The majors were mostly softer last week as the broad-based dollar rally continued. CHF and JPY outperformed while AUD and SEK underperformed. Risk off sentiment is likely to dominate this week as concerns about financial stability remain high. As such, we expect risk assets to remain under pressure. The dollar has not benefitted much from the risk off backdrop but we believe the uptrend remains intact.
AMERICAS
We suspect markets will remain jittery as financial stability risks remain at the forefront. Over the weekend, depositors lined up at another West Coast regional bank to withdraw funds, suggesting panic and fear will remain the main marker drivers for now. After the failure of SVB, many are waiting for more shoes to drop. Smaller regional banks have come under pressure even though none of them really had the same sort of unique business model as SVB. However, in a sign that tensions remain, Signature Bank was closed by New York state financial regulators on Sunday. A senior Treasury official said there are other banks that appeared to be in similar situations to SVB and Signature and that regulators had ongoing concerns about their depositors. The FDIC started the auction process for SVB Saturday and final bids were due by Sunday afternoon. As of this writing , no details have emerged.
Treasury Secretary Yellen said there would be no Federal bailout of SVB. She stressed that this is a very different situation than the Great Financial Crisis, adding “We’re not going to do that again. But we are concerned about depositors, and we’re focused on trying to meet their needs.” Treasury, the Fed, and the FDIC jointly announced here that all SVB depositors would have access to their money starting this Monday. The Fed also said that it’s creating a new “Bank Term Funding Program” that offers loans to banks under easier terms than it typically provides. The new program will provide loans of up to one year for collateral that will be valued at par. This should help stem the panic as Yellen emphasized that “The American banking system is really safe and well capitalized. It’s resilient.” We concur. It was announced that depositors at Signature Bank would have full access to their money on Monday.
Fears of financial contagion trumped the stronger than expected jobs report last Friday. Equity markets fell, led by financials, while U.S. Treasury yields plummeted. This took a toll on the dollar, which really should have benefited from a safe haven bid. If markets calm down Monday, we expect these trades to unwind. Indeed, U.S. stock futures are up over 1% as of this writing. Bond yields remain depressed and the dollar remains under pressure, but these too should reverse.
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 still priced in, but odds of a larger 50 bp move have fallen to less than 20% from over 70% pre-SVB. A 25 bp hike May 3 is still priced in, but odds of another 25 bp hike June 14 are only around 33%. Furthermore, two 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 Friday, there will be no Fed speakers until Chair Powell’s post-decision press conference March 22.
The data focus this week will be on February inflation readings. CPI will be reported Tuesday. Headline is expected at 6.0% y/y vs. 6.4% in January, while core is expected at 5.5% y/y vs. 5.6% in January. We thought it would be a good time to highlight the Cleveland Fed's inflation Nowcast model. Right now, it is predicting y/y rates for February CPI of 6.21% for headline and 5.54% for core, which are both above current Bloomberg consensus. If the Cleveland Fed is accurate, the upside miss would likely feed into higher U.S. rates and a stronger dollar. PPI will be reported Wednesday. 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. If these readings run hotter than expected, we think the Fed will likely hike by 50 bp this month.
Retail sales data Wednesday 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 this Wednesday after the retail sales data.
Regional Fed surveys for March will start rolling out. Empire survey kicks things off Wednesday and is expected at -8.0 vs. -5.8 in February. Philly Fed reports Thursday 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.
Other minor data will be reported. January business inventories and TIC data will be reported Wednesday. Weekly jobless claims, February import/export prices, building permits, and housing starts will all be reported Thursday. February leading index and University of Michigan preliminary March consumer sentiment will be reported Friday. Headline is expected to remain steady at 67.0. Of note, 1-year inflation expectations are seen falling a tick to 4.0% while 5- to 10-year expectations are seen steady at 2.9%.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank meets Thursday and is expected to hike the deposit rate 50 bp to 3.0%. At this point, the only debate 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 quickly downshifting to 25 bp. 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 80% priced in, which seems too low to us. A 25 bp hike May 4 is priced in, with only around 30% odds of a larger move. Two more 25 bp hikes are priced in for June and July that takes the deposit rate up to 3.75% but after that, odds of one last 25 bp hike top out around 55% in October.
Eurozone data reports are limited. January IP will be reported Wednesday and is expected at 0.4% m/m vs. -1.1% in December. As a result, the y/y rate is expected at 0.3% vs. -1.7% in December. Final February CPI data will be reported Friday.
The U.K. highlight will be the spring budget presentation Wednesday. 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. The OBR gives its budget briefing Thursday.
Of note, U.K. policymakers have been forced to contend with the SVB fallout due to its U.K. unit. Over the weekend, emergency meetings were held between Prime Minister Rishi Sunak, Bank of England Governor Andrew Bailey and City Minister Andrew Griffith. For now, Sunak is downplaying contagion risks even as reports suggest that the U.K. unit of SVB has approached other banks about a rescue.
BOE tightening expectations remain steady. WIRP suggests a 25 bp hike March 23 is nearly 90% priced in, while a 25 bp hike May 11 is about 70% priced in. One last 25 bp hike is nearly priced in that would see the policy rate peak near 4.75% vs. 4.5% 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 also like to point at that because the BOE started tightening in December 2021, the economy is just starting to feel the impact as 2023 gets under way and so there are still headwinds ahead. Dhingra speaks Monday.
U.K. labor market data Tuesday will be important. The unemployment rate for the three months ending in January is expected to rise a tick to 3.8%, while average weekly earnings for the same period are expected to fall two ticks to 5.7% y/y. If so, it would take some pressure off of the BOE to continue hiking.
Sweden reports February CPI Wednesday. Headline is expected to remain steady at 11.7% y/y, CPIF is expected to remain steady at 9.3% y/y, and CPIF ex-energy is expected to remain steady at 8.7% y/y. At the last policy meeting February 9, the Riksbank hiked rates 50 bp to 3.0% and also delivered several other hawkish measures as it noted “Inflation is far too high and has continued to rise. The policy rate will probably be raised further during the spring.” Starting in April, the Riksbank will accelerate its Quantitative Tightening and sell SEK3.5 bln ($340 mln) per month in government bonds. Furthermore, the bank is putting more emphasis on the exchange rate after a period of benign neglect, noting “If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target. A stronger krona would be desirable.” Lastly, forward guidance shifted more hawkish, as the policy rate is now seen 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, while the swaps market is pricing in a peak policy rate near 4%, which is more hawkish than the Riksbank’s forward guidance.
ASIA
Minutes of the January 17-18 Bank of Japan meeting will be released Wednesday. At that meeting, the settings for Yield Curve Control were maintained and the bank pledged to continue large scale JGB purchases and to remain nimble. The bank noted that the economy was under pressure from slowdown overseas and that risk to the economy are skewed to the downside for both FY22 and FY23 and balanced for FY24. Governor Kuroda said he does not believe the trading band for the 10-year JGB yield needs to be widened further, adding that the bank needed more time to assess the impact of its December adjustment. As we all know, the bank also kept policy steady at the next meeting March 9-10. Looking ahead, WIRP suggests around 20% odds of liftoff April 28, rising to around 33% June 16 and then nearly 90% for July 28. 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 35 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.
Japan reports key data. Q1 BSI large manufacturing and large all industry business conditions will be reported Monday. January trade and core machine orders will be reported Thursday. Exports are expected at 7.0% y/y vs. 3.5% in January, while imports are expected at 12.5% y/y vs. 17.5% in January. Core machine orders are expected at -3.5% y/y vs. -6.6% in January.
Australia highlight will be February jobs data Thursday. Consensus sees 50.0k jobs added vs. -11.5k in January, while the unemployment rate is seen falling a tick to 3.6% even as the participation rate is seen rising a tick to 66.6%. Ahead of that, CBA February household spending and March Westpac consumer confidence, and February NAB business survey will be reported Tuesday. WIRP suggests less than 15% odds of a 25 bp hike at the next meeting April 4, while the swaps market is pricing in a peak policy rate near 4.0%.
New Zealand reports key Q4 data. Current account will be reported Wednesday and is expected at -8.5% of GDP vs. -7.9% in Q3. GDP will be reported Thursday and is expected at -0.2% q/q vs. 2.0% in Q3. The y/y rate is expected at 3.3% vs. 6.4% in Q3. WIRP suggests a 25 bp hike is fully priced in for the next meeting April 5, with nearly 40% odds of a larger 50 bp move. The swaps market is pricing in a peak policy rate between 5.5-5.75%.
