Central Bank Watch – Renewed Hawkish sentiment at the Fed, ECB and BoC

We had key monetary policy meetings from Bank of Canada, Peru’s central bank and the Bank of Korea which went as expected and there were no surprises in the FOMC minutes. Renewed hawkish sentiment at the Fed, ECB and BoC suggest that a hiking bias is back. We saw Fed Governor Waller (FOMC voter) impact markets Friday saying that the central bank has not made much progress on inflation. Fed Rate hike expectations climbed, with the implied likelihood of a 25-bps increase on May 3 rising to 74.5% from 67.0% yesterday and 71.2% a week ago.

We have a plethora of Fed Speakers ahead & Bank of Canada Governor Macklem and SDG Rogers will appear twice before parliamentary committees. Bank Indonesia rater decision is due Tuesday and PBoC Prime Rate Wednesday. Next big Central Bank decisions are new Bank of Japan Governor Ueda’s first Interest rate decision on April 28th, the FOMC on May 3rd, the ECB the next day, the RBA on May 2nd and the Bank of England on May 11th.

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 The People’s Bank of China who are widely expected to leave its one-year Medium Term Lending Facility Rate unchanged at 2.75% to start the week.
  • Bank Indonesia is likely to stay on hold on Tuesday as core inflation comes back in line with its 3% +/-1% headline target band.
  • Minutes to the RBA’s meeting on April 4th on Monday evening.
  • Fed-speak on tap with Governors Bowman (Tuesday and Thursday) and Waller (Thursday), Chicago’s Goolsbee (Wednesday), New York’s Williams (Wednesday), Cleveland’s Mester (Thursday) and Atlanta’s Bostic (Thursday) and Boston’s Cook (Friday)
  • Fed’s Beige Book Wednesday
  • Bank of Canada Governor Macklem and SDG Rogers will appear twice before parliamentary committees on Tuesday and Wednesday (11:30amET each day)

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:

  • Bank of Canada maintained its overnight rate at 4.50% in April 2022, as expected. The move follows the aggressive hikes from last year meetings.
  • South Korea’s Monetary Policy Board kept its base rate unchanged at 3.5% during its April meeting as widely expected in a unanimous decision
  • Peru: BCRP holds as expected for third consecutive month at 7.75%. It replaced the text of making “additional changes” with making “changes” to monetary policy, if necessary. The new text accommodates more to the possibility that the interest rate has already reached its terminal level at 7.75%.

Eyes on the Bond Market

U.S. Treasuries fell further Friday, widening this week’s losses in all tenors. Treasury yields responding to an increase in year-ahead inflation expectations seen in the preliminary University of Michigan Consumer Sentiment Index for April and Fed Governor Waller (FOMC voter) saying that the central bank has not made much progress on inflation. Fed Rate hike expectations climbed today, with the implied likelihood of a 25-bps increase on May 3 rising to 74.5% from 67.0% yesterday and 71.2% a week ago. The U.S. Dollar Index climbed 0.5% to 101.56.

Yield Watch


  • 2-yr: +11 bps to 4.10% (+14 bps for the week)
  • 3-yr: +13 bps to 3.84% (+9 bps for the week)
  • 5-yr: +10 bps to 3.61% (+11 bps for the week)
  • 10-yr: +7 bps to 3.52% (+12 bps for the week)
  • 30-yr: +5 bps to 3.74% (+12 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $12.7bn last week to $8.586. TN.
  • Fed Credit was down $281bn from the June 22nd peak.
  • Over the past 186 weeks, Fed Credit expanded $4.860 TN, or 130%.
  • Fed Credit inflated $5.776 Trillion, or 205%, over the past 544 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt gained $11.7bn last week to $3.331 TN.
  • “Custody holdings” were down $130bn, or 3.8%, y-o-y.

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 two central banks delivering policy decisions.

Tuesday, April 18, 2023

  • 03:30 Bank Indonesia Interest Rate Decision. Likely to stay on hold on Tuesday as core inflation comes back in line with its 3% +/-1% headline target band.

Wednesday, April 19, 2023

  • 21:15 PBoC Loan Prime Rate. Expected to be unchanged.

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

Monday, April 17, 2023

  • 09:00 BoE MPC Member Cunliffe Speaks
  • 12:00 Federal Reserve Bank of Richmond President Thomas Barkin speaks in person before the Richmond Association for Business Economics, 1200 EDT/1600 GMT. Audience Q&A expected. No media Q&A. No text. No livestream.
  • 21:30 RBA Meeting Minutes
  • 22:00 China NBS Press Conference

Tuesday, April 18, 2023

  • 03:30 Bank Indonesia Interest Rate Decision
  • 13:00 Federal Reserve Board Governor Michelle Bowman speaks on “Considerations for a Central Bank Digital Currency” before a Psaros Center for Financial Markets and Policy event, 1300 EDT/1700 GMT. Text and livestream available. Q&A from moderator. .

Wednesday, April 19, 2023

  • 14:00 Federal Reserve Beige Book
  • 16:30 Federal Reserve Bank of Chicago President Austan Goolsbee participates in Marketplace interview, via NPR Network, 1630 CDT/1730 EDT/2130 GMT.
  • 19:00 Federal Reserve Bank of New York President John Williams speaks before the Money Marketeers of New York University, 1900 EDT/2300 GMT. Text and moderated Q&A expected.
  • 21:15 PBoC Loan Prime Rate

Thursday, April 20, 2023

  • 07:30 ECB Publishes Account of Monetary Policy Meeting
  • 12:20 Federal Reserve Bank of Cleveland President Loretta Mester speaks on the economic and policy outlook before the Akron Roundtable Signature Series, 1220 EDT/1620 GMT. Audience Q&A expected. Text available. No media Q&A. Livetream at https://www.youtube.com/user/ClevelandFed.
  • 14:00 Federal Reserve Bank of Dallas President Lorrie Logan and Federal Reserve Board Governor Michelle Bowman give opening remarks before a Fed Listens event, 1400 CDT/1500 EDT/1900 GMT. Livestream at https://www.dallasfed.org/cd/events/2023/23fedlistens. (Logan: no text, no Q&A; Bowman: text available. No Q&A).
  • 17:00 Federal Reserve Bank of Atlanta President Raphael Bostic participates in presentation and armchair discussion on regional and national economic conditions at Eastern Florida State College, 1700 EDT/2100 GMT. No livestream. Audience and media Q&As expected. No embargoed text.
  • 19:45 Federal Reserve Bank of Philadelphia President Patrick Harker speaks on the economic outlook before the Samuel Zell and Robert Lurie Real Estate Center Members’ Meeting, 1945 EDT/2345 GMT. Livestream and text available. Audience Q&A expected.

Friday, April 21, 2023

  • 16:35 Federal Reserve Board Governor Lisa Cook speaks on “Important Questions for Economic Research” before a Carroll Round Keynote Speech event, 1635 EDT/2035 GMT. Text available. Q&A from moderator and audience. RSVP for livestream: https://georgetown.zoom.us/webinar/register/WN_QaB-lE4pQyWcR2V7_Blk1g.

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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