Central Bank Watch – RBA, BOC, RBI with a Live FOMC Ahead

The Federal Reserve’s next move is overhanging global financial markets, June FOMC is still ‘live’. Ahead of that we sees The BoC, RBA, RBI, CBR and BCRP decisions. The FOMC has gone into communications blackout ahead of the June 14th decision. We look towards the most recent data and mutterings. Friday’s US jobs report confused many with strong jobs growth but at the same time lower earnings and unemployment. Earlier in the week Cleveland Fed President Mester (not an FOMC voter) said that she sees no compelling reason to pause the rate hikes in June.

Later that day, Fed Governor Jefferson (FOMC voter and nominee for Vice Chair) said “…skipping a rate hike at the coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming” and Philadelphia Fed President Harker (2023 FOMC voter) said the Fed can “take a bit of a skip for a meeting.” In response, the probability of a 25-basis points rate hike at the June meeting plunged to 25.6%, according to the CME FedWatch Tool. Still, Fed officials continue to signal that more rate hikes may be needed.

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 Reserve Bank of Australia with significant market probability attached to a hike on Tuesday with about one-third of consensus expecting a 25bps move. The Bank of Canada policy rate decision on Wednesday that will be delivered via a statement without either forecasts or press conference. Reserve Bank of India has consensus expecting an unchanged repurchase rate of 6.5% on Thursday. Banco Central de Reserva del Peru is expected to hold its reference rate unchanged at 7.75% again on Thursday evening. The Central Bank of Russia decision is on Friday.

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:

  • European Central Bank policymaker Wunsch said that more rate hikes may be needed since real rates are still low while policymaker de Cos said that while there is more tightening to do, the ECB is getting close to the end of the hiking cycle.
  • Bank of Japan Governor Ueda said that the Japan has not yet reached sustainable 2.0% inflation.
  • European Central Bank policymaker Villeroy de Galhau said that the inflationary peak has probably been passed in France while policymaker Muller said that one more rate hike is likely and that expectations for rate cuts in 2024 are too optimistic.
  • European Central Bank policymaker de Guindos said that 25-bps rate hikes represent “the new normal.”
  • European Central Bank policymaker Panetta repeated that inflation is too high, but also acknowledged that the ECB is not far from reaching the terminal rate.
  • Cleveland Fed President Mester (not an FOMC voter) told FT that she sees no compelling reason to pause the rate hikes.
  • Fed Governor Jefferson (FOMC voter) said he thinks that “…skipping a rate hike at the coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming”
  • Philadelphia Fed President Harker (2023 FOMC voter) said he thinks the Fed can “take a bit of a skip for a meeting.”

Eyes on the Bond Market

U.S. Treasuries ended the holiday-shortened week on a firmly lower note with shorter tenors leading the selling which reversed a good portion of this week’s gains. The bond market compressed the 2s10s spread by six basis points to -82 bps. The 2-yr note yield fell five basis points to 4.51% and the 10-yr note yield fell 11 basis points to 3.69%. Uncertainty about the debt ceiling finally eased after a deal was passed by both chambers of Congress. The catalyst Friday was the Employment report for May, which saw the NFP crush expectations (actual 339,000; consensus 190,000) however at the same time average hourly earnings growth slowed to 4.3% y/y from 4.4% in April, and the unemployment rate increased by 30 basis points to 3.7%.

Bond Traders Weekly Outlook: Shorter Tenors Lead the Selling Ahead of Fed

Yield Watch

Friday/Week/Month

  • 2-yr: +18 bps to 4.51% (-5 bps for the week)
  • 3-yr: +16 bps to 4.14% (-9 bps for the week)
  • 5-yr: +14 bps to 3.84% (-9 bps for the week)
  • 10-yr: +8 bps to 3.69% (-11 bps for the week)
  • 30-yr: +5 bps to 3.88% (-8 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $25.9bn last week to $8.380 TN.
  • Fed Credit was down $521bn from the June 22nd peak.
  • Over the past 194 weeks, Fed Credit expanded $4.653 TN, or 125%.
  • Fed Credit inflated $5.569 TN, or 198%, over the past 551 weeks.
  • Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $12.2bn last week to a one-year high $3.410 TN. “Custody holdings” were up $14bn, or 0.4%, y-o-y.

The probability of a 25-basis points rate hike at the June meeting plunged to 25.6%, according to the CME FedWatch Tool after the jobs report. Still, Fed officials continue to signal that more rate hikes may be needed. the fed funds futures market, at least 75% expect the fed funds rate range to remain at 5.00-5.25% after the June meeting, but the implied likelihood of a rate hike in July rose to 69.4% from 54.0% yesterday.

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%

Central Bank Week Ahead:

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

Tuesday, June 6, 2023

  • 00:30 RBA Interest Rate Decision & Statement

Wednesday, June 7, 2023

  • 10:00 BoC Statement & Interest Rate Decision

Thursday, June 8, 2023

  • 00:30 RBI Interest Rate Decision
  • 19:00 Peru Interest Rate Decision

Friday, June 9, 2023

  • 06:30 CBR Interest Rate Decision

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

Monday, June 5, 2023

  • 10:00 German Buba President Nagel Speaks
  • 13:30 Federal Reserve Bank of Cleveland President Loretta Mester gives brief remarks before the National Personal Finance Challenge hosted by the Council for Economic Education, approx. 1330 EDT/1730 GMT. No text. No Q&A. Livestream at https://www.youtube.com/user/EconomicEducation.

Tuesday, June 6, 2023

  • 00:30 RBA Interest Rate Decision & Statement
  • 19:20 RBA Governor Lowe Speaks
  • 19:50 RBA Assist Gov Bullock Speaks
  • 21:30 RBA Chart Pack Release

Wednesday, June 7, 2023

  • 06:30 German Buba Wuermeling Speaks
  • 10:00 BoC Statement & Interest Rate Decision

Thursday, June 8, 2023

  • 00:30 RBI Interest Rate Decision
  • 11:10 BoC Deputy Governor Beaudry Speaks
  • 16:30 Fed’s Balance Sheet, Balances with Federal Reserve Banks
  • 19:00 Peru Interest Rate Decision

Friday, June 9, 2023

  • 06:30 CBR Interest Rate Decision
  • 08:00 CBR Press Conference

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

Latest Key Central Bank Decisions, Reports Archive

2023

2022

For a Complete Macro and Micro Market Overview Visit Our Traders Market Weekly

Traders Market Weekly: The Fed, BoE and SNB and a Leaky Dyke…

Sources: TC WSJ Bloomberg Scotia Bank

Trade Smart

From The TradersCommunity Research Desk