Central Bank Watch – Banker Torment, SNB, Norges Bank, Turkey and BOE all Raised Rates

The week saw a slate of rate hikes by the Bank of England (+50 bps to 5.00%), Norges Bank (+50 bps to 3.75%), Swiss National Bank (+25 bps to 1.75%), and Central Bank of Turkey (+650 bps to 15.0%). Those moves stoked concerns about global inflation and the lag effects of rate hikes potentially impacting global growth. Federal Reserve Chairman Powell testified in front of the House Financial Services Committee and Senate as part of the Federal Reserve’s Semi-Annual Monetary Policy Report. He didn’t provide any new surprises in terms of monetary policy views, yet there was consternation among committee members regarding capital requirements for banks. That understanding, coupled with the growth concerns, undercut the bank stocks.

In the week ahead Sweden’s Riksbanken and Banco de la Republica de Colombia are the major banks with a monetary policy meeting. Several central bank officials, including Fed Chair Powell and ECB President Lagarde, will attend the ECB Forum on Central Banking in Portugal.

Central Bank Weekly Analysis and Outlook – Banker dynamics are complex. There are myriad facets to analyze and contemplate.

Central bank monetary policy decisions and market activity interest rate decisions can have a dominant effect on financial markets, fiscal policy and geopolitics. We keep an eye on key banker developments, what they mean and what is ahead.

In the Week Ahead

After two weeks of aggressive hawkish central bank action where it seems the mantra is if higher rates kickstart a global recession so bit it, inflation is the evil ‘we must contain’. The weak flash global PMI’s on Friday reinforces those concerns. Sweden’s Riksbanken is the major bank with a monetary policy meeting. Several central bank officials, including Fed Chair Powell and ECB President Lagarde, will attend the ECB Forum on Central Banking in Portugal.

We move onto data watching mode. In the US, we also get the Bank Stress Test results. Data wise we get PCE indices with personal income and spending, the final reading of GDP growth, Michigan Consumer Confidence, and new and pending home sales. There will be inflation rate releases for Canada, the Euro Area, Germany, Italy, France, and Spain. Finally, in China, the NBS Manufacturing and non-manufacturing PMIs will be released, while in Germany, the Ifo Business Climate Index and GFK Consumer Confidence will be of importance.

To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.

Central Bank Highlights This Past Week:

Most of the G10 central banks may complete their rate hike cycles around the middle of the year or earlier, the unwinding of central bank balance sheets may continue longer, depending on the damage done.

This week’s central bank main events included:

Fed’s Powell’s prepared text released and notes that FOMC participants expect further rate hikes by year-end

  • Process of getting inflation back to 2% “has a long way to go”
  • Nearly all FOMC participants expect it will be appropriate to raise rates somewhat further by year end
  • Seeing some effects of tightening but it will take time to see full effects
  • Labor market remains very tight but nominal wage growth showing signs of easing, job vacancies have declined
  • Longer-term inflation expectations appear to remain well anchored
  • Tighter credit likely to weight on economic activity but extent remains uncertain
  • We will continue to make our decisions meeting by meeting
  • Reducing inflation is likely to require a period of below-trend growth
  • Fed Chair Powell continued his monetary policy testimony before the Senate Banking Committee the next day. He didn’t provide any new surprises in terms of monetary policy views, yet there was consternation among committee members regarding capital requirements for banks. 
  • The Mexican Central Bank, Banco de México kept interest rates at 11.25% at its June 2023 meeting, in a unanimous decision. The bank said guidance is to hold rate at 11.25% for a prolonged period.
  • The Central Bank of Turkey hiked by 650bps to 15% for the 7-day repo rate at its June 2023 meeting, the consensus guess was 20%, with one call calling for to 40%. The lira touched a fresh record low, another 2.6% lower to 24.20 after.
  • The Bank of England MPC at its May meeting Thursday raised the key bank rate by raised by 50 bps to 5.00% as expected by many after the previous days hot inflation numbers.
  • Norway’s central bank, the Norges Bank’s Monetary Policy and Financial Stability Committee unanimously raised the policy benchmark interest rate by 50 bps to 3.75 percent during its June meeting, bringing borrowing costs to the highest level since December 2008
  • The Monetary Board of the Bangko Sentral ng Pilipinas (BSP), Philippines central bank held rates at 6.25%. Rates are now the highest since the 7.50 percent logged in May 2007.
  • Bank Indonesia kept its benchmark interest rate unchanged at 5.75% as universally expected at it’s April meeting. Guidance emphasized the need to avoid imported inflation and stability risks around a weaker rupiah.
  • The Swiss National Bank raised its policy rate by 25 bps to 1.75% in its June meeting, following a 50bps move in March and bringing borrowing costs the highest since November 2008.
  • Banco Central do Brasil​ kept its benchmark interest rate unchanged in June 2023, in line with market expectations. The board guidance emphasized “patience and serenity in the conduct of monetary policy” while deleting reference to possibly resuming the tightening cycle.
  • The People’s Bank of China lowered its one-year loan prime rate by ten basis points to 3.55% while the five-year rate was also lowered by ten basis points, to 4.20%, though the moves were seen as underwhelming by the market.
  • Richmond Fed Barkin: Despite falling from its peak inflation is still too high. Demand is still elevated compared with its pre-pandemic trend. Elevated demand is boosting inflation higher
  • The RBA announced meeting minutes and marked the AUD lower. According to the minutes, the Reserve Bank of Australia (RBA) discussed the potential for a 25 basis points rate rise. The board was split but ultimately decided that an immediate hike was necessary to ensure inflation would return to the target over a “reasonable” timeframe.
  • European Central Bank policymaker Stournaras said that additional rate hikes cannot be excluded and that a peak rate will likely be maintained for at least six months.
  • Fed Governor (FOMC voter) Bowman said that additional rate hikes will be necessary during a plenary session hosted by the Cleveland Fed.
  • San Francisco Fed President Daly (non-voter) said that it is reasonable to believe that the Fed will hike rates two more times this year and that it is “prudent” to slow the pace of tightening as the terminal rate nears.

Eyes on the Bond Market

U.S. Treasuries showed solid gains across the curve to finish the week. Friday’s move was fueled by flash June Manufacturing and Services PMI readings from major economies. These came at the time major central banks including the Fed, BoC, RBA, SNB, ECB, and the Bank of England are threatening more rate hikes. This week’s underperformance in shorter tenors put additional pressure on the 2s10s spread, which compressed by seven basis points since last Friday to -101 bps.

U.S. Treasuries $12 billion 20-yr bond reopening met stellar demand, reflecting continued strong appetite for U.S. government debt. WTI crude oil widened this week’s loss to $2.74, or 3.8%, week while the U.S. Dollar Index rose 0.5% to 102.91, gaining 0.6% for the week.

Treasury borrowings will now be playing catch up. Treasury Q1 issuance slowed to $124 billion to a record $26.956 TN. Outstanding Treasury debt surged $7.937 TN, or 41.7%, over the past 13 quarters. Since the end of 2007, Treasury debt has inflated $20.905 TN, or 345%. After ending 2007 at 41%, Treasury debt closed the quarter at 102% of GDP.

Yield Watch


  • 2-yr: -5 bps to 4.75% (+4 bps for the week)
  • 3-yr: -4 bps to 4.33% (+1 bp for the week)
  • 5-yr: -5 bps to 4.00% (+1 bp for the week)
  • 10-yr: -6 bps to 3.74% (-3 bps for the week)
  • 30-yr: -5 bps to 3.82% (-4 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $17.9bn last week to $8.335 TN.
  • Fed Credit was down $566bn from the June 22nd peak.
  • Over the past 197 weeks, Fed Credit expanded $4.608 TN, or 124%.
  • Fed Credit inflated $5.524 TN, or 197%, over the past 554 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt jumped $16.3bn last week to $3.425 TN.
  • “Custody holdings” were up $22.1bn, or 0.7%, y-o-y.

Fed 2023 Bank Stress Tests.

Update: This got more interesting with the three bank failures in a week. Silicon Valley Bank (SVB) was the largest failure since Washington Mutual’s September 2008 collapse. It was also the second largest in U.S. history.

SVB is the dominant financier for Silicon Valley startups. SVB ended 2022 with a $120 billion securities portfolio, the vast majority mortgage securities (MBS and CMOs). SVB’s spectacular collapse will have a major negative impact on its $74 billion loan portfolio.

Silvergate Capital Corp. plans to wind down operations and liquidate its bank after the crypto industry’s meltdown. Silvergate collapsed amid scrutiny from regulators and a criminal investigation by the Justice Department’s fraud unit into dealings with fallen crypto giants FTX and Alameda Research. Silvergate’s woes deepened as the bank sold off assets at a loss and shut its flagship payments network, which it called “the heart” of its group of services for crypto clients.

The Federal Reserve last month released the hypothetical scenarios for its annual bank stress tests. This year, 23 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets. Last year the Fed found all 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks.

Busy Central Bank Week Ahead:

Sweden’s Riksbank. Forward guidance that was provided at the April 26th meeting explicitly stated that the central bank would hike either at this coming meeting or the next one in September. Developments since then may have put a more exigent spin on the timing, magnitude and forward guidance.

Banco de la Republica de Colombia. After surprising the market at its April meeting by raising its lending rate by 25bps, a majority of analysts are expecting the central bank of Colombia to hold its lending rate at 13.25%.

This Week’s Interest Rate Announcements (Time E.T.)

Thursday, June 29, 2023

  • 03:30 Riksbank Interest Rate Decision

Friday, June 30, 2023

  • 14:00 Banco de la Republica de Colombia Interest Rate Decision

This Week’s Central Bank Speeches, Meetings (Time E.T.)

Monday, June 26, 2023

  • 04:50 SNB Chairman Thomas Jordan speaks
  • 07:00 German Buba Monthly Report
  • 10:25 SNB Gov Board Member Maechler Speaks
  • 13:30 ECB President Lagarde Speaks

Tuesday, June 27, 2023

  • 04:15 BoE MPC Member Dhingra Speaks
  • 04:30 MPC Member Tenreyro Speaks
  • 05:30 BoC Deputy Gov Kozicki Speaks

Wednesday, June 28, 2023

  • 06:30 BoE MPC Member Pill Speaks
  • 06:30 BoE Quarterly Bulletin
  • 09:00 SNB Quarterly Bulletin
  • 09:30 BoE Gov Bailey Speaks
  • 09:30 ECB President Lagarde Speaks
  • 09:30 Discussion — Chair Jerome H. Powell Watch Live Policy Panel Discussion At the European Central Bank (ECB) Forum on Central Banking 2023, Sintra, Portugal
  • 11:00 ECB President Lagarde Speaks
  • 16:30 Fed Bank Stress Test Results

Thursday, June 29, 2023

  • 02:30 Discussion — Chair Jerome H. Powell Watch Live Dialogue with Bank of Spain Governor Pablo Hernández de Cos At the Banco de España Fourth Conference on Financial Stability, Madrid, Spain
  • 03:30 Riksbank Interest Rate Decision
  • 03:30 Swedish Monetary Policy Meeting Minutes
  • 03:35 German Buba Balz Speaks
  • 04:00 ECB Economic Bulletin
  • 04:00 SARB Quarterly Bulletin
  • 05:00 German Buba Mauderer Speaks
  • 12:30 MPC Member Tenreyro Speaks
  • 15:00 FOMC Member Bostic Speaks
  • 16:30 Fed’s Balance Sheet

Friday, June 30, 2023

  • 06:00 EU Leaders Summit
  • 07:30 RBI Monetary and Credit Information Review
  • 10:30 BoC Business Outlook Survey
  • 14:00 Banco de la Republica de Colombia Interest Rate Decision

Federal Reserve FOMC Schedule 2023

The Fed with a Strong US Dollar

The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.

The survey of 40 economists was conducted Oct. 21-26.

  • 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
  • 38% said the policy makers would be forced to cut rates earlier than expected and
  • 18% said the Fed would not be able to raise rates as much as planned.
  • Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.

The Fed as expected raised another 50 basis-points last meeting. The median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.

“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”

Anna Wong (Bloomberg chief US economist)

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