• Fed Vice Chair for Supervision Barr blamed SVB’s failure on its senior management; Bullard was the latest Fed official to draw the distinction between financial stability and price stability; Canada Finance Minister Freeland announced a budget that will boost deficits in the coming years
  
• ECB officials continue to flag more hikes ahead; Germany reported April GfK consumer confidence; SNB policymakers speak later today; BOE released the results of its latest financial policy survey; Czech National Bank is expected to keep rates steady at 7.0%
  
• New BOJ Deputy Governor Uchida suggested any policy changes would likely be surprises; Australia reported soft February CPI; Thailand hiked rates 25 bp to 1.75%, as expected

The dollar is getting some limited traction. DXY is up slightly and trading near 102.50 after two straight down days. A clean break below 102.466 would set up a test of last week’s low near 101.915. We believe that markets are overestimating the Fed’s capacity to ease and so the dollar should eventually recover when expectations are repriced. The euro is trading near $1.0860 while sterling is trading near $1.2350. The yen is the worst performer today, with USD/JPY is trading back near 132. With the BOJ seen on hold for the foreseeable future and banking sector tensions easing, we believe USD/JPY remains a buy at current depressed levels. AUD is also underperforming after softer than expected CPI Data (see below). Bottom line: we expect the dollar rally to resume after this current bout of market turmoil fades and markets are one again able to focus on the fundamentals.

AMERICAS

Fed Vice Chair for Supervision Barr blamed SVB’s failure on its senior management. In testimony before the Senate Banking Committee yesterday, Barr noted that "Fundamentally, the bank failed because its management failed to appropriately address clear interest rate risk and clear liquidity risk" whilst adding that those concerns were fist highlighted by bank supervisors back in November 2021. With lawmakers critical of the regulatory response, Barr said SVB was at fault for not acting with greater urgency to address the highlighted, adding that "The examiners at the San Francisco Federal Reserve bank called those issues out...and those actions were not acted upon in a timely way." Of course, this begs the question of why not? If banks follow neither the regulatory guidelines nor the regulatory solutions, isn’t there something wrong with the regulatory process? Barr testifies before the House Finance Services Committee today.

Bullard was the latest Fed official to draw the distinction between financial stability and price stability. Yesterday, he said “In my view, continued appropriate macroprudential policy can contain financial stress in the current environment, while appropriate monetary policy can continue to put downward pressure on inflation.” The next FOMC meeting is May 2-3 and WIRP suggests around 45% odds of 25 bp hike then. After that, it’s all about the cuts. Two cuts by year-end are now priced in. While down from 4-5 cuts priced in during the height of the banking crisis, two cuts is still two too many. In that regard, Powell said that Fed officials “just don’t see” any rate cuts this year.

Survey readings for March continue rolling out. Richmond Fed manufacturing and Dallas Fed services surveys were reported yesterday, with the Richmond reading coming in at -5 vs. -10 expected and -16 in February and the Dallas reading coming in at -18.0 vs. -9.3 in February. Chicago PMI Friday will be key and is expected at 43.0 vs. 43.6 in February. Last week, preliminary March S&P Global PMIs came in much stronger than expected, with the composite rising to 53.3 vs. 51.1 in February. This was the highest since last May. February pending home sales will be reported today and are expected at -3.0% m/m vs. 8.1% in January.

Consumer confidence surprised to the upside. The Conference Board’s headline measure rose to 104.2 in March vs. 101.0 expected and a revised 103.4 (was 102.9) in February. A modest drop in the present situation was offset by a solid gain in expectations.

Canada Finance Minister Freeland announced a budget that will boost deficits in the coming years. New spending was announced totaling CAD43 bln ($31.6 bln) over the next six years, which focuses on improving the health care system, boosting green technology incentives, and helping low income Canadians cope with high inflation. The deficit for FY22-23 ending this month is forecast at CAD43 bln, or 1.5% of GDP, up from CAD36.4 bln forecast in the November budget update. By FY27-28, the forecast sees a deficit of CAD14 bln vs. the CAD4.5 bln surplus previously seen. As a result of the wider deficits, federal debt will climb to 43.5% of GDP in FY23-24 beginning April 1 vs. 42.5% estimated for FY22-23. It’s then forecast to decline to 42.2% of GDP in FY25-26 and 39.9% by FY27-28. Revenue projections are down and so the increased spending will be largely financed by increased borrowing and higher taxes on corporations and high income earners. Coming at a time of high and rising interest rates, the projections for wider budget deficits are not likely to be taken very well. Stay tuned.

EUROPE/MIDDLE EAST/AFRICA

ECB officials continue to flag more hikes ahead. Kazimir said “Personally I think we shouldn’t ease up if the base scenario doesn’t change significantly. We should continue hiking, maybe at slower pace.” However, he added that “We’ll decide on the basis of current data from the beginning of May. We’ll also need to take into account the situation on financial markets, how markets will be willing to finance banks and offer them enough capital.” Elsewhere, Chief Economist Lane noted that “If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up. However, if the financial stress we talked about becomes stronger, then we’ll have to see what’s appropriate.” This is a slightly different message from President Lagarde, who said that there was no trade-off between price and financial stability.

Markets have repriced the ECB tightening outlook. The next policy meeting is May 4 and WIRP suggests only 75% odds of a 25 bp hike then. After that, another 25 bp hike is nearly priced in for Q3 and so the peak policy rate is seen near 3.5%. Some odds are priced in for a rate cut by year-end, which seems very unlikely. Schnabel speaks later today and we expect hawkish comments to emerge after it was reported that she pushed for more explicit language underscoring further tightening at this month’s meeting.

Germany reported April GfK consumer confidence. It came in at -29.5 vs. -30.0 expected and -30.5 in March, and comes after a stronger than expected IFO business climate reading for March. Survey indicators have improved but the hard data have yet to see much of a bounce. March unemployment and February retail sales will be reported Friday. Sales are expected at 0.5% m/m vs. flat in January.

Swiss National Bank policymakers speak later today. Governing Board members Maechler and Moser will both appear at an SNB event and they will surely be asked about the banking sector outlook after the UBS/CS deal. Last week, the bank hiked rates 50 bp to 1.5% and flagged more hikes ahead as Governor Jordan said “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.” We concur. The market is pricing in a peak policy rate near 2.0% over the next year, which sounds about right.

Bank of England released the results of its latest financial policy survey. The survey was completed February 3, well before the banking crisis started and yet it found that more than half of the respondents were braced for a “high-impact” event. This turned out to be very prescient. The report noted that global investors are reining in their appetite for risk sharply due to recent stresses in the financial system, which it said will add to refinancing risk for riskier borrowers. That said, the BOE’s assessment of risks to the U.K. financial sector indicate that the banking sector remains robust enough to deal with a wide variety of potential macro scenarios. Regarding the macro backdrop, the BOE sees fewer households at risk of debt default due to the drop in energy prices and the improvement in the labor market outlook. The bank estimated that around 2.5 mln more mortgage borrowers will be exposed to higher rates this year as fixed-rate deals expire and face an average increase in monthly mortgage payments of GBP250. Around 110,000 borrowers will be at risk of default, lower than it saw in December but still worrisome. In that regard, BOE tightening expectations remain subdued. The next policy meeting is May 11 and WIRP suggests around 70% odds of a 25 bp hike to 4.5%, with odds of another 25 bp hike topping out near 50% in Q3. Mann speaks today so expect some hawkish comments to emerge.

Czech National Bank is expected to keep rates steady at 7.0%. The bank has kept rates steady since its last 125 bp hike last June. At the last meeting February 2, the bank said it debated the scenario of keeping rates at current levels for longer. Governor Michl said he sees a higher rate path than what markets are pricing. Right now, the market is pricing in the start of an easing cycle over the next three months, which seems very unlikely to us as well. Inflation may have peaked but remains well above the 1-3% target range. Lastly, Michl noted that the strong koruna is helping to tighten monetary conditions.

ASIA

New Bank of Japan Deputy Governor Uchida suggested any policy changes would likely be surprises. Appearing before parliament, Uchida noted that “Due to the nature of the yield curve control, it’s hard to get markets to price in a change beforehand,.” Uchida’s views are viewed as very important as his time at the BOJ began in 2012 and so he is seen as an integral part of the massive stimulus programs under Abenomics that were overseen by outgoing Governor Kuroda. Of note, Governor-elect Ueda is set to take over April 9. WIRP suggests virtually no odds of liftoff April 28, rising to around 20% June 16 and nearly 55% for July 28. A hike isn’t fully priced in until October 31. 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.

Australia reported soft February CPI. Headline came in at 6.8% y/y vs. 7.2% expected and 7.4% in January. It was the second straight month of deceleration but remains well above the 2-3% target range. Reserve Bank of Australia next meets April 4 and WIRP suggests rates are likely to e kept steady at 3.60% vs. nearly 10% odds of a rate cut that was priced in at the start of this week. A pause next month makes total sense. A cut? Not so much. One cut is priced by year-end and this seems very unlikely. Indeed, we are not convinced that the tightening cycle has ended as the labor market remains very tight.

Bank of Thailand hiked rates 25 bp to 1.75%, as expected. The bank signaled further hikes as Assistant Governor Piti said “With all the data that we have now, we think the rate normalization should continue.” Forecasts for growth, headline inflation, and core inflation this year were all cut by a tick to 3.6%, 2.9%, and 2.4%, respectively, while the forecast for headline inflation next year was raised to 2.4% vs. 2.0% previously. The market is pricing in a very gradual tightening cycle, with the policy rate seen at 2.25% in one year and 2.5% in three years.