Key Bullets and Market Chatter

Published on September 17, 2021
SGH Insight
In the interest of efficiency and time I thought we might share a few brief highlights of key market related points in (and not in) our reports while addressing some market rumors and chatter. Please let us know if you find them helpful, and we wish you in the meantime a good weekend.

*Debt ceiling suspension will probably be included in a Continuing Resolution going out to December. Beyond that there is no plan yet.
Market Validation
Policy Validation

Bloomberg 9/20/21

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer say a stopgap government funding bill will include a suspension of the debt limit through December 2022.
“We believe a suspension of the debt limit through December 2022 would provide an amount of time commensurate with the debt incurred as a result of passing last winter’s bipartisan $908 billion emergency COVID relief legislation,” Pelosi and Schumer say
Pelosi and Schumer say the stopgap bill would fund the government through December of this year.

In the interest of efficiency and time I thought we might share a few brief highlights of key market related points in (and not in) our reports while addressing some market rumors and chatter. Please let us know if you find them helpful, and we wish you in the meantime a good weekend.

  • Tim has written extensively for us on the Fed/US Economy, but some key points: The weight of the FOMC we think is slowly evolving to a bit greater focus/concern on the durability of rolling, so not just autos, semiconductors, etc., supply side constraints into the middle of 2022, bit more durable upside pressure on (obviously) transitory inflation, and maybe more importantly the slower than hoped for return of the work force into the economy (UI benefits, school openings, Delta/Covid writ large). We think there is a greater than even, call it 70% chance, the Fed pulls the first rate hike forward into 2022 from 2023 in next week’s SEP. There appears to be little drama around a November taper announcement (and maybe concurrent start) date, or a roughly mid-year end to the process, it is just a signaling device at this point despite the Fed’s probably too tight linkage to payrolls, and so the bar to moving off these general parameters if/once adopted we expect will be high.
  • Debt ceiling suspension will probably be included in a Continuing Resolution going out to December. Beyond that there is no plan yet.
  • Nobody, including leadership, appears to have a clue on where Reconciliation will end up, but in talks with Hill members and staff the general assumptions hover roughly around a split the “Manchin/Sanders” difference $2-2.5 trillion end gross number – but who knows. The Senate will push back hard on the prescription drug exclusion in the House and insert some more stringent revenue raisers than the House side (including with a focus on housing affordability and homelessness, all hugely expensive). Most assume there will be some movement on the SALT cap, means tested of course. We thus expect some of the proposed rates/revenue raisers will be going up from the Ways and Means version, Manchin/Sinema notwithstanding, not down. Obviously, lots of moving parts.
  • China: We have been a bit of an outlier since the summer flagging that the White House would like to ease back the “Trump-era” tariff regime – by the end of this year (reasons: it demonstrates the new administration’s ability to engage with China on a multitrack level, tough on security but with cooperation on economics where it is in our interests, aid to the economy/markets, some very minor relief on inflation, and yes, intense corporate lobbying). Obviously the WH has great sensitivity to the politics, and we need a big “give” from China, so even though Beijing wants tariff relief too, they (also) don’t need it, and so are playing a bit at the moment. There will clearly be no give on issues like subsidies, and I suspect we are circling around movement on a more public (and Biden/democratic caucus priority) issue of climate change, which Beijing has linked to economic cooperation but a linkage we have not yet accepted. Biden asked Xi if he would move the 2050 China carbon neutrality target up by 5 or 10 years; Xi said thanks but no thanks but said let’s keep talking. The news article saying Xi “rejected” a summit meeting is incorrect. They are being non-committal and I think are just in negotiating mode. I would still expect an October Rome summit.
  • ECB: The extended commitment on interest rates and new framework do not extend to asset purchases, and I think many analysts/traders do not really grasp this still. Obviously, the ECB want ultra-easy accommodation, but the end game is to wean off these purchases, slowly, slowly, and while they are not tapering (“pre-set”), I would be surprised if the ECB did not adjust PEPP (remember, “Pandemic Emergency Purchases”) downwards again for Q1 of 2022. Greater QI 2022 issuance/supply should not really matter much, unless there is some huge blow out in rates (it is costless for the ECB to tweak around with this). “Asset purchases are still non-conventional policy, and we sort of think we will be done in 10 years, call it 2025.” Board Member Isabel Schnabel explicitly said in her blog that the commitment on rates allows the ECB to be more flexible in asset purchases, which we know has unwanted side effects if kept in place for too long (pardon the paraphrasing).
  • ECB: All this is in light of forecasts that are likely to be revised up. I would be seriously shocked if Chief Economist Philip Lane would deliberately seek to leak and jolt the hard-fought rates commitment, or even make such an inadvertent mistake, as yesterday’s news article and rumors suggest, later denied. But yes, the 1.5% 2023 inflation forecast is conservative. “After overestimating inflation for so many years, it is reasonable to ask at least if that might not be now changing, but that remains to be seen.”  So directionally the article is onto something, but I would venture to say not a single ECB official would pencil in or say at this time we are bringing our rate hike expectations forward on that basis.

All the best and have a great weekend.

Sass

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