The major currencies were mostly firmer last week despite the broad risk-off impulses stemming from banking sector concerns. JPY, NZD, and SEK outperformed while CHF, NOK, and EUR underperformed. We do not think the weekend deal for UBS to buy CS will resolve those concerns and so we see EM and other risk assets coming under pressure this week. The Fed debate continues but we believe it will hike rates 25 bp this Wednesday, adding to the pressure on risk assets.
The Fed along with five other central banks announced a coordinated move to boost liquidity in their existing USD swap arrangements. A joint statement from the Fed, ECB, BOJ, BOE, SNB, and BOC said that “To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily.” They added that the move was designed to “enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.” The daily operations will begin this Monday and will continue at least through the end of April.
Reports suggest some interest in buying Signature Bank had emerged. Reports over the weekend suggest New Yor Community Bancorp is pursuing a deal. Ahead of the weekend, there were rumors that Bank of America was interested in a deal. So far, there has been no confirmation of either report. While this might help quell some concerns, we think First Republic remains in the crosshairs and until its situation has been resolved, markets are likely to remain extremely jittery.
The two-day FOMC meeting ends Wednesday. WIRP suggests only 60% odds of a 25 bp hike, rising to nearly 90% for the May 2-3 meeting. We believe the ECB showed the way forward and so the Fed should follow suit and hike rates despite ongoing tensions in the banking system. Only one 25 bp hike is priced in, while three 25 bp rate cuts are priced in by year-end. With inflation still running hot, we do not think an easing cycle will be seen this year. Updated macro forecasts and Dot Plots will be released. It wouldn’t take much to get a hawkish shift in the Dot Plots but given the ongoing banking sector concerns, policymakers may be hesitant to shift their Dots significantly at this meeting.
February Chicago Fed National Activity Index will be reported Thursday. Headline is expected at 0.10 vs. 0.23 in January. A zero reading means the economy is growing at around trend and so we are back at above trend growth for two straight months after three straight months below trend. If so, the 3-month moving average would improve to -0.04 vs. -0.26 in January and would be the highest since October. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. This series has taken on greater significance now that the 3-month to 10-year curve has inverted deeply. The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth. Of note, the Atlanta Fed’s GDPNow model is currently tracking 3.2% SAAR and the next model update will come this Friday. If this growth rate is maintained, it would be the third straight quarter of above trend growth in the U.S.
March survey readings will continue to roll out. S&P Global reports its preliminary PMI readings Friday. Manufacturing is expected at 47.0 vs. 47.3 in February while services is expected at 50.3 vs. 50.6 in February. If so, the composite PMI would fall a tick or two below 50 vs. 50.1 in February. Regional Fed surveys will also continue to roll out. Philadelphia Fed non-manufacturing will be reported Tuesday. Kansas City Fed manufacturing will be reported Thursday and is expected at -2 vs. 0 in February, followed by its services measure Friday.
Housing data is expected to show ongoing weakness. February existing home sales will be reported Tuesday and are expected at 5.0% m/m vs -0.7% in January. New home sales will be reported Thursday and are expected at -3.0% m/m vs. 7.2% in January. This sector may see some near-term relief as mortgage rates have fallen, with the average national 30-year fixed rate now at 6.97% vs. 7.13% in early March. However, any relief is likely to be brief and temporary if the banking crisis eases. Other minor data will be reported. Q4 current account data will be reported Thursday and is expected at -$214 bln vs. -$217 bln in Q3. February durable goods orders will be reported Friday and are expected at 1.0% m/m vs. -4.5% in January. Core orders (non-defense ex-aircraft) are expected at-0.2% m/m vs. 0.8% in January.
Weekly jobless claims Thursday will be of interest. That’s because initial claims data will be for the BLS survey week containing the 12th of the month. They are expected at 200k vs. 192k last week. If so, the 4-week moving average for initial claims would rise slightly from 196.5k last week. If we get another low reading, we will likely get another solid NFP for March. Of note, continuing claims are reported with a one-week lag and so next week’s data will be for the BLS survey week. This week, they are expected at 1.69 mln vs. 1.684 mln last week.
Canada reports key data. February CPI will be reported Tuesday. Headline is expected at 5.4% y/y vs. 5.9% in January, while core median is expected at 4.8% y/y vs. 5.0% in January and core trim is expected at 4.9% y/y vs. 5.1% in January. If so, headline would be the lowest since January 2022 but still well above the 1-3% target range. Furthermore, the expected 0.6% m/m gain would be worrisome as it comes after a 0.5% gain in January. January retail sales will be reported Friday. Headline is expected at 0.7% m/m vs. 0.5% in December, while ex-autos is expected at 0.6% m/m vs. -0.6% in December.
Bank of Canada releases its summary of deliberations Wednesday. At the March 8 meeting, the bank paused as expected. While the bank said it was prepared to hike again if needed, the statement removed the reference to excess demand in the economy. The bank noted then that the latest data remain “in line with the bank’s expectation that CPI inflation will come down to around 3% in the middle of this year.” It added that “With weak economic growth for the next couple of quarters, pressures in product and labor markets are expected to ease.” Overall, the tone was on the dovish side and supported the pause. Next meeting is April 12 and WIRP suggests 25% odds of a cut then. Yes, a cut. While a pause might be warranted, a cut is not. Period.
A deal was announced for UBS to buy Credit Suisse for CHF3 bln. It includes extensive government guarantees as well as a CHF100 bln liquidity provision from the Swiss National Bank. The government offered a CHG9 bln guarantee for potential losses from assets that UBS is acquiring. Swiss regulator Finma said that about CHF16 bln of Credit Suisse bonds will become worthless as a result of the deal. SNB Governor Jordan said that “It was indispensable that we acted quickly and find a solution as quickly as possible.“ Of note, UBS Chairman Colm Kelleher said “Let me be very specific on this: UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture.” And so ends the troubled saga of a once-great bank (originally Schweizerische Kreditanstal) that was founded in 1856.
Banking sector developments should not impact the Swiss National Bank decision Thursday. Madame Lagarde stressed last week that there is no trade-off between price and financial stability. We concur. This was a very strong statement that suggests any banking sector issues won't derail the tightening cycle. We think this view is held by pretty much every central bank, including the SNB, which supports market consensus for a 50 bp hike to 1.5% this week. At the last meeting December 15, Governor Jordan said “There is a danger that inflation could remain elevated in Switzerland in the medium term owing to second-round effects. The renewed tightening of our monetary policy is therefore necessary.” He added that “It was pretty clear that 50 bp is the right decision. If you look at our inflation forecasts over the medium term, inflation is still slightly above our 2% threshold.” Since then, both headline and core inflation have picked up. The market is pricing in a peak policy rate near 1.75%, which sounds about right.
European Central Bank tightening expectations have fallen after last week’s decision. WIRP suggests only 75% odds of a 25 bp hike May 4. After that, the odds of one last 25 bp hike in Q3 top out around 20% and so the deposit rate is likely to peak near 3.25%. There are plenty of ECB speakers this week and the hawks are likely to push back against the market’s dovish take on policy. Centeno and Lagarde speak Monday. Lagarde and Villeroy speak Tuesday. Lagarde, Villeroy, Lane, Rehn, Wunsch, Panetta, and Nagel all speak Wednesday. Stournaras, Holzmann, Centeno, Lane, and de Cos speak Thursday. Nagel and Centeno speak Friday.
Preliminary March PMI readings Friday will be the eurozone data highlight. Headline manufacturing is expected at 49.0 vs. 48.5 in February, services is expected at 52.5 vs. 52.7 in February, and the composite PMI is expected to remain steady at 52.0. Looking at the country breakdown, the German composite is expected at 51.0 vs. 50.7 in February and the French composite is expected at 51.6 vs. 51.7 in February. Italy and Spain will be reported with the final PMI readings in early April.
Other minor data will be reported. Eurozone January trade data will be reported Monday. January eurozone construction output, March German ZEW survey, and French retail sales data will be reported Tuesday. ZEW expectations component is expected at 15.0 vs. 28.1 in February, while current situation is expected at -44.7 vs. -45.1 in February. Eurozone January current account data will be reported Wednesday.
Bank of England meets Thursday. Here too, financial stability concerns should not impact policy. That said, tightening expectations have evaporated. WIRP suggests a 25 bp hike March 23 is about 50-50 and a hike isn’t fully priced in until the August 3 meeting. After that, no more hikes are priced in and so the expected peak policy rate stands at 4.25% vs. 4.75% at the start of this month and 6.25% right after the disastrous mini-budget back in September. Mann speaks both Thursday and Friday.
U.K. February public sector net borrowing will be reported Tuesday. Ex-banking groups is expected at GBP11.7 bln vs. -GBP5.4 bln in January. Last week’s budget speech was underwhelming and we think it relied on overly optimistic macro assumptions. This week’s PSNB data may prove to be a wakeup call for those that are looking past recent fiscal policy issues.
February CPI will be reported Wednesday. Headline is expected at 9.9% y/y vs. 10.1% in January, core is expected at 5.7% y/y vs. 5.8% in January, and CPIH is expected at 8.7% y/y vs. 8.8% in January. If so, headline would decelerate for the fourth straight month to the lowest since August but would remain well above the 2% target. With inflation still so high, can the Bank of England really afford to stay on hold?
February retail sales and preliminary March PMI readings will be reported Friday. Headline sales are expected at 0.2% m/m vs. 0.5% in January, while sales ex-auto fuel is expected at 0.2% m/m vs. 0.4% in January. Elsewhere, headline manufacturing PMI is expected at 50.0 vs. 49.3 in February, services is expected at 53.0 vs. 53.5 in February, and the composite PMI is expected at 52.7 vs. 53.1 in February. CBI reports its March industrial trends survey Wednesday, while March GfK consumer confidence will be reported Thursday.
Norges Bank meets Thursday and is expected to hike rates 25 bp to 3.0%. At the last policy meeting January 19, Norges Bank kept rates steady at 2.75% but noted that “The policy rate will need to be increased somewhat further.” Governor Bache later said rates “will most likely be raised in March.” The expected rate path from December saw the policy rate peaking near 3.0%, with gradual easing expected in H2 2024. Updated macro forecasts and expected rate path will come at this week’s meeting. February CPI data was soft as headline came in at 6.3% y/y vs. 6.8% expected and 7.0% in January, while underlying came in at 5.9% y/y vs. 6.3% expected and 6.4% in January. Both inflation measures have resumed the disinflation trend that was interrupted by the January spike, though headline is still more than triple the 2% target.
Japan highlight will be February national CPI data Friday. Headline is expected at 3.3% y/y vs. 4.3% in January, core (ex-fresh food) is expected at 3.1% y/y vs. 4.2% in January, and core ex-energy is expected at 3.4% y/y vs. 3.2% in January. The improvement would be due almost entirely to the energy relief measures that went into effect last month.
Other data will be reported. February department store sales and preliminary March PMI readings will be reported Friday.
Recent data should keep the Bank of Japan on hold near-term. WIRP suggests around 10% odds of liftoff April 28, rising to around 35% June 16 and 45% for July 28. A hike isn’t fully priced in until December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 15 bp of tightening over the next 12 months followed by only 15 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.
Reserve Bank of Australia releases its minutes Tuesday. At the March 7 meeting, the bank hiked rates 25 bp to 3.60% but signaled a potential pause as it said “In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.” Later, Lowe was more specific and noted that the RBA will be guided by incoming data on employment, inflation, retail sales, as well as various business surveys in deciding on whether to hike rates or pause at the April 4 meeting. He noted that “If collectively they suggest the right thing is to pause then we’ll do that, but if they suggest that we need to keep going we’ll do that. So we’ve got a completely open mind about what happens at the next board meeting.” Despite the strong labor market data last week, WIRP suggests 15% odds of a 25 bp cut at the next meeting April 4. Yes, a cut. Why should banking sector developments in the U.S. and Europe impact RBA policy? The answer is that it shouldn’t. We simply cannot fathom a rate cut when unemployment remains so low. A pause, maybe. A cut? Unlikely.
Preliminary March PMI readings will be reported Friday. The composite PMI has risen two straight months to 50.6 in February but we believe further upside is limited as China reopening has had limited impact on regional trade and activity.