Central Bank Watch – Confronting Fed, Bank of England and Swiss National Bank Meetings Ahead

It’s been a week since the implosion of three US banks, Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. From there we saw further selling of Credit Suisse that has never recovered from Archegos and the panic selling and speculative attacks on other US Regional banks. The Federal Reserve has worked in concert with the Treasury and major money center banks to stabilize conditions. The speed of protective measures for the financial system has been impressive but with that longer-run moral hazard problems and adverse incentives are front and center.

This week will test this narrative with monetary policy decisions from major central banks including The Fed, BoE, SNB, and Norges Bank. Judging by how markets finished the week it apparently has not been enough. It is a narrative rooted in rationality within irrational market reactions

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

The response included full deposit guarantees at ‘afflicted’ US banks, a new Federal Reserve facility to help against bank runs deposit flight and forced liquidation of impaired securities portfolios. There was also improved margin requirements when borrowing from the Fed’s discount window, liquidity supports to US banks. Money center banks injecting cash totaling $30 billion into First Republic Bank.

In Europe Credit Suisse plans to borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back about SFr3bn of its debt in an attempt to boost liquidity and calm investors.  We also saw more cautious forward guidance from the ECB, even though they still raised by 50bps, scared to implasy the sfiancial system is fragile if they didn’t hike. There was also news of possible merger discussions between UBS and Credit Suisse among the responses.

We have the backdrop of a more hawkish Fed Chair in the face of escalating systemic risk. How will this affect Fed policy given the massive treasury positions out there? How much damage is the Federal Reserve willing to do in the guise of controlling inflation?

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.

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 Discount Window Borrowing Soars To All-Time High: Discount Window Loans Jump To $152.9 Bln In Week To March 15, Banks Borrow $164.8 Bln From Fed Facilities In Week To March 15, Banks Borrowed $11.9 Bln From New Loan Facility From Sun-Wed
  • 11 banks pledge $30 billion to First Republic Bank: Bank of America, Wells Fargo, Citigroup and JPMorgan Chase will contribute about $5 billion apiece, while Goldman Sachs and Morgan Stanley will deposit around $2.5 billion, the banks said in a news release. Truist, PNC, U.S. Bancorp, State Street and Bank of New York Mellon will deposit about $1 billion each.
  • “This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” The Federal Reserve, Treasury Department, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency said in a joint statement.
  • Federal Reserve and Treasury: Resolution of Silicon Valley Bank; no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. Similar systemic risk exception for Signature Bank, NewYork. All depositors of both institution will be made whole. Signature shareholders and certain unsecured debt holders will not be protected
  • The Federal Reserve board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors
  • Treasury department, using the exchange stabilization fund, would provide $25 billion as credit protection to the Federal Reserve banks in connection with bank term funding program
  • Advances can be requested under the program until at least March 11, 2024
  • People’s Bank of China Governor Yi was reappointed to another five-year term.

Eyes on the Bond Market

U.S. Treasuries continued in the same vein as the previous week with safe haven flows from the continued fallout from the banking crisis. An intense squeeze engulfed the Treasury market. U.S. Treasuries ended the week toward their highest levels of the week. European and U.S. equities faced pressure from banks. First Republic Bank announced a suspension of its dividend and confirmed that it borrowed funds from the Fed’s discount window over the past week. This week’s action expanded the 2s10s spread by 47 bps to -42 bps and the MOVE index sailed past its pandemic high to a level not seen since 2008.

Yield Watch

Friday/For the week

  • 2-yr: -32 bps to 3.82% (-77 bps for the week)
  • 3-yr: -28 bps to 3.68% (-60 bps for the week)
  • 5-yr: -28 bps to 3.47% (-48 bps for the week)
  • 10-yr: -19 bps to 3.40% (-30 bps for the week)
  • 30-yr: -12 bps to 3.60% (-10 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit surged $142bn last week to $8.447 TN.
  • Fed Credit was down $453bn from the June 22nd peak.
  • Over the past 183 weeks, Fed Credit expanded $4.720 TN, or 127%.
  • Fed Credit inflated $5.636 Trillion, or 201%, over the past 540 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt increased $2.2bn last week to $3.362 TN.
  • “Custody holdings” were down $73bn, or 2.1%, y-o-y.

Rate markets saw fed funds futures market still sees around 60% odds of a 25bps rate hike and then expect the FOMC to end the hiking cycle. Delivering even a 25bps hike has to be accompanied by further measures to calm markets. The ECB raised 50bps this week, part of the rationale was they feared not being aggressive would signal a week market. The issues at Credit Suisse were already telling us that, however.

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.

Central Bank Week Ahead:

In the week ahead we have key monetary policy meeting, from the Fed, BoE and SNB the market will focus on with the banking crisis.

In the week ahead we get eight central banks delivering policy decisions.

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

Wednesday, March 22, 2023

  • 14:00 Fed Interest Rate Decision.
  • 17:00 Brazil Interest Rate Decision
  • 22:30 Hong Kong Interest Rate Decision

Thursday, March 23, 2023

  • 03:00 Philippines Interest Rate Decision
  • 04:30 SNB Interest Rate Decision
  • 05:00 Norges Bank Interest Rate Decision
  • 07:00 Turkey Interest Rate Decision
  • 08:00 BoE Interest Rate Decision

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

    Monday, March 20, 2023

    • 07:00 German Buba Monthly Report
    • 10:00 ECB President Lagarde Speaks
    • 10:30 Turkey Central Government Debt Stock (Feb)
    • 12:00 ECB President Lagarde Speaks
    • 17:30 US Reserve Balances with Federal Reserve Banks
    • 20:30 RBA Meeting Minutes

    Tuesday, March 21, 2023

    • 08:30 ECB President Lagarde Speaks
    • 09:30 EUR ECB’s Enria Speaks
    • 11:30 ECB’s Enria Speaks

    Wednesday, March 22, 2023

    • 04:45 ECB President Lagarde Speaks
    • 05:30 ECB’s Lane Speaks
    • 09:45 ECB’s Panetta Speaks
    • 13:00 German Buba Balz Speaks
    • 13:00 German Buba President Nagel Speaks
    • 13:30 BOC Summary of Deliberations
    • 14:00 Fed Interest Rate Decision. Federal Open Market Committee second day statement released.
    • 14:30 FOMC Press conference
    • 17:00 Brazil Interest Rate Decision
    • 21:00 BOK Financial Stability Board Meeting Minutes
    • 22:30 Hong Kong Interest Rate Decision

    Thursday, March 23, 2023

    • 03:00 Philippines Interest Rate Decision
    • 04:30 SNB Interest Rate Decision (Q1)
    • 05:00 SNB Press Conference
    • 05:00 Norges Bank Interest Rate Decision
    • 07:00 Turkey Interest Rate Decision
    • 08:00 BoE Interest Rate Decision
    • 08:00 BoE MPC Meeting Minutes
    • 11:00 BoE MPC Member Mann
    • 11:00 ECB’s Lane Speaks

    Friday, March 24, 2023

    • 05:30 German Buba President Nagel Speaks
    • 09:30 Federal Reserve Bank of St. Louis President James Bullard gives presentation and participates in fireside chat on the U.S. economy and monetary policy before Greater St. Louis Inc. In-person event with virtual option. Slides and press release anticipated.

    Federal Reserve FOMC Schedule 2023

    • January 31-February 1, 2023 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)
    • March 21-22 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
    • May 2-3 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
    • June 13-14 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
    • July 25-26 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
    • September 19-20 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
    • October 31-November 1 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
    • December 12-13 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)

    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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