Fed, BOE and SNB meetings will all deliver rate hikes in the week ahead of us and we will get preliminary March PMI data for the Eurozone and the UK as well as inflation data for Canada.
USD
The US government has guaranteed safety of all deposits in SVB and Signature Bank. They said that this is not a bailout as SVB equity and bond investors will get wiped out, only depositors will be protected. US Treasury announced new Bank Term Funding Program (BTFP) which will allow banks to pledge collateral at par, meaning holdings of long-dated Treasuries or MBS with mark-to-market losses can unlock liquidity based on original value. With Fed hiking interest rates in the past 12 months value of long-dated Treasuries and MBS decreased significantly causing losses and illiquidity. First Republic Bank, another troubled bank, received $30bn in additional funds from a group of 11 big banks with JP Morgan, Citibank, Bank of America and Wells Fargo depositing $5bn each while Goldman Sachs and Morgan Stanley each deposited $2.5bn. Fed document showed that for the week ending on Wednesday March 15, banks borrowed $152.85bn from the lender of last resort which was up from less than $5bn the previous week. The amount borrowed is higher than the previous all-time high of $111bn seen in the 2008.
February inflation report came in at 6% y/y as expected and down from 6.4% y/y in January. Core CPI slipped to 5.5% y/y from 5.6% y/y the previous month. Inflation has been coming down for eighth straight month. Shelter was the biggest contributor as it accounted for over 70% of the increase followed by food prices and energy index. Core services ex. shelter & healthcare rose by 0.8% m/m. Considering falling inflation and potential systematic risks in banking sector Fed will opt for a 25bp rate hike next week.
Retail sales in February declined -0.4% m/m as expected. Retail sales ex autos were down -0.1% m/m while ex autos and gas were flat on the month. A very surprising reading and a positive for the economy was control group, which excludes volatile components such as building materials, gasoline, autos and food service. It rose 0.5% m/m and January reading was revised up to 2.3% m/m from 1.7% m/m.
The yield on a 10y Treasury started the week and year at around 3.7%, rose toward 4.1% and finished the week at around the 3.4% level. The yield on 2y Treasury dropped more than 100bp from last week’s high at 5.08% as it fell to 3.814% and finished the week at around 4.1%. Spread between 2y and 10y Treasuries widened over the weekend and started the week at -75bp then tightened further due to sharp drop in 2y yield to -51bp. It finished the week at around -62bp. FedWatchTool sees the probability of a 25bp rate hike in March at 84.9% while probability of no change is at 15.1%. Probability of a 50bp rate hike is at 0 and it finished the last week at 40%.
This week we will have FOMC meeting. A 25bp rate hike is the most probable outcome. We will get a new Summary of Economic Projections and a revised dot-plot. According to statements from FOMC members that dot-plot will be revised up to show higher terminal rate. Fed members entered a quiet period right as the turmoil in banking sector occurred so we may see some tweaks to the terminal rate.
Important news for USD:
Wednesday:
Fed Interest Rate Decision
EUR
ECB delivered on a 50bp rate hike as announced thus lifting the rate to 3.5%. The statement started with “Inflation is projected to remain too high for too long.” They are switching to data dependent approach with inflationary data and outlook as the main data points. Macroeconomic projections were done prior to the tensions in the financial markets so they should be interpreted with added uncertainty. “ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.” Core inflation is seen averaging 4.6% in 2023, 2.5% in 2024 and 2.2% in 2025. Growth has been revised to 1% in 2023 due to surrounding uncertainties and is expected to pick up to 1.6% in both 2024 and 2025. APP portfolio will remain declining by €15bn per month until the end of June of 2023.
At the press conference President Lagarde stated that ECB is closely monitoring tensions in the financial markets. She stated that underlying price pressures are staying strong and that wage pressures are gaining strength. Falling energy prices could give a boost to the growth as companies adjust as well. Stronger rebound in China could lead to increase in foreign demand which could also boost growth. She reiterated data dependence stating that it is impossible to determine what the rate path will be. The decision at ECB meeting was adopted by very large majority of members.
This week we will have preliminary March PMI data.
Important news for EUR:
Friday:
S&P Global Manufacturing PMI (Eurozone, Germany, France)
S&P Global Services PMI (Eurozone, Germany, France)
S&P Global Composite PMI (Eurozone, Germany, France)
GBP
February payroll change came in at 98k vs 42k in January. ILO unemployment rate for January remained at 3.7% while employment change for 3 months leading to January rose by 65k. Wages are still elevated but came in weaker than compared to the previous month (5.7% 3m/y vs 6% 3m/y for average weekly earnings and 6.5% 3m/y vs 6.7% 3m/y when bonus is excluded). The report underscores tightness in labour market. Even though nominal wages are high, high inflation is keeping real wages in negative territory. Real wages for total pay fell 3.2% 3m/y for the biggest decline since 2009.
This week we will have inflation data, BOE meeting and preliminary March PMI readings. Base case for BOE is still a 25bp rate hike but with the fallout of SVB and wages coming down there is a rise in probability of a no-change.
Important news for GBP:
Wednesday:
CPI
Thursday:
BOE Interest Rate Decision
Friday:
S&P Global Manufacturing PMI
S&P Global Services PMI
S&P Global Composite PMI
AUD
After couple of months of weak employment reports, February jobs report smashed expectations along all of the major components. Employment change came in at 64.6k vs 48.5k as expected. The unemployment rate ticked down to 3.5% while participation rate ticked up to 66.6%. The economy added 74.9k full-time jobs while part-time jobs declined by 10.3k. Majority of declines in part-time jobs can be attributed to their move to full-time jobs which is a great sign for the economy. Underemployment and underutilisation declined to their historic lows. Due to the issues with the banking sector around the globe RBA will not feel forced to raise rates at their April meeting but this report underscores how tight labour market in Australia is.
China has cut RRR rate by 25bp in order to stimulate economy. RRR now stands at 10.75%, The cutting of RRR releases huge amount of liquidity in the system which should help cushion it from the turmoil that catches banking system around the world. The cut should also allow easier access to credit.
NZD
Q4 GDP went into negative for the quarter as it printed -0.6% q/q and 2.2% y/y. Q3 reading was revised down to 1.7% q/q from 2% q/q adding more to the weak reading. Digging into details we can see that consumption was flat while investment dropped. Finance minister Robinson stated that despite poor Q4 reading economy remains resilient. Probability of a 25bp rate hike in April is increasing as markets price out another 50bp rate hike and it can be seen in NZD weakening.
CAD
Wholesale sales for January came in at 2.4% m/m, up from -0.7% m/m in December. The increase showed higher sales in the machinery, equipment and supplies and food, beverage, & tobacco products. The declines were seen in motor vehicles & motor vehicle parts & accessories. Housing starts rebounded in February and rose by 244k, up from 215.4k in January.
This week we will have inflation data.
Important news for CAD:
Tuesday:
CPI
JPY
Core machinery orders, a good proxy for CAPEX 6-9 months down the line, rebounded heavily in January and printed 9.5% m/m and 4.5% y/y. Japan Center for Economic Research now estimates that wage hikes for this year will be at 3.05% which is up from 2.85% seen in January. This will be the highest yearly increase since 1997. Higher wages should lead to higher consumption and a demand-pull inflation which is much more sustainable and easier to manage.
CHF
SNB total sight deposits for the week ending March 10 came in at CHF510.8bn vs CHF519.4bn the previous week. After a hot CPI reading previous week SNB is selling USD and EUR and buying CHF in order to prop up Swissy strength and keep inflation in check.
Credit Suisse was in trouble this week. Their main shareholder declined to add more financial assistance to the bank and it led to Credit Suisse CDS shooting up higher on concerns that it will be the next bank to go bust. Their stock fell 20%. Later in the week it was announced that bank will borrow CHF50bn from the SNB thus effectively getting a bailout from the central bank.
This week we will have SNB meeting. There is a consensus of a 50bp rate hike in order to subdue rising inflation.
Important news for CHF:
Thursday:
SNB Interest Rate Decision
