Is it safe for central banks to keep hiking?

Is it safe for central banks to keep hiking?

Key data to move markets this week

EUROPE 
Thursday: ECB Meeting and Monetary policy decision. 
Friday: Eurozone Harmonised Index of Consumer Prices, Eurozone Core Harmonised Index of Consumer Prices, and Eurozone Labour costs.
Monday: German PPI.
Tuesday: Eurozone ZEW Economic Sentiment Survey, German ZEW Current Situation and Economic Sentiment surveys.

UK
Friday: Consumer Inflation Expectations.
Wednesday: CPI, PPI and RPI data.
Thursday: Bank of England Interest rate decision, Monetary policy summary, and Bank of England Minutes.

US
Thursday: Initial jobless claims, Continuing jobless claims, Building Permits, Housing Starts, and Philadelphia Manufacturing survey. 
Friday: Michigan Consumer Sentiment Index and University of Michigan 5-year inflation expectations.
Wednesday: Fed Interest rate decision, Monetary policy statement, and FOMC economic projections. 
Thursday: Chicago Fed National Activity Index, Initial jobless claims, and Continuing jobless claims. 

US Stock Indices

Nasdaq 100 +1.72% MTD and +11.97% QTD
Dow Jones Industrial Average -1.54% MTD and -2.99% QTD 
NYSE -4.97% MTD and -3.44% QTD 
S&P 500 -1.28% MTD and +2.08% QTD 

The Federal Reserve, Treasury and Federal Deposit Insurance Corp (FDIC) launched emergency measures on Sunday to backstop deposits and shore up confidence in the banking system after the collapse of Silicon Valley Bank triggered fears of a bank run on similar mid size banks. Since 2019, rules around capital, liquidity and resolution have been relaxed for US banks with assets ranging from $50bn to $250bn. The US government has claimed SVB’s collapse will not impact taxpayers although, according to the Financial Times, European regulators think that this will in fact be a bail-out in all but name and that the US was wrong to break with its own standard of guaranteeing only the first $250,000 of deposits by invoking a “systemic risk exception.” This may threaten global financial regulatory co-operation moving forward. 

Many US banks were hit hard this week with regional banks most affected including First Republic BankComerica IncorporatedPacWest Bancorp, and KeyCorp with trading halted several times for volatility. The KBW regional banking index has fallen over 26% MTD. Although depositors are now flocking to big US banks including JP MorganBank of AmericaWells FargoCitigroup, and Morgan Stanley, these also saw their share prices fall earlier in the week. 

Mega caps. Tech stocks benefited from the shift in market sentiment around the continuation of rate rises with AlphabetAmazonAppleMicrosoftMeta Platforms, and Tesla all up on the week.

Energy stocks continued to come under pressure this week as the rally in bonds and the increased likelihood of recession weighed on future demand with Apa Corp (US)Occidental PetroleumShellEnergy FuelsChevronMarathon Oil CorporationHalliburton, and Marathon Petroleum all down

Materials and Mining stocks were down this week as uncertainty in the commodities sector hit stocks. Yara InternationalDow ChemicalSibanye StillwaterCF Industries HoldingsInternational Paper CompanyFreeport-McMoranMosaicAlbemarle Corporation, and Newmont Mining were all down.

European Stock Indices

Stoxx 600 -5.35% MTD and +2.72% QTD 
DAX -4.10% MTD and +5.83% QTD 
CAC 40 -5.26% MTD and +6.36% QTD 
IBEX 35 -6.76% MTD and +6.44% QTD 
FTSE MIB -6.96% MTD and +7.84% QTD
FTSE 100-3.04% MTD and +2.49% QTD 

European banking stocks were hit by the collapse of SVB with Credit Suisse bearing the brunt. Credit Suisse shares sank over fell as much as 31%, hitting new record lows. It fell below 2 Swiss francs on Wednesday after its biggest shareholder, the Saudi National Bank, said it could not raise its stake beyond 10% due to regulatory issues. Credit Suisse is in the midst of a complex three-year restructuring and its 2022 annual report published on Tuesday cited "material weaknesses" in internal controls over financial reporting, noting that it had not yet stemmed customer outflows. According to Refinitv, concerns about the Swiss bank led the European banking index to fall 6.9%, its biggest one-day drop in nearly 13 months. The Swiss Central Bank and the supervisor FINMA agreed to fund Credit Suisse with liquidity "if necessary," but insisted that Credit Suisse was sound and "meets the capital and liquidity requirements imposed on systemically important banks." The SNB and FINMA said "there are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the U.S. banking market." The Swiss Central Bank has agreed to loan Credit Suisse SFr50bn ($54bn) and Credit Suisse is seeking to buy back about SFr3bn of its debt in an attempt to boost liquidity and calm investors. According to the Financial Times, the bank plans to make a cash tender offer for 10 US dollar-denominated senior debt securities worth up to $2.5bn and four euro-denominated senior debt securities worth up to €500mn. The offers will expire on March 22. 

Other Global Stock Indices
MSCI World Index -2.69% MTD and +1.11% QTD 
Hang Seng -1.24% MTD and -1.22% QTD

Fixed Income

US 10-year Treasuries at 3.47%.
German 10-year Bunds at 2.13%.
UK 10-year Gilts at 3.32%.

It was a wild week for global bonds that saw yields on US Treasuries and euro zone bonds falling as investors rushed to buy government bonds. These are generally seen as safe haven investments. The bond rally was due to massive drops in US and European bank stocks and suddenly shifting interest rate expectations. However, Eurozone yields were up again following the announcement that the Swiss central bank would give a lifeline to Credit Suisse. 

Commodities

Gold futures to $1,921.40 per ounce.
Silver futures to $21.94 per ounce.
West Texas Intermediate crude futures to $68.09 a barrel.
Brent crude futures to $73.69 a barrel.

Both crude benchmarks hit their lowest since December 2021 this week. Despite both OPEC and the International Energy Agency raising their estimates for global oil demand in 2023, bearishness in the market remained as US crude stockpiles rose by 1.6 million barrels last week. According to S&P Global Commodity Insights, the International Energy Agency’s monthly report released on 15 March raised its estimate for global oil demand in 2023 by another 100,000 b/d as rebounding air traffic and pent-up Chinese demand are expected to push consumption to record highs. Chinese retail sales grew 3.5% y/o/y in the first two months of the year after contracting by 1.8% y/o/y in December. However, as noted by ING, weaker exports are hitting Chinese industrial production (and hence energy demand). Chinese industrial production month-on-month growth in February was just 0.12%. The biggest export item, electronic parts, including semiconductors, fell 17% on a y/o/y basis YTD. 

Gold prices renewed their rally on Thursday as investors continued to seek a safe haven amidst raised concerns about stresses across the banking sector. Gold has moved above its 50 day average. 

Currencies

After dropping earlier in the week due to the sudden collapse of SVB, the USD strengthened later in the week as investors looked to a safe haven amidst concern over potential financial stability contagion. The GBP is -0.32% YTD against the USD. The EUR is -1.18% YTD as fears of another European banking crisis weighed on the single currency.

Bitcoin  +6.18% MTD and +48.45% YTD.
Ethereum  +3.50% MTD and +38.71% YTD.

Note: As of 6:30 pm EST 15 March 2023 

Global Macro Updates

A cautious Fed ahead? The Fed, like the ECB, finds itself balancing its mandate for price stability with the need for financial sector stability. Headline inflation is still well above target, rising 6% year on year in February, following a 0.4% increase from the previous month. That is a moderation from the annual 6.4% recorded in January. However, core inflation was up 0.5% in February, up from January’s 0.4% rise. On an annual basis, core CPI rose 5.5%, only 0.1 percentage point less than January’s year-on-year pace. The labour market also remains tight with the nonfarm payroll coming in at 311,000 for February. With 1.9 job openings for every unemployed person in January, the tight labour market is still generating higher wages. However, retail sales fell 0.4% last month after growing 3.2% in January and Producer price inflation is also down, falling 0.1% month-over-month in February 2023. The PPI index was 4.6% higher on an annual basis, down from 5.7% in January. Goldman Sachs Group Inc. boosted its estimate of the odds of a US recession to 35% over the next 12 months as bonds rallied this week and overall financial conditions have tightened. Swaps traders have brought forward expectations for interest rate cuts to later this year from early 2024.

ECB’s credibility on the line. The ECB is highly likely to stay on its intended path and raise rates later today. However, it could be forced to divert from plans for another hefty interest rate hike even though inflation remains too high. The ECB had been set for another 50 basis point increase today but the sell off in bank stocks and the concerns it has raised over wider financial sector stability has had a negative impact on European government bonds and swap markets and the Euro. Markets are now pricing in a 60% chance of a 25 basis point hike in eurozone rates. According to Refiniv, the peak ECB rate, also known as terminal rate, is now seen at only around 3.25%, down from 4.1% last week. The ECB is also now less likely to continue its previously anticipated series of 50 bps rate rises. 

The ECB must reconcile its commitment to price stability with the need to maintain financial stability. If it backtracks on a 50 bps rise while inflation remains stubbornly high, e.g., France reported a record high 7.3% on Wednesday, then it may lose credibility moving forward. Eurozone inflation was 8.5% in February. The ECB is expected to put forward new inflation forecasts today. However, for the ECB the problem has been that underlying or core inflation has remained stubbornly high, suggesting that the disinflation process will be drawn out and, therefore, monetary policy will have to remain tighter for longer.

Will the UK budget benefit the BoE? The Chancellor of the Exchequer, Jeremy Hunt, revealed his new budget on Wednesday. With increased childcare provision and pension allowances, as well as corporate tax breaks to boost weak business investment, the government is hoping to get more mothers and the over 50s back to work. Although the independent Office for Budget Responsibility (OBR) is no longer forecasting a recession for this year, it said it was hard to judge the impact of Hunt's attempts to get more workers into the jobs market and it warned that the share of people in work or looking for it was set to hit a 23-year low next year before rising. Given the turmoil in markets this week caused by potential for systemic financial stresses and the drop in UK yields, traders now see the Bank of England pausing rate hikes as the most likely outcome at its March policy meeting. Investors see around a 40% chance of a 25 basis point hike and around a 60% chance they keep rates unchanged.

Crypto’s surprising support. BitcoinEthereumBNBCardanoPolygon and other cryptocurrencies saw significant gains this week following the US government, Treasury and FDIC decision to support both depositors from failed banks Silicon Valley and Signature as well provide additional funding to other banks that could be in a similar situation. As noted by Cointelegraph.com, Cathie Wood, CEO of asset management firm ARK Invest, said in a series of tweets that cryptocurrencies acted as a safe haven amid the ongoing banking crisis in the United States. She blamed the recent downfall of the likes of Silicon Valley Bank (SVB), Signature and others on the Fed’s policy failure.

This article is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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