It was a volatile and seemingly emotional week for many investors with Silicon Valley Bank imploding, Credit Suisse on the ropes and the powers that be coming to the rescue. And with that come large swings in the expectations of Fed hikes, pauses and cuts, dragging market sentiment in both directions along the way. Touch wood, the dust appears to have settled, and now the focus shifts to what the Fed will actually do on Wednesday. Add to that the potentially live central bank meetings for the BOE and SNB, and we could be in for another interesting week.
The week that was:
- Volatile and choppy trade in the first half of the week surrounding the implosion of Silicon Valley Bank (SVB)
- The Fed, US Treasury and FDIC came to the rescue around Market open to ensure deposits for the failed Silicon Valley Bank were guaranteed
- Expectations for a 50bp Fed hike fell from over 70% the week prior to zero,
- Credit Suisse fessed up to their own financial reporting mishaps, causing their largest backer (Saudi National Bank) to refuse to provide further regulatory liquidity, causing the SNB to step in with a $54 liquidity pump
- The ECB hiked rates by 50bp to 3.5%, warned that inflation is to remain high for a very long time, yet provided no forward guidance on rates
- US CPI, PPI and retail sales were all softer which plays into the theme of a less aggressive Fed than Jerome Powell let on at his testimony the week prior
- However, with core CPI m/m increasing in momentum is suggests inflation may remain sticky (or tick higher in the coming months)
- Australian employment remains resilient to rate hikes, with job growth hitting an 8-month high, unemployment back to 3.5% and participation rate ticking higher
- RBA cash rate futures imply a 75% chance of a policy pause in April, down from 100% the day before the employment report
- New Zealand’s Q4 GDP contracted by -0.6% in Q4, below the RBNZ’s own 0.7% forecast, and the current account balance to GDP fell to -8.9%, which sparked a warning from S&P Global Ratings Agency that NZ could lose their AA+ ratings status
- China’s investments, retail sales and industrial production rose to suggest the record level of loans lent in January are seeping through the economy
- The MOVE index (implied volatility for US treasuries) rose to its highest level since 2007
- The VIX (Volatility Index) spent the week ranging aggressively between 22 – 30
- It was also a turbulent week for gold and oil, with their weekly ranges exceeding 200% of their 10-week ATR's
- Gold enjoyed its best week (and day on Friday) since March 2020, rising around 3.5% on Friday and 6.4% for the week
- Oil prices fell to a 15-month low during risk-off trade, although news that Saudi Arabia and Russia met to discuss stabilising the market may have placed a floor for prices ~$65
- The ASX 200 closed below 7,000 for the first time since January 3rd
The week ahead (calendar):
- Canada: New Motor Vehicle Sales (MoM),
- EU: International Trade in Goods, Job Vacancies, German PPI
- Switzerland: Q4 Employment Statistics,
- China: Loan Prime Rate
- Australia: Speech by Christopher Kent, Assistant Governor (Financial Markets) – Long and Variable Monetary Policy Lags
- US: State Job Openings and Labor Turnover
- Canada: Inflation Report, Job Vacancies
- EU: ZEW Economic Sentiment (EU, Germany), Construction Production, Conference Board Leading Indicator (France)
- Switzerland: Money Supply M3
- Australia: Minutes of March 2023 Monetary Policy Meeting of the Reserve Bank Board
- New Zealand: Trade Balance, Credit Card Spending, Global Dairy Trade Price Index
- US: FOMC Meeting and press conference, Existing Home Sales, Building Permits, Jobless Claims, New Home Sales
- Canada: Monetary Policy Minutes, New Housing Price Index
- EU: Balance of Payments,
- UK: Consumer price inflation, Producer Price Inflation, UK House Price Index,
- Switzerland: Balance of Payment,
- Australia: Leading Index,
- New Zealand: Chief Economist Paul Conway will give a speech on inflation, Westpac Consumer Sentiment,
- UK: BOE Monetary Policy Meeting, Business insights and impact on the UK economy
- Switzerland: SNB Monetary Policy Decision,
- Japan: Reuters Tankan
- Australia: Labour Force (detailed), Judo Bank Flash Australia Composite PMI, Conference Board Leading Index
- US: S&P Global Composite PMI, State Employment and Unemployment
- Canada: Monthly Survey of Manufacturing (Flash estimate), Retail Trade, Wholesale Trade, Real-time local business conditions, Mortgage Lending
- EU: S&P Global Composite PMI (France, Germany EU)
- UK: S&P Global Composite PMI, Retail Sales
- Japan: Jibun Bank Flash Japan Composite PMI, Nationwide CPI
View Earnings This Week
The week ahead (key events):
FOMC meeting on Wednesday US (Thursday early hours Asia)
Fed meetings are always highly anticipated events, but what makes this one different is how we’ve not seen such volatile swings of the Fed funds (which imply the probability of a hike and to what degree) just days ahead of a Fed meeting. Prior to SVB imploding, it was pretty much a given the Fed would hike by 50bp following a slew of strong economic data and a very hawkish testimony to the House and Senate by Jerome Powell.
By Thursday’s close, the Fed fund futures (FFF) now imply an 89.3% chance of a 25bp hike and just a 10.7% of a pause. This is usually a given, but if we’re to find that systematic risks does actually spread across the financial system ahead of Wednesday’s meeting, then a pause (or even a cut) would be more likely. Basically, take nothing for granted right now.
FFF implied by Thursday’s close:
- 89.3% chance of a 25bp hike on Wednesday to 5%
- 69.7% chance of a final 25bp hike to 5.25% in May
- First 25bp cut to arrive in June (52.3% chance)
- Another 25bp cut in July to take rates back to 4.75% (51.2% chance)
- Rates to remain at 4.5% for the remainder of 2023
UK inflation (Wednesday) and the BOE meeting (Thursday):
I may be alone on this one, but having read through BOE Governor Baileys recent speech, I’m fairly certain he said it was on a knives edge over whether the BOE pause or not.
It is down to incoming data, which makes Wednesday’s inflation report a likely proxy for any such hike (or not).
Last week’s employment data revealed fewer jobless claims, unemployment remained at 3.7% (not bad and better than 3.8% expected) and softer, but still decent earnings at 6.5%. GDP m/m was also better than expected at 0.3% m/m, up from -0.5% and better than the 0.1% forecast. Industrial and manufacturing output were big misses, but overall data is not too bad.
So perhaps Wednesday’s inflation report will be the decider between a 25bp hike or a pause. And with core CPI expected to rise to 6.2% (5.8% prior) y/y, and CPI at 10.3% y/y (10.1% prior), I’m leaning towards a 25bp hike.
SNB (Swiss National Bank) meeting on Wednesday:
The SNB hiked by 50bp in December to a (relatively low) 1% in December, taking their tightening cycle to 175bp from -0.5%. They hinted at further tightening in December, and President Jordan continued to hear at further hikes since. Moreover, inflation remains well above target, so I would be very surprised not to see another 50bp hike on Wednesday.
The week ahead for the APAC region
- Japan’s nationwide inflation report on Friday will gain my interest, to see if it tracks Tokyo’s annual inflation rate ~1pct point lower. Not that it will make a difference to the BOJ, who have been ultra-dovish through higher inflation rates, but it would be a nice victory for global deflation.
- The RBA’s Assistant Governor Christopher Kent speaks at 09:05 AEDT on Monday morning, in a speech titled “Long and Variable Monetary Policy Lags”. Whist the title could indicate it will be a session of saving face, it will be interest to see what – if anything – is said about the recent market turbulence and whether that still plays into a policy pause in April.
- Apart from the Loan Prime Rate on Monday, it is a quiet calendar week for China. Whilst LPR warrants a look (just in case), they have not surprised markets with it for some time.
- New Zealand’s trade balance data has piqued my interest, given GDP for Q4 contracted and at a much weaker pace than expected. Furthermore, investors want to see how day for Q1 plays to see how much of an impact, cyclone Gabrielle has had on the economy.
-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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