Dollar Firm as Risk Off Impulses Pick Up Ahead of PPI

March 15, 2023
  • It’s looking more and more like SVB is a rather unique situation; reports suggest the Fed is considering changes to its regulations regarding midsize banks; Moody’s downgraded the outlook for the entire U.S. banking system; Fed expectations have downshifted because of the SVB failure; CPI data yesterday underscore the need for further Fed tightening; PPI will be reported today; retail sales data will also be important; regional Fed surveys for March will start rolling out
  • Reports suggest the ECB is still likely to hike the deposit rate 50 bp to 3.0% tomorrow; eurozone reported January IP; U.K. highlight will be the spring budget presentation; Sweden February CPI ran hot
  • Minutes of the January 17-18 BOJ meeting were released; New Zealand reported a record current account deficit for Q4; China reported January-February IP and retail sales data

The dollar is firm as risk off impulses pick up ahead of PPI data. Global equities are lower, global bond prices are higher, and the yen is outperforming. The dollar is also benefitting as DXY is trading higher for the second straight day near 104.365 after three straight down days. A close above yesterday’s high near 104.049 would result in an outside up day that suggests further dollar gains ahead. We believe this bout of dollar weakness is overdone as Fed tightening expectations should eventually recover. The euro is trading lower near $1.0625 as the rally ran out of steam near $1.0760 today. Similarly, a close below yesterday’s low near $1.0680 would result in an outside down day that suggests further euro losses ahead. Sterling is trading lower near $1.2075 ahead of the budget speech (see below) after the rally this week encountered stiff resistance near $1.22. USD/JPY traded above 135 earlier but has since fallen to 133.75 as risk off sentiment takes hold. Up until now, the SVB fallout has continued to trump the stronger than expected U.S. data but that is unlikely to continue. Yesterday’s CPI data (see below) was a first step in getting the focus back on the fundamentals and today’s data could be the next step. Stay tuned.


It’s looking more and more like SVB is a rather unique situation. SVB revealed in a 2023 proxy statement that Chief Risk Officer Laura Izurieta left the bank last October but actually stopped serving in that role last April. Kim Olson reportedly took over the role in December but is based in New York rather than San Francisco. This is highly unusual, to state the obvious. We can say with a high degree of confidence that having a functioning risk officer is a necessary but not sufficient condition for avoiding a run on a financial institution.

Reports suggest the Fed is considering changes to its regulations regarding midsize banks. The Fed is reportedly mulling tougher capital and liquidity requirements as well as more comprehensive stress tests that would cover banks with assets between $100-250 bln. While the old saw about closing the barn doors after the horses have bolted comes to mind, we do think that this increased regulatory scrutiny is also a necessary but not sufficient condition for heading off the next financial crisis.

Moody’s downgraded the outlook for the entire U.S. banking system. Yes, the entire system. Moody’s noted that even though “all depositors of SVB and Signature Bank will be made whole, the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in US banks’ asset-liability management exacerbated by rapidly rising interest rates.” To say this is a mistake would be an understatement. How can the ratings agency lump the larger, well-capitalized banks in the same bucket with SVB and Signature? It simply makes no sense. While we generally refrain from criticizing the ratings agencies, this decision of just plain wrong, tells us nothing new, and does nothing but pour gasoline on the fire. Where was Moody’s on SVB a month ago? A warning then would have been helpful.

Fed expectations have downshifted because of the SVB failure. We couldn’t disagree more. We do not think SVB impacts Fed policy whatsoever; while financial stability is the Fed’s unofficial third mandate, we do not believe SVB meets that criterion. WIRP suggests a 25 bp hike March 22 is only 55% priced in. After that, no more hikes are priced in while markets have moved forward easing expectations to July 26. Yes, July 26. Three 25 bp cuts are nearly priced in by year-end and that is simply not going to happen. Period. Because the media embargo went into effect midnight last Friday, there will be no Fed speakers until Chair Powell’s post-decision press conference March 22. That is allowing the market’s imagination to run wild. Look for a dose of reality March 22. Ahead of that, the ECB will likely put the hammer down on any notions of dovishness (see below).

CPI data yesterday underscore the need for further Fed tightening. Both headline and core came as expected at 6.0% y/y and 5.5% y/y, respectively. While both y/y rates fell from January, we note that the m/m gains of 0.4% and 0.5%, respectively, are way too high if the Fed is to get inflation back to the 2% target. Looking at the details, Owners’ Equivalent Rent rose at a new cycle high of 8.0% y/y. It’s clear that housing is still a big part of the inflation story; core inflation ex-shelter and core services inflation ex-shelter both eased from January but remain at lofty levels. Bottom line: the inflation fight continues.

PPI will be reported today. Headline is expected at 5.4% y/y vs. 6.0% in January, while core is expected at 5.2% y/y vs. 5.4% in January. Here too, keep an eye on the m/m gains. Headline rose a whopping 0.7% in January while core rose 0.5%. Sweden’s CPI data today is a reminder that the global fight against inflation remains very much ongoing and it appears many central banks will still have to go higher for longer. This message from Sweden should not be ignored.

Retail sales data will also be important. Headline is expected at -0.4% y/y vs. 3.0% in January, while ex-autos is expected at -0.1% y/y vs. 2.3% in January. The so-called control group used for GDP calculations is expected at -0.3% m/m vs. 1.7% in January. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.6% SAAR growth for Q1, up from 2.0% previously. The next model update comes today after the data.

Regional Fed surveys for March will start rolling out. Empire survey kicks things off today and is expected at -8.0 vs. -5.8 in February. Philly Fed reports tomorrow and is expected at -15.0 vs. -24.3 in February. February IP will then be reported Friday and is expected at 0.2% m/m vs. flat in January. Manufacturing is expected at -0.2% m/m vs. 1.0% in January. January business inventories and TIC data will also be reported today.


Reports suggest the European Central Bank is still likely to hike the deposit rate 50 bp to 3.0% tomorrow. An unnamed person close to the Governing Council was the source. We believe 50 bp will be seen as the only reason it’s being questioned is the SVB crisis. We ask again, why should ECB policy be impacted by SVB? At this point, the only debate we expect tomorrow is what its forward guidance will be as the hawks and the doves slug it out. Some of the hawks have talked about four straight 50 bp hikes, while the doves have talked about a more nuanced meeting by meeting approach. The result will fall somewhere in between as President Lagarde hammers out another compromise. But make no mistake, the divide between the two camps will only get wider and louder. As things stand, WIRP suggests a 50 bp hike this week is around 55% priced in, which seems too low to us. After that, a 25 bp hike isn’t fully priced in until September 14. Odds of one more 25 bp hike top out at around 40% in Q4, which suggests a peak policy rate between 3.25-3.5% vs. 4.0% last week. There are a variety of reasons why the ECB might not get to 4.0% but SVB isn’t one of them.

Eurozone reported January IP. It came in at 0.7% m/m vs. 0.3% expected and a revised -1.3% (was -1.1%) in December. As a result, the y/y rate came in at 0.9% vs. 0.3% expected and a revised -2.0% (was -1.7%) in December. Final February French CPI was revised up a tick to 7.3% y/y. Final February eurozone CPI data will be reported Friday.

The U.K. highlight will be the spring budget presentation. Reports suggest Chancellor Hunt will announce temporary tax breaks totaling GBP11 bln over the next three years for U.K. companies. Reports suggest he will propose permanent tax relief for businesses in the leadup to the next general election expected in late 2024. Other reports suggest Hunt will unveil an expansion of free childcare that will cost around GBP4 bln. Ahead of the budget speech, Treasury has already announced that it would extend the existing price caps on household energy until June. The OBR gives its budget briefing tomorrow. About half a million workers went on strike today.

BOE tightening expectations remain restrained. WIRP suggests a 25 bp hike March 23 is only 50% priced in but priced in for May 11, while another 25 bp hike in Q3 is only about 35% priced in and so the peak policy rate is seen between 4.25-4.5% vs. 4.75% at the start of last week. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September. We’d like to stress that tightening expectations have been depressed by the SVB crisis, which makes no sense at all to us.

Sweden February CPI ran hot. Headline came in at 12.0% y/y vs. 11.7% expected and actual in January, CPIF came in at 9.4% y/y vs. 9.2% expected and 9.3% in January, and CPIF ex-energy came in at 9.3% y/y vs. 8.7% expected and actual in January. At the last policy meeting February 9, the Riksbank hiked rates 50 bp to 3.0% and also delivered several other hawkish measures and noted “Inflation is far too high and has continued to rise. The policy rate will probably be raised further during the spring.” Forward guidance shifted more hawkish, as the bank saw the policy rate peaking at 3.33% in Q4 2024 and staying there through Q1 2026. WIRP suggests another 50 bp hike to 3.5% is fully priced in for the next meeting April 26, with nearly 50% odds of a larger 75 bp move, while the market is pricing in a peak policy rate near 4.0%, which is more hawkish than the Riksbank’s current forward guidance. We expect another hawkish shift in the expected rate path at the April meeting.


Minutes of the January 17-18 Bank of Japan meeting were released. There was some discussion of another tweak to Yield Curve Control but many board members felt more time was needed to determine the impact of the December tweak on market functioning. Members also felt that it was appropriate to continue with the current monetary easing stance. One member said the bank shouldn’t rush to exit accommodation because other major economies were slowing down already. As we all know, the bank also kept policy steady at the next meeting March 9-10. WIRP suggests around 33% odds of liftoff April 28, rising to around 36% June 16 and then nearly 70% for July 28 and 95% for September 22. That said, the actual 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 20 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.

New Zealand reported a record current account deficit for Q4. The deficit came in at -8.9% of GDP vs. -8.5% expected and a revised -8.5% (was -7.9%) in Q3. Not only did the trade deficit contribute to shortfall, but also tourism as more New Zealanders traveled abroad. S&P warned that “It is catching our attention, the persistently weak and worsening current account position of the New Zealand sovereign, particularly given that it has been quite weak the last year or two and our forecasts are for it to narrow.” It added that “We would need to see the current account deficit narrow over the next 12 to 18 months and if it doesn’t there is going to be increased pressure on the AA+ rating.” The agency currently rates New Zealand at AA+ but has always pointed to the external imbalances as a key risk to the rating. Developments are negative for NZD and a clean break below 0.6105 is needed to set up a test of the November 10 low near 0.5840.

China reported January-February IP and retail sales data. IP came in at 2.4% y/y vs. 2.6% expected and 1.3% in December, while sales came in as expected at 3.5% y/y vs. -1.8% in December. Given how sharply the PMI reading have rebounded, the rather modest improvement in the hard data is disappointing. While the recovery continues, the modest pace supports our view that China will not be the engine of global growth this year. PBOC also kept its 1-year MLF rate steady at 2.75%. Of note, Governor Yi Gang will remain in his post, surprising many who thought that he and other policy pragmatists would be replaced for Xi’s third term. As such, we expect continuity in monetary policy this year and further modest easing measures should be announced later this year.

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