Central Bank Watch – Fed, New Zealand, Korea, Indonesia, Turkey and South Africa on Deck

We continue to see bond and currency markets roiled by renewed debt ceiling theatrics and in that setting we have another busy week of central bankers. We get minutes to the May 2nd – 3rd FOMC meeting which could inform pause versus hike bias and five regional central bank decisions offer modest risk to markets. RBNZ is nearly unanimous expected to hike again, Bank of Korea, Bank Indonesia and the Turkish Central Bank are all expected to extend pauses. The SARB is seen hiking again. We all so get a solid round up of Fed speakers.

Last week we saw the PBoC’s, Bankgo Sentral ng Pilipinas and Banco de México (Banxico) as expected hold their overnight rates at unchanged. The most watched for brought more of the same, Federal Reserve Chair Powell and past Chair Bernanke participating in ‘Perspectives on Monetary Policy’ tols us we have high inflation, and we don’t know how high rates have to go but we think risks are balanced to raising.

The Bank of England, Poland, Peru and Chile all met on rates with expectations largely as expected last week. BOE governor, Andrew Bailey reiterated in his press conference the bank will adjust the bank rate as necessary to return inflation to target sustainably. The Federal Reserve released its twice–yearly report Monday on financial hazards in its 2023 financial stability report.

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

This week eyes will again be on the ECB and Fed officials’ speeches. We also have five regional central bank decisions offer modest risk to markets. RBNZ is nearly unanimous expected to hike again, Bank of Korea, Bank Indonesia and the Turkish Central Bank are all expected to extend pauses. The SARB is seen hiking again. We all so get a solid round up of Fed speakers.

We get minutes to the May 2nd – 3rd FOMC meeting which could inform pause versus hike bias and a solid round up of Fed speakers.

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 PBoC met expectations by holding its 1-year Medium-Term Lending Facility Rate unchanged at 2.75% (only Bloomberg expected a cut). Destabilizing the yuan amid uncertainty toward the Fed’s next steps continues to hold back the PBoC despite basically never hitting its 3% inflation target that lacks credibility.
  • In a unanimous vote, the Governing Board of the Banxico maintained the interest rate unchanged at 11.25%, after 15 consecutive hikes. The Board mentioned that it will be necessary to maintain the reference rate at this level for an extended period of time. In addition, it reaffirmed its commitment to its mandate and its efforts to return to a low and stable inflation environment.
  • Bangko Sentral ng Pilipinas (BSP) kept its current key policy rates, noting that inflation has begun to ease. In a rate-setting meeting on Thursday, May 17, the BSP’s Monetary Board made no change to the key policy rate of 6.25%. BSP’s key policy rate in May 2022 was 2.25%, and it now settles at 6.25%.
  • Fed’s Bostic: There is some risk of a recession, but if we fall into one, it will not be long or deep There could be some increase in unemployment from here but economy will still be strong Appropriate policy is to wait and see the effects of tightening
  • European Central Bank policymaker De Guindos said that the ECB is in the final stages of its hiking cycle while policymaker Kazimir said that hikes may continue for longer than originally thought.
  • The latest policy minutes from the Reserve Bank of Australia showed a determination to bring inflation down to target.
  • The People’s Bank of China noted that implementation of monetary policy will be precise and forceful, and that inflation may rebound gradually in the second half of the year.
  • Bank of England Chief Economist Pill said that last week’s rate hike was made due to a concern about excessive momentum in the economy.
  • European Central Bank policymaker de Guindos said that the bulk of policy tightening has been done already but services inflation remains worrisome for the ECB. Meanwhile policymaker Muller said that it is premature to expect a rate cut in early 2024.
  • Dallas Fed President Lori Logan (FOMC voter) said that current data doesn’t justify pausing rate hikes in June, according to CNBC.
  • The European Central Bank’s latest economic bulletin reiterated that inflation has remained too high for too long and that future policy decisions will ensure that inflation returns to its 2.0% target.
  • ECB President Lagarde said that the council will be making “more delicate” decisions going forward.
  • Mr. Powell said that inflation is “far above” the Fed’s objective, but also said that rates may not have to rise as much because of credit conditions. These views were comparable to what he shared during his press conference following the FOMC meeting earlier this month, so they weren’t necessarily surprising.

Eyes on the Bond Market

U.S. Treasuries ended the week mixed with the sixth consecutive loss for the 5-yr note through to longer tenors. Treasury yields moving lower in response to debt ceiling and regional bank worries. This week’s fall was paced by shorter tenors keeping the yield curve under pressure, compressing the 2s10s spread by six basis points for the second consecutive week, to -58 bps. The US 2-year yield rose 29 basis points on the week trading at 4.27%. The high yield reached 4.349% the highest level since March 15, 2023.

Yield Watch


  • 2-yr: UNCH at 4.27% (+29 bps for the week)
  • 3-yr: +2 bps to 3.96% (+29 bps for the week)
  • 5-yr: +5 bps to 3.75% (+30 bps for the week)
  • 10-yr: +4 bps to 3.69% (+23 bps for the week)
  • 30-yr: +5 bps to 3.95% (+17 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $12.4bn last week to $8.448 TN.
  • Fed Credit was down $452bn from the June 22nd peak.
  • Over the past 192 weeks, Fed Credit expanded $4.722 TN, or 127%.
  • Fed Credit inflated $5.637 TN, or 201%, over the past 549 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt increased $8.0bn last week to a near eight-month high $3.390 TN.
  • “Custody holdings” were down $33.2bn, or 1.0%, y-o-y.

End-of-week market pricing were pricing a couple rate cuts between June and December. Market expectations for the Fed funds rate at the December 13th FOMC meeting jumped 25 bps this week to 4.64%. It was as high as 4.73% in early-Friday trading, before “Powell Steers Policy Debate With Clear Signal on June Rate Pause.” Hawkish Fed officials had the market pricing an almost 40% probability for a 25 bps June rate increase, before dovish Powell comments pushed the odds down to 18% by Friday’s close. It will be a divided committee for the June 14th meeting.

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:

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

In the week ahead we get 5 central banks delivering policy decisions.

Tuesday, May 23, 2023

  • 22:00 RBNZ Interest Rate Decision and Monetary Policy Statement

Wednesday, May 24 2023

  • 21:00 Bank of Korea Interest Rate Decision

Thursday, May 25 2023

  • 03:30 Bank Indonesia Interest Rate Decision
  • 07:00 Turkey Interest Rate Decision
  • 09:00 South Africa SARB Interest Rate Decision

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

Monday, May 22, 2023

  • 08:30 Federal Reserve Bank of St. Louis President James Bullard participates in discussion on the U.S. economy and monetary policy before the American Gas Association 2023 Financial Forum, 0830 EDT/1230 GMT. In-person event with virtual option. Slides and press release are not anticipated. No media availability. Fort Lauderdale Marriott, 3030 Holliday Drive, Grand Ballrooms E & F.
  • 09:00 Federal Reserve Bank of Dallas Lorie K. Logan Speaks
  • 10:50 Federal Reserve Bank of Richmond President Thomas Barkin and Federal Reserve Bank of Atlanta President Raphael Bostic participate in conversation before the Technology-Enabled Disruption Conference: “Uncertainty and Prospects for Disruptive Investments” hosted by the Federal Reserve Bank of Richmond, 1050 EDT/1450 GMT. No livestream.(Barkin: No text, no audience/media Q&A; Bostic: no embargoed text, audience Q&A expected, no media Q&A). Federal Reserve Bank of Richmond, 701 E. Byrd Street, Richmond, Va. 23219.
  • 11:00 Federal Reserve Bank of San Francisco President Mary Daly participates virtually in fireside chat before the National Association for Business Economics/Banque de France International Economic Symposium in Paris, France, approx. 0800 PDT/1100 EDT/1500 GMT (1700 CEST). Livestream available. No text. Audience Q&A expected.

Tuesday, May 23, 2023

  • 09:00 Federal Reserve Bank of Dallas President Lorrie Logan gives opening remarks before the Technology-Enabled Disruption Conference: “Uncertainty and Prospects for Disruptive Investments” hosted by the Federal Reserve Bank of Richmond, 0900 EDT/1300 GMT. No livestream. Text available. No Q&A.
  • 10:45 BOE MPC Member Haskel Speaks
  • 13:50 German Buba President Nagel Speaks
  • 22:00 RBNZ Interest Rate Decision and Monetary Policy Statement
  • 23:00 RBNZ Press Conference

Wednesday, May 24, 2023

  • 03:00 European Central Bank Non-monetary Policy Meeting
  • 06:00 German Buba Monthly Report
  • 09:00 BoE Gov Bailey Speaks
  • 10:05 Treasury Secretary Yellen Speaks
  • 12:10 Federal Reserve Board Governor Christopher Waller speaks on economic outlook before the University of California Santa Barbara conference: 2023 Santa Barbara County Economic Summit, 0910 PDT/1210 EDT/1610 GMT. Webcast and text available. Webcast link TBA. Q&A from moderator.
  • 14:00 FOMC Meeting Minutes
  • 21:00 Bank of Korea Interest Rate Decision

Thursday, May 25, 2023

  • 03:30 Bank Indonesia Interest Rate Decision
  • 04:35 SNB Gov Board Member Maechler Speaks
  • 06:30 German Buba President Nagel Speaks
  • 07:00 Turkey Interest Rate Decision
  • 09:00 South Africa SARB Interest Rate Decision
  • 09:50 Federal Reserve Bank of Richmond President Thomas Barkin speaks on the state of the region before the SWVA (Southwest Virginia) Economic Forum, 0950 EDT/1350 GMT. Livestream available to media. No text. Information: https://www.uvawise.edu/economic-development/swva-economic-forum.
  • 10:00 Federal Reserve Bank of Boston President Susan Collins shares remarks and participates in fireside chat Q&A with students and staff of the Community College of Rhode Island, 1030 EDT/1430 GMT. Livestream available, link TBA. Embargoed text expected. Q&A from CCRI audience only.
  • 12:30 BOE MPC Member Haskel Speaks
  • 16:30 Fed’s Balance Sheet, Reserve Balances with Federal Reserve Banks

Friday, May 26, 2023

  • None Seen

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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