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.

October 17, 2022
SGH Insight
Chips Ban Retaliation

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

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

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

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

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

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

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

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

Market Validation
Reuters 10/20/22

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

Bloomberg 10/17/22

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

Bloomberg 10/18/22

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

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

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

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

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

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

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

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

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

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

Market Validation
Bloomberg 10/13/22

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

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

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

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

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

Governor Christopher J. Waller

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

Market Validation
Bloomberg 10/13/22

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Market Validation
Bloomberg 9/21/22

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

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

Fed Longer-Run Median Fed Funds Rate at 2.5%; prior median longer-run Federal funds rate 2.5%
Longer run Fed funds median at 2.5% compares to previous forecast of 2.5%
2022 median Fed funds 4.4% vs 3.4%
2023 median Fed funds 4.6% vs 3.8%
2024 median Fed funds 3.9% vs 3.4%
2025 median Fed funds 2.9%
Read Full Report
September 19, 2022
SGH Insight
...Regardless of the dots, Powell will attempt to maintain a hawkish tone at this press conference. Now that we are past the peak recession story, and there is no convincing evidence of any sustained slowing of inflation, Powell should be free to take on a tone more like Sintra and Jackson Hole and less like the July press conference. I think Powell will want to follow Waller and emphasize the uncertainty about the path of policy:
I expect that getting inflation to fall meaningfully and persistently toward our 2 percent target will require increases in the target range for the federal funds rate until at least early next year. But don’t ask me about the policy path because I truly don’t know—it will depend on the data...
Market Validation

From the FOMC press conference
>> Hi, thank you for taking our questions, I'm from the New York Times. Can you give us detail around how you'll know when the slow down the rate increases and when to stop?

Chair Powell >> My main message has not changed at all since Jackson Hall. The FOMC is resolved to bring inflation down and we will keep at it until the job is done. So, the way we're thinking about this is the overarching focus of the committee is getting inflation back down to 2%. To accomplish that, we'll need to do two things in particular to achieve a period of growth below trend and softening in labor market conditions to foster a better balance. So, on the first, the committee's forecast and those of most outside forecasters show growth running below its longer-run potential this year and next year. So far there is only modest evidence that labor market is cooling off. Job openings are down a bit. Quits are off their all-time highs. There's signs that wage measures may be flattening out. Payroll gains have moderated, but not much. In light of the high inflation we're seeing, we think we'll -- in light of what I just said -- we'll need to bring our funds rate to a restrictive level and to keep it there for some time. What will we be looking at, is your question. We'll be looking at a few things. First, we'll want to see growth continuing to run below trend, to see movements in the labor market showing a return to a better balance between supply and demand, and clear evidence that inflation is moving back down to 2%. That's what we'll be looking for. In terms of reducing rates, we'd want to be very confident that inflation is moving back down to 2% before we would consider that.
Read Full Report
September 06, 2022
SGH Insight
Fed on Path for Another 0.75-Point Interest-Rate Lift After Powell’s Inflation Pledge
Fed officials face questions over how high to lift rates by year’s end and how fast to get there
By Nick Timiraos
Updated Sept. 7, 2022 10:29 am ET
In a speech Aug. 26 in Jackson Hole, Wyo., Mr. Powell underscored the central bank’s commitment to boosting interest rates enough to lower inflation from 40-year highs. “We will keep at it until we are confident the job is done,” he said.
His remarks and tone placed him among the Fed officials who favor a more aggressive pace of rate increases than others, said Tim Duy, chief U.S. economist at research firm SGH Macro Advisors. Raising rates by 0.75 percentage point would fit that approach, he said.
Mr. Powell’s speech showed he “very much did not want to leave the impression that the Fed would fall short on fighting inflation,” Mr. Duy said.

Several officials have signaled a desire to raise the fed-funds rate closer to 4% by year’s end—or about 1.5 percentage point higher than its current level. That could be accomplished in rate increases of various sizes at each of the three remaining Fed meetings this year.
The hawkish approach would point to a 0.75-point rate rise at the coming meeting, followed by smaller increases at the next two, analysts said.
“The argument is you’re going to have to go much further than where policy rates are now, and the risk of overshooting is still fairly low,” said Mr. Duy. “And you would rather try to get a little bit more ahead of the curve rather than risk falling behind further.”

Market Validation
Bloomberg 9/7/22

Fed-Dated OIS Bid After WSJ Report Hints at 75bp Sept. Rate Hike

Fed hike premium jumps following WSJ report from Nick Timiraos that the Fed’s inflation fighting pledge could tee up another 75bp rate hike rather than a 50bp move for this month’s meeting.
September Fed OIS jumps around 4bp following the report, tops at 3.046% and current cycle highs before paring move slightly to price in around 70bp rate hike for the September meeting, up from 67bp priced Tuesday close
Front-end of the Treasuries curve underperforms into the weakness, flattening 2s10s by around 2bp and dropping to -16.5bp, spread remains inside session range
Further out, Fed dated OIS prices in around 149bp of additional hikes into the December meeting vs. 145bp priced Tuesday close
Read Full Report
September 06, 2022
SGH Insight
A 75bp move on September 7 to 3.25% would position the bank to calibrate the next phase of its policy cycle -– an enviable position that most other central banks have yet to achieve -– where it can begin to guide rates via smaller increments to a restrictive terminal rate that truly will be guided by incoming data.
Still chasing inflation but no longer chasing a neutral rates setting, the BOC then will deliberate whether it needs 50bp or 75bp in tightening over its two remaining meetings this year to finish 2022 around 3.75% or 4%.
With no accompanying press conference this week, the central bank may drop the “frontloading” reference in the statement once rates are at neutral. That change would denote the largest hikes are behind the BOC. Its July statement described the 100bp move as frontloading “the path to higher interest rates.”
We do, however, expect the bank to retain statement language indicating that rates will need to rise further, particularly given inflation still remains too high for Macklem to declare a stopping point.
Market Validation
Bloomberg 9/7/22

The Bank of Canada delivered a fourth consecutive outsized interest-rate hike in a bid to slow the nation’s economy and drag inflation down from four-decade highs.
Policy makers led by Governor Tiff Macklem raised the benchmark overnight rate by 75 basis points to 3.25% on Wednesday, giving Canada’s central bank the highest policy rate among major advanced economies. Officials said they expect to continue raising rates, keeping the door open for more hikes in coming months.
“Given the outlook for inflation, Governing council still judges that the policy interest rate will need to rise further,” officials said in the statement.
The jumbo hike into the restrictive range points to a central bank still uncomfortable with sticky inflation, but sets the stage for policy makers to start fine-tuning borrowing costs as price pressures are brought to heel.
While dropping any references to “front-loading,” the statement suggests the Bank of Canada has shifted to thinking about smaller adjustments to policy, and is looking at where officials can start winding down the tightening campaign.
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” the bank said.
Read Full Report
September 05, 2022
SGH Insight
The Reserve Bank of Australia (RBA) is likely to deliver its fourth consecutive 50bp rate hike this week, taking the cash rate to 2.35%, as it seeks to push rates into more restrictive territory to get inflation under control despite a torrent of protest over a housing market downturn.
Market Validation
Bloomberg 9/6/22

Australia’s central bank delivered its
fourth consecutive half-percentage point interest-rate increase
and reinforced that it’s not on a “pre-set path” in its drive to
rein in inflation.
The Reserve Bank raised the cash rate to 2.35%, the highest
level since 2015, from 1.85% at Tuesday’s meeting.
Read Full Report
August 22, 2022
SGH Insight
...I think we can already see the points that represent the central messaging at this week’s upcoming Jackson Hole conference. I anticipate that sideline discussions will emphasize the hawkish points of agreement discussed above: rates need to be in restrictive territory and stay there for an extended period, restoration of price stability is the number one job, and don’t believe we won’t accomplish that goal. There is less unanimity here than it appears, at least as far as the terminal rate is concerned, and financial journalists can press to find divisions should they choose to do so, but that basic messaging should be uniform across speakers...

...Bottom Line
FOMC participants might share a common objective in restoring price stability, but with rates now in the range of long-term neutral, there is no consensus among members of the ultimate level of policy rates necessary to meet that objective. We think that the consensus will eventually emerge on the higher end of the estimates, but that remains to be seen. That said, there is a very unified theme in the messaging, and Powell can reinforce that theme. Market participants are hawked up going into this week, and that sets up the risk they will be disappointed by anything that feels less than a total repudiation of the July meeting and minutes. That said, I also get the sense the market participants would like to take on a solid, one direction trade as they return from summer breaks, and if they want to focus on the hawkish messaging, they can take short term rates higher.

Market Validation
Bloomberg 9/19/22

US 10-Year Yield Rises to 3.5% for First Time Since 2011

The 10-year Treasury yield briefly rose above 3.50% for the first time since 2011 on Monday, with the bond market extending its bearish run ahead of another jumbo rate hike expected this week by the Federal Reserve to bring down inflation.
The 10-year yield jumped as much as 6.6 basis points to 3.516%, breaking above a psychological level that held in mid-June. Still the main selling pressure in the Treasury market remained focused on the policy sensitive two-year note with the benchmark rising as much as 9 basis points to 3.96%, marking a fresh high since October 2007.

Bloomberg 8/26/22

Federal Reserve Chair Jerome Powell issued a
fresh warning to investors doubting his resolve to fight
inflation: interest rates are heading higher and will stay there
“for some time.”
The message from Jackson Hole -- hammered home by Powell in
a terse five-page speech Friday and endlessly repeated by his
colleagues -- is that the central bank will not blink in the
fight to cool prices.
“Restoring price stability will likely require maintaining
a restrictive policy stance for some time,” Powell told the
audience at the Fed’s annual retreat in Wyoming’s Grand Teton
National Park. “The historical record cautions strongly against
prematurely loosening policy.”
“Higher for longer is the new watchword,” said Peter
Hooper, global head of economic research for Deutsche Bank AG.

Read Full Report
August 18, 2022
SGH Insight
With all the focus on rate hikes, there was one additional comment in today’s interview that did not get much coverage, but which we found intriguing. That was to float the possibility that the size of the ECB’s balance sheet and the reinvestment of the bonds held under the Asset Purchase Program may be a matter of discussion by the Governing Council soon.
We have, truth be told, assumed that reinvestments would be on autopilot for a while, so any material discussion, if it were to happen, would be newsworthy.
Market Validation
Bloomberg 8/26/22

Some European Central Bank officials want to begin a debate by year-end on when and how to shrink the almost 5 trillion euros ($5 trillion) of bonds accumulated during recent crises.
Deciding how to go about the process -- known as quantitative tightening -- is the logical next step after the ECB raised interest rates for the first time since 2011 in July, people familiar with the plans said, asking not to be identified as the deliberations aren’t public.
The Governing Council hasn’t discussed the issue yet, and it’s unclear when the best moment would be to start reducing the balance sheet, given the increasing likelihood of a recession in the 19-member euro zone, according to the people.
ECB staff are currently studying how the Federal Reserve and the Bank of England are managing QT, one person said.
Read Full Report
August 15, 2022
SGH Insight
...Stimulus, as in the first half, will come largely from the fiscal side.

There, the CFEAC stressed that governments at all levels should continue to accelerate fiscal expenditure and shore up domestic consumption in the second half of 2022. It approved fiscal expenditures of 13.821 trillion yuan for the second half, an increase of 2.9% from the same period last year, and an increase of 7.2% from the 12.888 trillion yuan in H1 2022. It called for China’s fiscal expenditure to grow by double digits year over year in H2 to achieve Beijing’s full-year 2022 fiscal spending target of 8.4% growth.

The 12.888 trillion-yuan H1 fiscal expenditure figure represents a 5.9% increase from the same period in 2021 and makes up 48.25% of the 26.71 trillion yuan full-year 2022 fiscal spending target. China’s local governments, encouraged by Beijing, issued 3.41 trillion yuan worth of new special bonds in the first half of 2022, a 93% frontloading of the 3.65 trillion-yuan annual quota for new special bonds this year, and leaving little room for additional new issuance this year under the current quota.

To help steady economic growth from Q4 2022 to H1 2023, local governments will therefore pull issuance of new special bonds from the 2023 quota into October and November of this year. About 1.8 trillion yuan of special bonds are expected to be issued in advance...
Market Validation
Bloomberg 8/26/22

China stepped up its economic stimulus with
a further 1 trillion yuan ($146 billion) of funding largely
focused on infrastructure spending, support that likely won’t go
far enough to counter the damage from repeated Covid lockdowns
and a property market slump.
The State Council, China’s Cabinet, outlined a 19-point
policy package on Wednesday, including another 300 billion yuan
that state policy banks can invest in infrastructure projects,
on top of 300 billion yuan already announced at the end of June.
Local governments will be allocated 500 billion yuan of special
bonds from previously unused quotas.

Bloomberg 8/16/22

China’s embattled developers surged in the
stock and bond markets Tuesday on news that authorities are
planning to help some raise fresh financing, adding to signs of
official support for an industry grappling with a debt crisis
and slumping home sales.
Notes from Country Garden Holdings Co., CIFI Holdings Group
Co. and Longfor Group Holdings Ltd. soared at least 11 cents on
the dollar Tuesday, according to Bloomberg-compiled prices, set
for the biggest gains since March. Their shares surged more than
9% in Hong Kong and a Bloomberg Intelligence gauge of the sector
gained 2.4%, the most in three weeks.
Chinese authorities have told several property developers
that state-owned credit support provider China Bond Insurance
Co. will give full guarantees for some of their upcoming onshore
bond offerings, according to people familiar with the matter.
The first batch of private developers to be included in the plan
include Longfor, Seazen Group Ltd., CIFI, Country Garden and
Gemdale Corp., the people said, asking not to be identified
because the matter is private.
Read Full Report
August 10, 2022
SGH Insight
Bottom Line: The CPI report is on net good news, but not good enough to deter the Fed from ongoing rate hikes. It leans the odds back toward 50bp at the next meeting, but not decisively so. While there is a heavy focus on the next meeting, this report alone doesn’t suggest we should expect a lower rate path even if the Fed opts for 50bp. That choice actually argues for a higher path of rates assuming elevated inflation remains persistent. If the Fed concludes that it can’t restore price stability without a recession, then 50bp would only be delaying the inevitable and 75bp becomes a more obvious option.
Market Validation
Bloomberg 8/16/22

Heightened activity seen in SOFR spreads Tuesday including a large Mar23/Sep23 steepener, blocked mid-morning. Front-end spreads are starting to indicate Fed rate cut pricing shifting out of early next year and deeper into 2023 and 2024.
At 10:28am ET 15,000 SOFR Mar23/Sep23 spread was bought via block at -28.5bp; DV01 on the trade is $375k
Read Full Report
August 03, 2022
SGH Insight
Now Bailey, concerned about so-called second round effects feeding into inflation, looks set to cross over to recommend 50bp, and with the support of at least his chief economist Huw Pill, that vote should carry the day. Both supported only 25bp in June.
MPC members are fretting that price and wage setting behavior could entrench inflation at a higher level. In the most recent comments by a BOE official on July 7, Pill noted that the BOE’s guidance reflects “a willingness – should circumstances require – to adopt a faster pace of tightening than we have seen implemented in this interest rate cycle so far.”
Three of the four external board members – Jonathan Haskel, Michael Saunders, and Catherine Mann – already wanted 50bp in June. Of the four remaining votes, at least one, if not two other members, might also vote for 50bp.
Even as the Bank most likely opts for the bigger increment tomorrow, it will be careful not to suggest a string of 50bp moves will follow, nor even that it won’t sit out moves later this year. Additional guidance Thursday will, however, shape expectations about how quickly the Bank intends to get to a neutral rate around 2.25%.
Market Validation
Bloomberg 8/4/22

The pound reversed gains against the US dollar and UK bonds rallied after the Bank of England warned of a long recession and said its monetary policy path was not pre-set.
That took the shine off a widely expected 50 basis-point interest-rate hike for pound investors. The currency fell as much as 0.5% to $1.2084, having gained by that much before policy makers raised interest rates to 1.75%. Ten-year gilt yields dropped as much as eight basis points and part of the yield curve briefly inverted to reflect fears of an economic slowdown.
While delivering its biggest rate rise in nearly 30 years, the BOE suggested it could be less forceful in raising rates in the coming months. It warned the UK is heading for more than a year of recession under the weight of soaring inflation, leading traders to pile into gilts as a haven.

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