Central Bank Watch – Resilient Demand and Inflation Data Confusing Bankers and Analysts

The bond market is turning nervous as we continue to see bond and currency markets roiled by renewed debt ceiling theatrics and more data this week (PCE, GDP Price Index, Services PMI, Personal Income and Spending, Jobless Claims) pointing to resilient demand and inflation. The futures market is now pricing in a 69% probability of a 25-bps hike on June 14th, with peak Fed funds now at 5.33% for the July 26th meeting. Higher for longer is the pricing, the market has shifted the December 13th meeting 5.00% policy rate up 36 bps this week and 70 bps in 11 sessions. Last week we saw RBNZ, Bank of Korea, Bank Indonesia and the Turkish Central Bank do large;ly expected and the SARB hiking more than expected.

This week ahead is data heavy for the central bankers to test their nerves. We get the US labor report, global PMI, inflation for the Euro Area and Q2 GDP growth rates for Canada, India, Brazil, and Turkey. We all so get a solid round up of Fed speakers. We have no policy meetings scheduled.

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. d to closely follow the US labor report, JOLTS job openings, ISM Manufacturing PMI, and CB consumer confidence. Additionally, inflation rates are anticipated for the Euro Area, Germany, France, Italy, Spain, and South Korea. Q2 GDP growth rates will be released for Canada, India, Brazil, and Turkey, along with manufacturing PMIs for China, Italy, Spain, Canada, Russia, India, and South Korea.

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:

RBNZ, Bank of Korea, Bank Indonesia and the Turkish Central Bank all did expected. The SARB surprised with a bigger hike. We had FOMC minutes and a solid round up of Fed speakers.

  • The South African Reserve Bank (SARB) increased its benchmark repo interest rate by another 50 bps to 7.25% at its May 2023 meeting. Markets had expected a smaller 25 bps increase. Policymakers cited concerns regarding the significant depreciation of the rand and the mounting pressures of inflation as key drivers behind the rate adjustment.
  • The Central Bank of Turkey held its key one-week repo rate at 8.5% in its May 2023 meeting, as expected. Holding steady for a third straight month following a 50-bps cut previously in response to the country’s earthquake disaster.
  • The Reserve Bank of New Zealand aggressive hiking cycle continues. It raised its Official Cash Rate by another 25 bps to 5.50%, as expected.
  • The Bank of Korea left its base rate at 3.50%, as expected, and increased its terminal rate forecast by 25 bps to 3.75%.
  • Bank Indonesia (BI) left unchanged its benchmark 7-day reverse repurchase rate at 5.75%, as unanimously predicted by 31 economists surveyed by Reuters.
  • Minneapolis Fed President Kashkari (FOMC voter) said in a CNBC interview it’s a decision to pause in June is a close call, adding that if the Fed skips in June, it does not mean the tightening cycle is over
  • European Central Bank policymaker de Cos repeated that there is still some way to go in the central bank’s tightening campaign.
  • MoneyNeverSleeps
  • European Central Bank policymaker Nagel said that several more rate hikes will be needed while ECB President Lagarde repeated that she wants rates to reach a sufficiently restrictive level.
  • Fed’s Collins: Fed may be at or near time to pause rate hikes, Inflation too high but sees promising signs of moderation, Watching wide array of data, Banking sector likely to weigh on demand, Pause on rate action would give Fed space to measure impact
  • Richmond Fed’s Barkin: Some businesses still saying they need to raise prices, The labor market is ‘quite tight’, Demand is definitely cooling, in part because it was overstimulated during the pandemic, Fed rate hikes are also helping to reduce demand
  • European Central Bank policymaker de Guindos said that wages and profits present an upside risk to inflation while the crisis in the banking sector poses a downside risk. Meanwhile, ECB policymaker Vasle repeated that more rate hikes are needed.
  • European Central Bank policymaker Knot said that he is not seeing signs that underlying inflation is abating and that at least two more rate hikes are needed before a lengthy pause.
  • ECB Chief Economist Lane said that inflation will return to target in a timely manner, though growth in 2023 will be subdued.

Eyes on the Bond Market

The 2-yr note yield rose seven basis points to 4.56%, rising 29 basis points this week to 4.56%. The 10-yr note yield fell one basis point to 3.80% Friday, rising 11 basis points this week to 3.80%. This week’s underperformance in shorter tenors put significant pressure on the 2s10s spread, compressing it by 18 bps to -76 bps

U.S. Treasuries ended the week mostly lower note, widening their losses from this week. The entire complex fell after the release of the Personal Income/Outlays report for April, which showed in-line income growth (actual 0.4%) coupled with higher-than-expected spending growth (actual 0.8%; 0.4%) and a persistently high PCE Price Index growth (4.4% yr/yr). At the same we saw a stronger than expected Durable Orders report (actual 1.1%; consensus -1.0%) briefly sending 10s and 30s into the red, though both tenors returned into positive territory as the day went on.

Yield Watch


  • 2-yr: +7 bps to 4.56% (+29 bps for the week)
  • 3-yr: +6 bps to 4.23% (+27 bps for the week)
  • 5-yr: +3 bps to 3.93% (+18 bps for the week)
  • 10-yr: -1 bp to 3.80% (+11 bps for the week)
  • 30-yr: -4 bps to 3.96% (+1 bp for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $42.3bn last week to $8.406 TN.
  • Fed Credit was down $495bn from the June 22nd peak.
  • Over the past 193 weeks, Fed Credit expanded $4.679 TN, or 126%.
  • Fed Credit inflated $5.595 TN, or 199%, over the past 550 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt increased $7.9bn last week to an 11-month high $3.398 TN.
  • “Custody holdings” were down $27bn, or 0.8%, y-o-y.

End-of-week market pricing were pricing fed funds futures market now showing a 66.5% implied likelihood of another 25-bps increase in June, up from 17.4% a week ago.

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 have no central banks delivering policy decisions.

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

Monday, May 29, 2023

  • All Day Holiday United Kingdom – Bank Holiday
  • All Day Holiday United States – Memorial Day
  • All Day Holiday Switzerland – Pentecost

Tuesday, May 30, 2023

  • 07:00 RBA Governor Lowe Speaks
  • 13:00 Federal Reserve Bank of Richmond President Thomas Barkin speaks virtually to the NABE Monetary Policy and Outlook Webinar, 1300 EDT/1700 GMT. Livestream available. Audience Q&A expected.
  • 19:00 AUD RBA Governor Lowe Speaks

Wednesday, May 31, 2023

  • 04:00 ECB Financial Stability Review
  • 07:30 RBI Monetary and Credit Information Review
  • 08:50 Federal Reserve Bank of Boston President Susan Collins and Federal Reserve Board Governor Michelle Bowman give opening remarks before hybrid “Fed Listens” event to discuss challenges and opportunities following the disruptions of the COVID-19 pandemic, 0850 EDT/1250 GMT. Livestream available at https://www.bostonfed.org/news-and-events/events/2023/0531.aspx.
  • 09:15 BoE MPC Member Mann
  • 11:00 SNB Board Member Jordan Speaks
  • 12:20 Federal Reserve Bank of Boston President Susan Collins gives closing remarks before hybrid “Fed Listens” event to discuss challenges and opportunities following the disruptions of the COVID-19 pandemic, 1220 EDT/1620 GMT. No Q&A. Livestream available at https://www.bostonfed.org/news-and-events/events/2023/0531.aspx.
  • 13:30 Federal Reserve Bank of Philadelphia President Patrick Harker participates in fireside chat on the global macroeconomy and monetary conditions before the Official Monetary and Financial Institutions Forum, 1330 EDT/1730 GMT. Livestream available. No text. Audience Q&A expected. No media Q&A.

Thursday, June 1, 2023

  • 03:30 SNB Vice Chairman Schlegel Speaks
  • 07:30 ECB Publishes Account of Monetary Policy Meeting
  • 13:00 Federal Reserve Bank of Philadelphia President Patrick Harker speaks on the economic outlook to virtual NABE Monetary Policy and Outlook Webinar, 1300 EDT/1700 GMT. Livestream and text available. Audience Q&A expected.
  • 12:30 BOE MPC Member Haskel Speaks
  • 16:30 Fed’s Balance Sheet, Reserve Balances with Federal Reserve Banks

Friday, June 2, 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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Sources: TC WSJ Bloomberg Scotia Bank

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