind-down concluding in March 2022.
The statement has retired “transitory” in its characterization of inflation: “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”

Dot plot: Given the forecast revisions, the majority of FOMC participants now anticipate a steeper path of rate hikes than at the last meeting -- three rate hikes for next year,

Beyond those outcomes, however, market participants are focused on Powell’s messaging regarding the vulnerability of the expected rate path. An SEP forecast of two rate hikes suggests a June liftoff while markets are pricing in a 40% change of a March liftoff. What would Powell say about these odds? I think Powell will want to retain maximum flexibility. In this case, I think that means he will not want to embrace current market pricing for a March rate hike, but he won’t want to push back on it either. Given how rapidly the Fed shifted gears between the November and December FOMC meetings, it seems Powell would be making a misstep to rule out March. At the same time, if he appeared to embrace a March hike, he would be sending a signal ahead of the data. I think that would be a mistake given the possibility of Omicron-related disruptions. I think the basic story he will want to push is that with the balance of risk tilted toward inflation, the Fed will act to prevent inflation from becoming entrenched, which should be interpreted as every meeting is now “live.” September, November, and now December, were all “live” for policy change, and we should expect January will be as well.

Policy validation

*Powell: 'There's a Real Risk' High Inflation Will Be More Persistent Than Expected
*POWELL: NEED TO SEE HOW DATA EVOLVE IN COMING MONTHS
*POWELL: WILL DISCUSS TIMING OF RATE HIKES IN COMING MEETINGS
*POWELL: WE'LL BE POSITIONED TO RAISE RATES IF NEEDED
*POWELL: FED COULD HIKE BEFORE REACHING MAXIMUM EMPLOYMENT
*POWELL: WE ARE MAKING RAPID PROGRESS TOWARD MAX EMPLOYMENT
*POWELL: MAXIMUM EMPLOYMENT WILL BE A JUDGMENT CALL BY FOMC
*POWELL: WE'RE TWO MEETINGS AWAY FROM FINISHING TAPER NOW
*POWELL: DON'T FORESEE LONG DELAY BETWEEN TAPER, RATE HIKE

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December 14, 2021
SGH Insight
Monetary Policy
On the monetary front, the stimulus will likely come in two phases. From when the most recent Reserve Requirement Ratio cut takes effect on December 15 to the Spring Festival on February 1, there will be an injection of more liquidity into the markets through the ramping up of re-lending to banks, including through a recently introduced decarbonization supportive tool. Another RRR cut will probably come then in February, although some officials think an interest rate cut may be less likely.
For perspective on magnitude and the room for stimulus, the CEWC meeting set the CPI target for 2022 at 3.0%, the same as for 2021, but predicted inflation would rise in a more modest way, from 0.9% in 2021 to 2.2% in 2022. And so, officials believe inflation will pose no major constraints on monetary policy.
Credit Policy
On the credit front, the CEWC pledged to stabilize credit growth, keeping total social financing growth broadly in line with nominal GDP growth.
That means next year’s credit target will be basically the same as this year, or slightly increased. That too will be front loaded — new loans are expected to reach about 20 trillion yuan in 2022, with the first quarter likely to be close to 8 trillion yuan, up about 300 billion yuan from 7.7 trillion over the same period last year.
Market Validation
Policy Validation

Yicai Global 12/27/21

China’s Central Bank Vows to Promote Real Estate Market’s Healthy Development

China’s central bank has pledged to promote the real
estate market’s healthy development, saying it will safeguard the legitimate
rights and interests of homebuyers and better meet their reasonable housing
needs.

The People’s Bank of China made the commitment at its fourth-quarter monetary
policy committee meeting on Dec. 24, according to an announcement the next
day.

Structural monetary policy tools should be used with precision to transform
those policy tools linked to the real economy into market-oriented tools that
are beneficial to small and micro enterprises as well as individual industrial
and commercial households, the PBOC said.

Special refinancing will be used to reduce carbon emissions and encourage
green and high-efficient coal application, the bank said, adding that it will
guide financial institutions to boost support for small and micro firms, tech
innovation and eco-friendly development.

The PBOC will encourage increased lending to the manufacturing sector to
ensure that financial support for private enterprises is compatible with their
contribution to economic and social development, accelerating the realization
of a green financial system aimed at peak carbon-dioxide emissions and carbon
neutrality.

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December 13, 2021
SGH Insight
The likely data highlight of the week comes Wednesday in the form of the retail sales report for November. Wall Street is expecting retail sales will moderate from 1.7% to a still strong 0.9% gain. Note that the Chicago Fed retail sales tracker predicts a more modest 0.4% gain.
Market Validation
Bloomberg 12/15/21

U.S. Nov. Retail Sales Rose 0.3%, Below Estimate

Retail sales less autos rose 0.3% in Nov., est. 0.9%


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December 08, 2021
SGH Insight
Monetary Stimulus – Pumping Q1 2022
From a policy perspective, Premier Li Keqiang, Vice Premier Liu He, and the senior economic leadership in Beijing have put top priority on stimulating growth going into and through Q1 of 2022. That is due both to concerns over slowing growth going into the new year, and difficult base effect comparisons to 2021.
The Communique of the 2021 CEWC will be intended to demonstrate that China has made economic stability its top priority for 2022. From the Party’s perspective, “As long as economic growth can be maintained above 5.0% in 2022, we will be able to lay a solid foundation for maintaining average annual economic growth at more than 5.0% during the 14th Five-Year Plan (2021-2025).”
Market Validation
South China Morning Post 12/10/21

China’s economic policymakers doubling down on ‘stability’ for 2022

Annual central economic work conference wrapped up on Friday with leaders stressing the importance of boosting demand with 'front-loaded' policy support.

As China's year-on-year economic growth expected to drop below 4 per cent in the fourth quarter of 2021, fears of a hard landing are triggering calls for more supportive measures.

Beijing has set the tone for its plans to safeguard the country's economic stability and prevent downward risks in the coming year, according to a statement following the annual central economic work conference that concluded on Friday.

"We are facing three kinds of pressure, including contraction of demand, supply shocks and weaker expectations," the statement said, according to state media. "Our policy support should be front-loaded appropriately."
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December 07, 2021
SGH Insight
On The Dots
You ask, I answer, now with some quick thoughts on next week’s dot plot.
The theme for the week is my expectation of a high probability that the Fed hikes rates in March. My view is that the balance of risks is changing rapidly, as evidenced by the Fed’s sharp pivot from patience to accelerating the pace of tapering, that March must be considered in play. To be sure, we have three months of data before we get there, so anything can happen, but the data and the Fed narrative shift are driving us in that direction.
Market Validation
Bloomberg 12/17/21

Treasury Curve Flattens as Waller Says March Fed Meeting Is Live

The spread between U.S. Treasury 5-year and 30-year Treasuries flattened to session lows after Federal Reserve Governor Christopher Waller said he wants to put the March FOMC meeting on the table for liftoff if needed. In the wake of this week’s Fed meeting, expectations were that May was a live meeting. As mentioned earlier, Waller, an infrequent Fed speaker, was among the first to the faster taper camp.
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