Central Bank Watch – Fed, HKMA, BOE, Norges, BSP, CBC and SNB All Hike Rates Amid Banking Crisis

A hectic week led off by the Fed raising by 25bp. From there the Hong Kong Monetary Authority, Bangko Sentral ng Pilipinas, Norges Bank and Bank of England also all hike rates 25bps. Taiwan raised by 12.5 bps and the Swiss National Bank announced a 50-bps rate hike. Brazil and Turkey Held rates unchanged. Markets were hesitant how the central banks would respond since the implosion of three US banks, Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. There was also the UBS takeover of Credit Suisse and the ongoing selling of US Regional Bank stocks.

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.

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.

In the week ahead

We have key monetary policy meetings from Thailand, South Africa, Columbia and Mexico.

Federal Reserve Vice Chair for Supervision Michael Barr testifies on “Bank Oversight” before the Senate Committee on Banking, Housing and Urban Affairs and on “Bank Supervision” before the House Financial Services Committee

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, BoE, BoJ, ECB SNB, BoC to coordinate action to enhance liquidity provision Coordinated central bank action to enhance provision of US dollar liquidity Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, Swiss National Bank are today announcing a coordinated action to enhance provision of liquidity via standing US dollar liquidity swap line arrangements
  • Christopher Kent, Reserve Bank of Australia Assistant Governor We were not involved in the central bank swap operation, Banking problems are just one of many considerations for monetary policy, Global banking system lot stronger than a decade ago, Problems are with a few institutions that were badly mismanaged
  • European Central Bank President Lagarde said that she has not seen clear evidence that inflation is trending down and that she is not committed to any rate hikes or a pause yet.
  • The Reserve Bank of Australia’s March Minutes showed an agreement to consider a pause in raising rates in April.
  • ECB Chief Economist Lane said that there are reasons to believe that underlying inflation will ease over time.
  • The Bank of Korea noted that the domestic financial sector is sound and that non-banks face stress from a weak property market.
  • European Central Bank policymaker Nagel cautioned that more rate hikes will be needed if inflation evolves according to projections.

Eyes on the Bond Market

U.S. Treasuries had another choppy week with the Fed and multiple central bank action raising rates. The action put the skids under US regional banks Thursday and European banks Friday sending CDS through the roof with safe haven bond buying. Deutsche Bank shares fell to levels not seen since October. In the U.S., the Treasury held an unscheduled meeting of the Financial Stability Oversight Council.

Treasuries saw yields on the 10-yr note and shorter tenors to levels not seen since mid-September before pulling back. The 2-yr note yield, which fell to 3.56%, settled at 3.77%. The 10-yr note yield, which declined to 3.29% at its low, settled the session at 3.38%. The 2s10s spread expanded by three basis points to -39 bps.

Yield Watch

Friday/For the week

  • 2-yr: -3 bps to 3.77% (-5 bps for the week)
  • 3-yr: UNCH at 3.59% (-9 bps for the week)
  • 5-yr: -1 bp to 3.41% (-6 bps for the week)
  • 10-yr: -3 bps to 3.38% (-2 bps for the week)
  • 30-yr: -4 bps to 3.64% (+4 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 meetings from Thailand, South Africa, Columbia and Mexico. Federal Reserve Vice Chair for Supervision Michael Barr testifies on “Bank Oversight” before the Senate Committee on Banking, Housing and Urban Affairs and on “Bank Supervision” before the House Financial Services Committee

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

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

Wednesday, March 29, 2023

  • 03:00 Thailand Interest Rate Decision

Thursday, March 30, 2023

  • 09:00 SARB Interest Rate Decision
  • 14:00 Columbia Interest Rate Decision
  • 15:00 Mexico Interest Rate Decision

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

Monday, March 27, 2023

  • 04:30 German Buba Balz Speaks
  • 04:30 German Buba President Nagel Speaks
  • 10:40 ECB’s Elderson Speaks
  • 11:00 ECB’s Schnabel Speaks
  • 13:00 BoE Gov Bailey Speaks
  • 17:00 Federal Reserve Board Governor Philip Jefferson speaks on “Implementation and Transmission of Monetary Policy” before H. Parker Hill Lecture event hosted by Washington and Lee University, No webcast. Text available. Q&A from audience.

Tuesday, March 28, 2023

  • 00:00 BoJ Governor Kuroda Speaks
  • 04:35 ECB’s Enria Speaks
  • 04:45 BoE Deputy Governor Woods Speaks
  • 04:45 BoE Gov Bailey Speaks
  • 04:45 MPC Member Ramsden Speaks
  • 07:00 BoE Quarterly Bulletin
  • 07:00 BCB Copom Meeting Minutes
  • 07:30 German Buba Wuermeling Speaks
  • 09:00 German Buba President Nagel Speaks
  • 10:00 German Buba Balz Speaks
  • 10:00 Federal Reserve Vice Chair for Supervision Michael Barr testifies on “Bank Oversight” before the Senate Committee on Banking, Housing and Urban Affairs, 1000 EDT/1400 GMT. 106 Dirksen. Text available. Livestream at https://www.banking.senate.gov/
  • 12:30 German Buba Mauderer Speaks

Wednesday, March 29, 2023

  • 03:00 Thailand Interest Rate Decision
  • 03:00 European Central Bank Non-monetary Policy Meeting
  • 04:00 German Buba Balz Speaks
  • 05:30 BoE FPC Meeting Minutes
  • 09:00 SNB Quarterly Bulletin
  • 10:00 Federal Reserve Vice Chair for Supervision Michael Barr testifies on “Bank Supervision” before the House Financial Services Committee, 1000 EDT/1400 GMT. Text available. 2128 Rayburn. Livestream at https://financialservices.house.gov. FDIC Chairman Martin Gruenberg is also scheduled to testify.
  • 12:30 BoC Deputy Governor Gravelle Speaks
  • 14:50 BoE MPC Member Mann
  • 16:40 ECB’s Schnabel Speaks

Thursday, March 30, 2023

  • 04:00 ECB Economic Bulletin
  • 07:00 Brazil BCB Inflation Report
  • Tentative GBP BOE Inflation Letter
  • 08:00 Fed Vice Chair for Supervision Barr Speaks
  • 08:00 Brazil BCB National Monetary Council Meeting
  • 09:00 SARB Interest Rate Decision
  • 12:00 SNB Gov Board Member Maechler Speaks
  • 12:45 Federal Reserve Bank of Boston President Susan Collins speaks on the economy and participates in fireside chat before the National Association for Business Economics 39th Annual Economic Policy Conference Embargoed text available. Livestream on NABE website. https://www.nabe.com/NABE/Events/PC23/Main_Page.aspx?WebsiteKey=91b9e16d-e6fe-4f31-a4af-02c194225c32&eb56ef1cf1e3=2#eb56ef1cf1e3
  • 12:45 Federal Reserve Bank of Richmond President Thomas Barkin speaks in person before the Virginia Council of CEOs Quarterly Meeting, 1245 EDT/1645 GMT. No livestream. No text. Audience and media Q&As expected. University of Richmond https://www.vaceos.org/events/
  • 14:00 Columbia Interest Rate Decision
  • 15:00 Mexico Interest Rate Decision

Friday, March 31, 2023

  • 04:00 SARB Quarterly Bulletin
  • 07:30 RBI Foreign Exchange Reserves Report
  • 07:30 RBI Monetary and Credit Information Review
  • TBD Federal Reserve Board Governor Christopher Waller speaks on “The Unstable Phillips Curve” before the Federal Reserve Bank of San Francisco Macroeconomics and Monetary Policy Conference. Time TBD. Webcast expected. Text available. No Q&A. Federal Reserve Bank of San Francisco
  • 15:05 Federal Reserve Bank of New York President John Williams speaks and participates in a moderated discussion covering the economic outlook and monetary policy at event hosted by Housatonic Community College, Text and moderated Q&A expected. Livestream available.
  • 17:45 Fed Governor Cook Speaks

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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