Central Bank Watch – Busy Week with Fed’s Powell Semi Annual Testimony, SNB and BOE in Focus

Week two of the world’s most influential central banks delivering policy decisions this week went by without any surprises other than the Fed raising their terminal rate. The BoJ, PBOC, and ECB all went by as expected. In the week ahead Federal Reserve Chairman Powell will testify in front of the House Financial Services Committee and Senate as part of the Federal Reserve’s Semi-Annual Monetary Policy Report. e We get guidance in the week ahead from Bank of England, the Swiss National Bank, Norges Bank and Hungary. We will hear from LatAm banks, Mexico, Chile and Brazil plus Asian central banks Philippines, Indonesia and China.

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

It will be a busy week for central banks with policy meeting and key data dropping. Key speeches by several Federal Reserve policymakers and Federal Reserve Chair Jerome Powell and his colleagues Lisa Cook and Philip N. Jefferson will testify before Congress. We get guidance in the week ahead from Bank of England, the Swiss National Bank, Norges Bank and Hungary. We will hear from LatAm banks, Mexico, Chile and Brazil plus Asian central banks Philippines, Indonesia and China will provide details on the course of their monetary policy.

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:

  • The Bank of Japan as widely expected kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield unanimously.
Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band as Expected
  • ECB raised key rates by 25 bps in its June monetary policy decision to 4% as expected, the highest level, and the rate on the deposit facility to a 22-year high of 3.5%.
ECB Tightens Screws, Raises Rates Another 25bps Despite Europe Being in a Recession
  • The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, left its base interest rate charged through its overnight discount window unchanged at 5.50 per cent, tracking action by the U.S. Federal Reserve.
Hong Kong’s Monetary Authority Kept Interest Rates in Lockstep With Fed, Hibor Continues to Rise

The Federal Reserve left rates unchanged in a target range of 5.00-5.25% in unanimous vote at their June meeting as expected. Market Fed futures pricing suggested 8% of a 25-bps hike before the decision while the vast majority of economists predicting no change. Stock markets sold off and the US dollar went higher after the Fed raised the dot plot, with the median moving all the way to 5.6%, which implies two more hikes.

Federal Reserve Leave Rates Unchanged as Expected. See 5.6% Fed Fund Rate at Year End
  • Bank of England policymaker Haskel said that persistent inflation risks must be guarded against and that additional rate hikes could not be ruled out.
  • Swiss National Bank President Jordan repeated that the fight against inflation has not ended yet.
  • ECB policymaker Knot said that second-round effects and pressures in wages are being seen and that services inflation is harder to bring down.
  • People’s Bank of China lowered its seven-day reverse repurchase rate by ten basis points to 1.90%
  • People’s Bank of China lowered its medium-term lending facility rate by 10 bps to 2.65%, marking the first cut in ten months.
  • Fed Governor Waller said that he does not support altering monetary policy due to concerns about mismanagement of some banks. US economy is still ‘ripping along’ Right now everything ‘seems to be calm’ in the banking system Global spillovers from expected from coordinated central bank tightening have to really materialized It’s still not clear that recent bank failures have had a material effect on credit conditions Monetary policy should not be altered due to ‘ineffectual management at a few banks’ It’s the Fed’s job to use monetary policy to fight inflation; the job of bank leaders is to manager interest rate risk
  • Richmond Fed Barkin: Comfortable doing more on interest rates if demand does not slow Is “comfortable doing more” on interest rates if the coming data doesn’t confirm a story that slowing demand is returning inflation to the 2% target. Believes higher rates may create the risk of a more significant slowdown, but the experience of the 70s shows the Fed should not back off its inflation fight too soon. The 2% target has served the Fed well for a generation. Inflation has proved “stubbornly persistent,” and he is still looking to be convinced that weakening demand will control it.

Eyes on the Bond Market

U.S. Treasuries retreated ahead of a three-day weekend, lifting the 2-yr yield to its highest level in more than three months while yields on longer tenors finished in the lower half of this week’s range. Treasuries began the week on the defensive with participants eyeing a flood of new supply in coming weeks and months as the Treasury works to replenish its General Account with an estimated $1 trillion of Treasury issuance as part of the latest debt-ceiling resolution. We also had tamer CPI and PPI data and The Federal Reserve left rates unchanged in a target range of 5.00-5.25% but raised the dot plot, with the median moving all the way to 5.6%,

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.

Bond Traders Weekly Outlook: Absorbed Flood of New Supply Lifting 2-yr Yield to 3 Month High

Yield Watch

Friday/Week

  • 2-yr: +7 bps to 4.71% (+9 bps for the week)
  • 3-yr: +8 bps to 4.32% (+6 bps for the week)
  • 5-yr: +7 bps to 3.99% (+7 bps for the week)
  • 10-yr: +4 bps to 3.77% (+2 bps for the week)
  • 30-yr: +1 bp to 3.86% (-3 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $26.7bn last week to $8.353 TN.
  • Fed Credit was down $548bn from the June 22nd peak.
  • Over the past 195 weeks, Fed Credit expanded $4.627 TN, or 124%.
  • Fed Credit inflated $5.542 TN, or 197%, over the past 552 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt declined $2.5bn last week to $3.407 TN.
  • “Custody holdings” were up $12.6bn, or 0.4%, y-o-y.
Federal Reserve Leave Rates Unchanged as Expected. See 5.6% Fed Fund Rate at Year End
What is The Federal Reserve Discount Window and How it Operates

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.

Federal Reserve Hypotheticals For 2023 Bank Stress Tests have Unemployment at 10%

Busy Central Bank Week Ahead:

  • Bank of England Consensus and markets are in universal agreement toward expecting a 25bps hike in Bank Rate on Thursday. Uh oh. The scope for surprise, however, could take one or both of two forms. In this case, the speculation for some time now has been whether 25bps would be enough, or if something bigger may be delivered. Why? Accelerating wage growth, job growth and core inflation and conditioning the move on their data dependence. OIS markets foresee another 125–150bps of tightening before reaching a terminal Bank Rate of up to 6% from 4.5% at present by the end of this year or early next
  • Federal Reserve Powell delivers his semiannual Monetary Policy Report and testimony to Congress first to the House Financial Services Committee on Wednesday (10amET) and then to the Senate Banking Committee the next day at the same time. Powell may not have confidence to influence market pricing and is more likely to reinforce guidance that they are pausing to evaluate conditions before ‘nearly all’ FOMC members advocate returning with further tightening late
  • PBoC actions cut the 7-day reverse repo rate by 10bps on June 12th and then the 1-year Medium-Term Lending Facility Rate by 10bps two days later. Chinese banks will be reducing their 1- and possibly 5-year Loan Prime Rates by the same amount to start the week.
  • Swiss National Bank is expected to hike by 25bps on Thursday with the tail risk of a 50bps move. The ECB’s 25bps hike may provide some cover to stick with +25bps as could the challenges around combining UBS and CS.
  • Norges Bank expect a 25bps hike, but a substantially minority think there is the risk of a more hawkish surprise with a 50bps hike.
  • Banco de Mexico (Banxico) widely expected to leave its overnight rate unchanged at 11.25% on Thursday. The central bank delivered a final 25bps hike on March 30th. The risks posed by potential further Fed tightening are mitigated by the fact that the peso has appreciated by about 4% since the last policy decision.
  • Banco Central de Chile (BCCE) expected to extend its policy rate hold at 11 ¼% where it has been since October.
  • Banco Central do Brasil (BCB) has been holding at a Selic Rate of 13.75% since last August. Consensus unanimously expects another hold on Wednesday this week.
  • Bank Indonesia (BI) has held its 7-day reverse repo rate unchanged at 5.75% since January. BI’s communications are likely to be cautious around future easing guidance.
  • Bangko Sentral ng Pilipinas holding its overnight borrowing rate at 6.25% in May, the Philippines’ central bank is expected to extend its hold this Thursday.

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

Monday, June 19, 2023

  • 17:00 Chile Interest Rate Decision

Tuesday, June 20, 2023

  • 08:00 Hungary Interest Rate Decision

Wednesday, June 21, 2023

  • 17:00 Brazil Interest Rate Decision

Thursday, June 22, 2023

  • 03:00 Philippines Interest Rate Decision
  • 03:30 SNB Interest Rate Decision & Monetary Policy Assessment
  • 03:30 Indonesia Interest Rate Decision
  • 04:00 Norges Bank Interest Rate Decision
  • 07:00 BoE Interest Rate Decision
  • 15:00 Mexico Interest Rate Decision

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

Monday, June 19, 2023

  • 06:00 German Buba Monthly Report
  • 17:00 Chile Interest Rate Decision
  • 21:15 PBoC Loan Prime Rate
  • 21:30 RBA Meeting Minutes
  • 21:35 RBA Assist Gov Kent Speaks
  • 23:40 RBA Assist Gov Bullock Speaks

Tuesday, June 20, 2023

  • 06:30 FOMC Member Bullard Speaks
  • 08:00 Hungary Interest Rate Decision
  • 11:45 FOMC Member Williams Speaks
  • 19:50 BoJ Monetary Policy Meeting Minutes
  • 21:00 BOK Financial Stability Board Meeting Minutes
  • 21:30 BoJ Board Member Adachi Speaks

Wednesday, June 21, 2023

  • 09:45 German Buba President Nagel Speaks
  • 10:00 Federal Reserve Chairman Jerome Powell, Fed Governor Cook and Fed Governor Jefferson will testify in front of the House Financial Services Committee as part of the Federal Reserve’s Semi-Annual Monetary Policy Report.
  • 11:00 German Buba Balz Speaks
  • 12:25 Federal Reserve Bank of Chicago President Austan Goolsbee participates in moderated question-and-answer session before the Wall Street Journal Global Food Forum, 1125 CDT/1225 EDT/1625 GMT. Livestream available. No embargoed text. No media scrum https://globalfood.wsj.com/
  • 13:30 BOC Summary of Deliberations
  • 16:00 Federal Reserve Bank of Cleveland President Loretta Mester speaks during welcome social before the Policy Summit 2023: Communities Thriving in a Changing Economy” conference hosted by the Federal Reserve Bank of Cleveland. Event begins 1600 EDT/2000 GMT.
  • 17:00 Brazil Interest Rate Decision
  • 21:30 BoJ Board Member Noguchi Speaks

Thursday, June 22, 2023

  • 03:00 Philippines Interest Rate Decision
  • 03:30 SNB Interest Rate Decision & Monetary Policy Assessment
  • 03:30 Indonesia Interest Rate Decision
  • 04:00 Fed Waller Speaks
  • 04:00 SNB Press Conference
  • 04:00 Norges Bank Interest Rate Decision
  • 07:00 BoE Interest Rate Decision
  • 07:00 BoE MPC Meeting Minutes
  • 08:00 BOE Inflation Letter
  • 08:05 German Buba President Nagel Speaks
  • 09:55 FOMC Member Bowman Speaks
  • 10:00 Federal Reserve Chairman Jerome Powell, Fed Governor Cook and Fed Governor Jefferson will testify in front oof the Senate Banking Committee as part of the Federal Reserve’s Semi-Annual Monetary Policy Report.
  • 10:00 Federal Reserve Bank of Cleveland President Loretta Mester speaks before the Policy Summit 2023: Communities Thriving in a Changing Economy” conference hosted by the Federal Reserve Bank of Cleveland. Event begins 1000 EDT/1400 GMT
  • 15:00 Mexico Interest Rate Decision
  • 16:30 Fed’s Balance Sheet
  • 16:30 FOMC Member Barkin Speaks

Friday, June 23, 2023

  • 05:15 FOMC Member Bullard Speaks
  • 08:00 FOMC Member Bostic Speaks
  • 13:40 Federal Reserve Bank of Cleveland President Loretta Mester gives closing remarks before the Policy Summit 2023: Communities Thriving in a Changing Economy” conference hosted by the Federal Reserve Bank of Cleveland. Event begins 1340 EDT/1740 GMT.

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)
Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test

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