InvestMacro

By JustMarkets

This week will be full of important events. On Wednesday is the important monetary policy meeting of the Fed, where policymakers will announce their interest rate decision. Market pricing is leaning toward a quarter-point interest rate hike, which would raise borrowing costs to 5.00%. The Bank of England (BoE) and the Swiss National Bank (SNB) will hold their meetings on Thursday. Also, inflation data from the UK, Canada, and Japan will be released during the week. The volatile week will finish with data on business activity in different countries’ manufacturing and service sectors.

• – China PBoC Loan Prime Rate at 03:15 (GMT+2);
• – German Producer Price Index (m/m) at 09:00 (GMT+2);
• – Eurozone Trade Balance (m/m) at 12:00 (GMT+2);
• – New Zealand Trade Balance (q/q) at 23:45 (GMT+2).

• – Australia RBA Meeting Minutes at 02:30 (GMT+2);
• – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Canada Consumer Price Index (m/m) at 14:30 (GMT+2);
• – Eurozone ECB President Lagarde Speaks at 14:30 (GMT+2);
• – US Existing Home Sales (m/m) at 16:00 (GMT+2).

• – UK Consumer Price Index (m/m) at 09:00 (GMT+2);
• – UK Producer Price Index (m/m) at 09:00 (GMT+2);
• – Eurozone ECB President Lagarde Speaks at 10:45 (GMT+2);
• – US Crude Oil Reserves (w/w) at 16:30 (GMT+2);
• – US FOMC Economic Projections at 20:00 (GMT+2);
• – US Fed Interest Rate Decision at 20:00 (GMT+2);
• – US FOMC Statement at 20:00 (GMT+2);
• – US FOMC Press Conference at 20:30 (GMT+2).

• – Hong Kong Interest Rate Decision at 04:30 (GMT+2);
• – Singapore Consumer Price Index (m/m) at 07:00 (GMT+2);
• – Hong Kong Consumer Price Index at 10:30 (GMT+2);
• – Switzerland SNB Interest Rate Decision at 10:30 (GMT+2);
• – Switzerland SNB Monetary Policy Assessment at 10:30 (GMT+2);
• – Switzerland SNB Press Conference at 11:00 (GMT+2);
• – UK BoE Interest Rate Decision at 14:00 (GMT+2);
• – UK BoE MPC Meeting Minutes at 14:00 (GMT+2);
• – US Initial Jobless Claims (w/w) at 14:30 (GMT+2);
• – US New Home Sales (m/m) at 16:00 (GMT+2);
• – US Natural Gas Storage (w/w) at 16:30 (GMT+2).

• – Australia Manufacturing PMI (m/m) at 00:00 (GMT+2);
• – Australia Services PMI (m/m) at 00:00 (GMT+2);
• – Japan National Core CPI (m/m) at 01:30 (GMT+2);
• – Japan Manufacturing PMI (m/m) at 02:30 (GMT+2);
• – Japan Services PMI (m/m) at 02:30 (GMT+2);
• – UK Retail Sales (m/m) at 09:00 (GMT+2);
• – German Manufacturing PMI (m/m) at 10:30 (GMT+2);
• – German Services PMI (m/m) at 10:30 (GMT+2);
• – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+2);
• – Eurozone Services PMI (m/m) at 11:00 (GMT+2);
• – UK Manufacturing PMI (m/m) at 11:30 (GMT+2);
• – UK Services PMI (m/m) at 11:30 (GMT+2);
• – US Durable Goods Orders (m/m) at 14:30 (GMT+2);
• – Canada Retail Sales (m/m) at 14:30 (GMT+2);
• – US Manufacturing PMI (m/m) at 15:45 (GMT+2);
• – US Services PMI (m/m) at 15:45 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By JustMarkets

The US indices rose Thursday after reports that major Wall Street banks pledged billions of dollars to bail out First Republic Bank. JPMorgan Chase & Co (JPM), Bank of America Corp (BAC), and Wells Fargo & Company (WFC) led a group of major banks that will rescue First Republic Bank (FRC) deposits totaling $30 billion. As the stock market closed on Thursday, the Dow Jones Index (US30) increased by 1.17%, and the S&P 500 Index (US500) added 1.76%. NASDAQ Technology Index (US100) gained 2.48% yesterday.

The new Bank Term Funding Program (BTFP) is very popular among banks. The US banks took $303 billion in “cash” from the Fed over the week. Many analysts believe the new BTFP instrument is a hidden quantitative easing (QE) program. In general, if you evaluate the situation in a comprehensive way: bankruptcies of banks in the USA, the problem of Switzerland’s largest bank, and liquidity problems in a number of market segments (government debt). All these are direct consequences of the aggressive increase of rates in response to inflation, which was a consequence of previous unbridled monetary and fiscal policy. The Fed simply has no choice but to shift policy tightening toward easing. The US Federal Reserve’s monetary policy meeting next week will show the FOMC’s reaction.

The Federal Reserve’s cornerstone method for determining whether US banks can survive an economic crisis has had a huge misstep over the years: regulators have not tested a scenario resembling the 2023 economy and current financial conditions. Fed officials promoted annual stress tests as the primary supervisory method for assessing the health and soundness of the nation’s largest banks. According to regulatory experts, a more realistic stress-testing scenario would not have solved the institutional problems that led to SVB’s decline. But the lack of modeling of an interest rate hike does point to a hole in the way Fed officials think about financial risk.

European stocks rose yesterday. Germany’s DAX (DE30) gained 1.57%, France’s CAC 40 (FR40) jumped by 2.03%, Spain’s IBEX 35 index (ES35) added 1.50%, Britain’s FTSE 100 (UK100) closed up by 0.89%.

The ECB raised its rate by 50bp to 3.5% and will start cutting its bonds portfolio by 15bn euros a month. Further monetary policy will be determined by new data on inflation as well as the banking sector. The ECB’s latest set of forecasts, released Thursday, shows that inflation is still slightly above the bank’s medium-term target of 2% in 2025. At the same time, it raised growth forecasts for the single currency bloc and now sees GDP growth of 1% this year.

A rapid drop in US Treasury bond yields has driven the rise in precious metals in recent days. Yields are now near their lowest level since September 2022 amid a dovish revision to the Fed’s monetary policy outlook. Gold is considered a safe haven asset, so it performs well in times of heightened uncertainty, high volatility, and financial stress. Therefore, it is not surprising that it has rallied strongly over the past few trading sessions. If the US Federal Reserve announces its latest rate hike next week, gold and silver prices could get additional support, especially if bank problems worsen.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.80%, China’s FTSE China A50 (CHA50) fell by 0.60%, Hong Kong’s Hang Seng (HK50) ended the day down by 1.72%, India’s NIFTY 50 (IND50) added 0.08%, and Australia’s S&P/ASX 200 (AU200) ended the day up by 0.40%.

New Zealand’s GDP fell by 0.6% in the last quarter. For the RBNZ, this is a clear signal that it is time to cut down the tightening program, as the economy has shrunk faster than the central bank forecasts. If the second quarter of 2023 also sees a decline, it would mean that New Zealand is in about a six-month recession. According to Stats NZ, the decline in manufacturing activity was the biggest contributor to the decline, with the sector down by 1.9%. Overall, 9 of the 16 industries tracked by Stats NZ fell, especially in retail, housing, arts, leisure, and transportation.

S&P 500 (F) (US500) 3,960.28 +68.35 (+1.76%)

Dow Jones (US30)32,246.55 +371.98 (+1.17%)

DAX (DE40) 14,967.10 +231.84 (+1.57%)

FTSE 100 (UK100) 7,410.03 +65.58 (+0.89%)

USD Index 104.44 -0.20 (-0.19%)

• – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+2);
• – US Industrial Production (m/m) at 15:15 (GMT+2);
• – US Michigan Consumer Sentiment (m/m) at 16:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Why you can’t rely on the FDIC if your bank goes under

By Elliott Wave International

Editor’s note: The failures of Silicon Valley Bank and Silvergate Bank have many observers of the banking system discussing the possibility of contagion. Even so, many depositors feel safe because their deposits are covered up to $250,000 by the F.D.I.C. (Federal Deposit Insurance Corporation). However, this feeling of safety may very well be misplaced.

Here are some important insights about the F.D.I.C. and the safety of your bank deposits.

Millions of U.S. bank depositors feel safe in the knowledge that the Federal Deposit Insurance Corporation will protect their accounts, even if their bank goes under.

Yes, it’s true that the FDIC says it will do so. As their website states:

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

But, the question is: Does the FDIC have the wherewithal to fulfill its promise?

In the event of a major financial crisis, the answer is an emphatic “no.” Not even close.

Here’s what the Elliott Wave Theorist said in August 2008, near the middle of the 2007-2009 financial crisis:

The FDIC is not funded well enough to bail out even a handful of the biggest banks in America. It has enough money to pay depositors of about three big banks. After that, it’s broke.

No doubt, most bank depositors would be shocked to learn this.

But think about it: No single entity could possibly insure all of the nation’s bank deposits.

Yet, that FDIC sticker on the front of your bank is very reassuring. The discussions with your banker about your deposit “insurance” might be reassuring.

But, something that is not quite so reassuring is from none other than a former vice-chairman of the FDIC itself. Here’s what Thomas Hoenig wrote for the Los Angeles Times in a Dec. 18, 2014 article titled, “FDIC couldn’t cover a big bank bailout without taxpayer support”:

As a reminder, when the financial industry imploded in 2008, Congress had to pass a special law to fund a $700-billion bailout… . The Federal Deposit Insurance Corp. had nowhere near enough resources to fund their resolution.

Today, with assets of nearly $11 trillion and derivatives worth $4 trillion, the eight largest U.S. banks are far bigger and hold more derivatives than in 2008. Compare those numbers with the FDIC insurance fund of $54 billion. [Emphasis added]

These are eye-opening statistics.

The best way to protect your deposits is to adequately research the banks in your community, and pick one where the banks’ officers handle their customers’ deposits prudently.

Indeed, the Theorist once remarked:

Relatively safe banks may become even safer. If they have the sense to inform the public of their relative safety aspect, depositors in a developing financial crisis will move funds out of weak banks into stronger ones, making the weak ones weaker and the relatively strong ones stronger.

But, as you’ve seen, it’s a myth that the FDIC can always protect your bank deposits, and it’s not the only myth. We have more.

You can see them in EWI’s classic report, “Market Myths Exposed.” It’s part of your free 21-day Elliott wave journey across U.S. markets — FreePass for a Changed World.

You’ll discover the 10 most nefarious myths and how they undermine your financial safety. Myths like:

• News and Events Drive the Markets
• Earnings Drive Stock Prices
• To Do Well Investing, You Have to Diversify
• And 7 more

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By JustMarkets 

The released US producer price index data came in better than expected. Factory inflation decreased by 0.1% last month. Markets reacted with a drop in US Treasury bond yields. This indicates an impending change in the Fed’s rhetoric and the imminent end of the rate hike cycle. Federal funds futures show a 40% probability that the rate will remain unchanged at the March 22 meeting and a 60% probability that 25 bps will raise the rate to the 5.00% level. At the same time, it is expected that the maximum rates will be formed already at the next meeting, and by the end of 2023, the Fed will cut the rate to 3.75%. At the close of the stock market on Tuesday, the Dow Jones Index (US30) was down by 0.87%, and the S&P 500 Index (US500) fell by 0.70%. The NASDAQ Technology Index (US100) gained 0.05% yesterday.

Concerns about the deepening banking crisis persist. Shares of the struggling Swiss bank Credit Suisse fell to a new historic low. Credit Suisse’s biggest sponsor, the National Bank of Saudi Arabia, said it would not provide further financial assistance to the bank. The bank’s shares fell more than 26%. After European markets closed, Swiss regulators said that Credit Suisse was now meeting capital and liquidity requirements and that the Swiss National Bank would provide additional liquidity if needed. It became known today that Credit Suisse will exercise an option to borrow up to 50 billion Swiss francs ($53.68 billion) from the Swiss National Bank under two lines of credit to strengthen liquidity conditions. This situation has led to renewed sell-offs among European banks: French Societe Generale, Spanish Banco de Sabadell, and German Commerzbank fell sharply yesterday, pulling European indices into the abyss. German DAX (DE30) shed by 3.27%, French CAC 40 (FR40) fell by 3.58%, Spanish IBEX 35 (ES35) lost 4.37%, British FTSE 100 (UK100) closed yesterday down by 3.83%.

The consumer price index in France rose from 6.0% to 6.3% in annual terms. Inflationary pressures in Europe remain resilient and figures from Germany, Spain, and France clearly show it. Reuters reported yesterday that the European Central Bank intends to stick to its plans to raise its key rate by 50 basis points at its meeting today. ECB head Christine Lagarde’s remarks on the European central bank’s future plans are also worth a closer look. The Office for Budget Responsibility (OBR) forecast, taking into account the new UK budget, argues that the country will not enter a technical recession as originally thought. Instead, the UK economy is expected to contract by a modest 0.2%. The government has also pledged to halve inflation, and further OBR projections suggest that inflation will fall to 2.9% by the end of 2023.

Gold strengthened its position at $1900 on Wednesday, hitting a new six-week high. The banking crisis is forcing investors to hide money in precious metals. The technical on spot gold suggests it could go much higher. The fundamental picture now is also in favor of further growth in gold and silver.

Crude oil prices are down for the third straight day. The US WTI crude oil has fallen below $70 a barrel. The collapse of SVB, the problems of Credit Suisse, and the general financial instability contribute to the decline in quotes. While US authorities tried to ease fears of a broader contagion in the banking sector, the financial turmoil at Swiss bank Credit Suisse posed an additional threat to the global economy. At the same time, the IEA (International Energy Agency) reported an increase in oil inventories, pushing oil supply to an 18-month-high.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 0.03%, China’s FTSE China A50 (CHA50) added 0.02%, Hong Kong’s Hang Seng (HK50) jumped by 1.52%, India’s NIFTY 50 (IND50) declined by 0.42% and Australia’s S&P/ASX 200 (AU200) was positive 0.86% by Wednesday.

Bank of Japan (BOJ) Governor Haruhiko Kuroda, who is retiring in April, said his ten-year monetary experiment, during which $3.7 trillion was injected into the economy, was “half successful.” In addition to lowering borrowing costs, Kuroda’s policies sought to sway public opinion and lead the public out of deflation with a powerful kick of monetary stimulus. Kuroda left a mixed legacy for the Bank of Japan: his massive stimulus was praised for pulling the economy out of deflation, but it reduced bank profits and distorted market functions through prolonged low rates. In 2016, Kuroda added a cap on long-term rates as part of a policy called yield curve control (YCC), which is still in effect. Many analysts expect the Bank of Japan to begin dismantling Kuroda’s stimulus policy under a new governor, Kazuo Ueda.

In Australia, the latest labor market data showed that the economy added 64,600 jobs last month, with the unemployment rate falling to a record 3.5%. The stronger-than-expected employment figures for February reinforced fears of further interest rate hikes by the Reserve Bank of Australia (RBA).

S&P 500 (F) (US500) 3,891.93 −27.36 (−0.70%)

Dow Jones (US30)31,874.57 −280.83 (−0.87%)

DAX (DE40) 14,735.26 −497.57 (−3.27%)

FTSE 100 (UK100) 7,344.45 −292.66 (−3.83%)

USD Index 104.74 +1.14 (+1.10%)

• – Japan Trade Balance (m/m) at 01:50 (GMT+2);
• – Australia Unemployment Rate (m/m) at 02:30 (GMT+2);
• – Italian Consumer Price Index (m/m) at 11:00 (GMT+2);
• – US Building Permits (m/m) at 14:30 (GMT+2);
• – US Initial Jobless Claims (w/w) at 14:30 (GMT+2);
• – US Philadelphia Fed Manufacturing Index (m/m) at 14:30 (GMT+2);
• – Eurozone ECB Interest Rate Decision at 15:15 (GMT+2);
• – Eurozone ECB Monetary Policy Statement at 15:15 (GMT+2);
• – Eurozone ECB Press Conference at 15:45 (GMT+2);
• – US Natural Gas Storage (w/w) at 16:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Vidhura S. Tennekoon, Indiana University 

Silicon Valley Bank and Signature Bank failed with enormous speed – so quickly that they could be textbook cases of classic bank runs, in which too many depositors withdraw their funds from a bank at the same time. The failures at SVB and Signature were two of the three biggest in U.S. banking history, following the collapse of Washington Mutual in 2008.

How could this happen when the banking industry has been sitting on record levels of excess reserves – or the amount of cash held beyond what regulators require?

While the most common type of risk faced by a commercial bank is a jump in loan defaults – known as credit risk – that’s not what is happening here. As an economist who has expertise in banking, I believe it boils down to two other big risks every lender faces: interest rate risk and liquidity risk.

Interest rate risk

A bank faces interest rate risk when the rates increase rapidly within a shorter period.

That’s exactly what has happened in the U.S. since March 2022. The Federal Reserve has been aggressively raising rates – 4.5 percentage points so far – in a bid to tame soaring inflation. As a result, the yield on debt has jumped at a commensurate rate.

The yield on one-year U.S. government Treasury notes hit a 17-year high of 5.25% in March 2023, up from less than 0.5% at the beginning of 2022. Yields on 30-year Treasurys have climbed almost 2 percentage points.

As yields on a security go up, its price goes down. And so such a rapid rise in rates in so short a time caused the market value of previously issued debt – whether corporate bonds or government Treasury bills – to plunge, especially for longer-dated debt.

For example, a 2 percentage point gain in a 30-year bond’s yield can cause its market value to plunge by around 32%.

SVB, as Silicon Valley Bank is known, had a massive share of its assets – 55% – invested in fixed-income securities, such as U.S. government bonds.

Of course, interest rate risk leading to a drop in market value of a security is not a huge problem as long as the owner can hold onto it until maturity, at which point it can collect its original face value without realizing any loss. The unrealized loss stays hidden on the bank’s balance sheet and disappears over time.

But if the owner has to sell the security before its maturity at a time when the market value is lower than face value, the unrealized loss becomes an actual loss.

That’s exactly what SVB had to do earlier this year as its customers, dealing with their own cash shortfalls, began withdrawing their deposits – while even higher interest rates were expected.

This bring us to liquidity risk.

Liquidity risk

Liquidity risk is the risk that a bank won’t be able to meet its obligations when they come due without incurring losses.

For example, if you spend US$150,000 of your savings to buy a house and down the road you need some or all of that money to deal with another emergency, you’re experiencing a consequence of liquidity risk. A large chunk of your money is now tied up in the house, which is not easily exchangeable for cash.

Customers of SVB were withdrawing their deposits beyond what it could pay using its cash reserves, and so to help meet its obligations the bank decided to sell $21 billion of its securities portfolio at a loss of $1.8 billion. The drain on equity capital led the lender to try to raise over $2 billion in new capital.

The call to raise equity sent shockwaves to SVB’s customers, who were losing confidence in the bank and rushed to withdraw cash. A bank run like this can cause even a healthy bank to go bankrupt in a matter days, especially now in the digital age.

In part this is because many of SVB’s customers had deposits well above the $250,000 insured by the Federal Deposit Insurance Corp. – and so they knew their money might not be safe if the bank were to fail. Roughly 88% of deposits at SVB were uninsured.

Signature faced a similar problem, as SVB’s collapse prompted many of its customers to withdraw their deposits out of a similar concern over liquidity risk. About 90% of its deposits were uninsured.

Systemic risk?

All banks face interest rate risk today on some of their holdings because of the Fed’s rate-hiking campaign.

This has resulted in $620 billion in unrealized losses on bank balance sheets as of December 2022.

But most banks are unlikely to have significant liquidity risk.

While SVB and Signature were complying with regulatory requirements, the composition of their assets was not in line with industry averages.

Signature had just over 5% of its assets in cash and SVB had 7%, compared with the industry average of 13%. In addition, SVB’s 55% of assets in fixed-income securities compares with the industry average of 24%.

The U.S. government’s decision to backstop all deposits of SVB and Signature regardless of their size should make it less likely that banks with less cash and more securities on their books will face a liquidity shortfall because of massive withdrawals driven by sudden panic.

However, with over $1 trillion of bank deposits currently uninsured, I believe that the banking crisis is far from over.

About the Author:

Vidhura S. Tennekoon, Assistant Professor of Economics, Indiana University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior

The Federal Reserve faces its biggest dilemma yet as mistakes from the past come back to haunt, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The stark warning from deVere Group’s Nigel Green comes as US CPI data published yesterday reveals that core inflation rose in February in the world’s largest economy.

He says: “The headline CPI last month had risen by 6% from last year, down from the 6.4% pace recorded in January, as expected.

“However, core inflation which takes out volatile elements such as food and energy prices, jumped 0.5% on the month, and 5.5% on the year.

“This presents the biggest dilemma yet for the Fed.”

Nigel Green continues: “The central bank has the unenviable task of trying to cool high inflation – which remains stubbornly high and with core inflation on the rise again – despite one of the most aggressive rate hike programs in the world, as well as maintaining financial stability, in the face of the second and third biggest bank failures in US history in recent days.

“It’s time for an honest conversation. The Fed has already spectacularly failed to control inflation so far.

“Now they need to roll higher rates to cool inflation, but these pumped-up rates could trigger yet more problems for the critical banking sector.

“Investors are increasingly concerned that the Fed’s overtightening now – when monetary policy time lags are notoriously long – could steer the US economy into a recession.”

Time lag in monetary policies is very high. Economists estimate interest rate changes take up to 18 months to have the full effect. This means monetary policymakers need to try and predict the state of the economy 18 months ahead.

“We expect the central bank will remain hawkish. They will argue there’s not enough evidence to revise the hikes.”

The deVere CEO says “mistakes from the past come back to haunt” the Federal Reserve.

“The Fed didn’t act quickly enough to tame inflation. They resisted raising interest rates from near-zero levels for most of 2021, even as prices began shooting up due to pandemic-related supply chain snarls, Covid outbreaks and a persistent labour shortage, amongst other issues,” he notes. “This all leads to sky-high inflation – and especially wage inflation.”

It would seem that the Fed hasn’t learned the lessons from the 1980s.

“During much of the 1970s, the US central bank refused to roll-out rate hikes, probably due to political pressure from leaders unwilling to allow higher unemployment on their watch.

“Of course, this made workers keep asking for ever higher salaries, which forced businesses to keep increasing prices to compensate, and which led to the infamous 1980’s wage-price spiral and the recession.”

The deVere chief also flags not bringing quantitative easing (QE) to an end sooner as another potential mistake made by the Fed.

In 2022, the Fed brought an end to its QE policy, involving purchases of Treasury and mortgage-backed securities. QE was aimed at providing more liquidity to capital markets.

“Could QE have helped spur inflation as the increased money supply resulted in too much money chasing too few goods and services at that time?” he asks.

Nigel Green concludes: “Mistakes of the past are coming back to haunt the Fed as they face their toughest decision yet at their next meeting on March 22.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

By Christopher Decker, University of Nebraska Omaha 

The Federal Reserve is facing a rather sticky problem. Despite its best efforts over the past year, inflation is stubbornly refusing to head south with any urgency to a target of 2%.

Rather, the inflation report released on March 14, 2023, shows consumer prices rose 0.4% in February, meaning the year-over-year increase is now at 6% – which is only a little lower than in January.

So, what do you do if you are a member of the rate-setting Federal Open Market Committee meeting March 21-22 to set the U.S. economy’s interest rates?

The inclination based on the Consumer Price Index data alone may be to go for broke and aggressively raise rates in a bid to tame the inflationary beast. But while the inflation report may be the last major data release before the rate-setting meeting, it is far from being the only information that central bankers will be chewing over.

And economic news from elsewhere – along with jitters from a market already rather spooked by two recent bank failures – may steady the Fed’s hand. In short, monetary policymakers may opt to go with what the market has already seemingly factored in: an increase of 0.25-0.5 percentage point.

Here’s why.

While it is true that inflation is proving remarkably stubborn – and a robust March job report may have put further pressure on the Fed – digging into the latest CPI data shows some signs that inflation is beginning to wane.

Energy prices fell 0.6% in February, after increasing 0.2% the month before. This is a good indication that fuel prices are not out of control despite the twin pressures of extreme weather in the U.S. and the ongoing war in Ukraine. Food prices in February continued to climb, by 0.4% – but here, again, there were glimmers of good news in that meat, fish and egg prices had softened.

Although the latest consumer price report isn’t entirely what the Fed would have wanted to read – it does underline just how difficult the battle against inflation is – there doesn’t appear to be enough in it to warrant an aggressive hike in rates. Certainly it might be seen as risky to move to a benchmark higher than what the market has already factored in. So, I think a quarter point increase is the most likely scenario when Fed rate-setters meet later this month – but certainly no more than a half point hike at most.

This is especially true given that there are signs that the U.S. economy is softening. The latest Bureau of Labor Statistics’ Job Openings and Labor Turnover survey indicates that fewer businesses are looking as aggressively for labor as they once were. In addition, there have been some major rounds of layoffs in the tech sector. Housing has also slowed amid rising mortgage rates and falling prices. And then there was the collapse of Silicon Valley Bank and Signature Bank – caused in part by the Fed’s repeated hikes in its base rate.

This all points to “caution” being the watchword when it comes to the next interest rate decision. The market has priced in a moderate increase in the Fed’s benchmark rate; anything too aggressive has the potential to come as a shock and send stock markets tumbling.

About the Author:

Christopher Decker, Professor of Economics, University of Nebraska Omaha

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustMarkets

Inflationary pressures in the United States are easing. The latest data showed that consumer prices fell from 6.4% to 6.0% year-over-year. Core inflation (which excludes food and energy prices) has declined from 5.6% to 5.5%. This raises the possibility of a small interest rate hike by the Federal Reserve next week. As the stock market closed on Tuesday, the Dow Jones Index (US30) increased by 1.06%, and the S&P 500 Index (US500) added 1.65%. The NASDAQ Technology Index (US100) gained 2.14% yesterday.

According to the CME FedWatch tool, most futures traders expect a quarter-point hike next week, though 31% of traders are betting that the Fed will hold off on raising rates.

After the Silicon Valley Bank collapse, a wave of customers applied to transfer their accounts to major US banks such as JPMorgan Chase & Co (JPM) and Citigroup Inc (C). The US government’s emergency measures to prevent the collapse of regional banks have not stopped depositors from trying to transfer their accounts to larger banks. Thus, regional banks may suffer even more in the coming days and weeks.

Equity markets in Europe rose yesterday. German DAX (DE30) jumped by 1.83%, French CAC 40 (FR40) gained 1.86%, Spanish IBEX 35 (ES35) added 2.19%, and British FTSE 100 (UK100) closed up by 1.17%.

European bond yields fell further as investors bet on the European Central Bank’s (ECB) easing of policy tightening. Traders are now estimating a 25 basis point increase as the most likely outcome of this Thursday’s ECB policy meeting. But the latest inflation data is not conducive to that. Spain’s annualized inflation rate rose from 5.9% to 6.0%. Meanwhile, core inflation (which excludes food and energy prices) also added 0.1% last month. The data point to sustained inflationary pressures. A number of other European countries will release consumer price data this week, followed by the overall figure for the Eurozone on Friday.

Portugal announced a rash of measures Thursday to address the housing crisis, including ending the Golden Visa scheme and banning new Airbnb licenses for short-term rentals. Rents and housing prices have risen sharply in Portugal, which is one of the poorest countries in Western Europe. Last year, more than 50% of workers earned less than 1,000 euros a month, while rents in Lisbon alone jumped by 37% in 2022. To solve the housing shortage, the government will rent vacant homes directly from landlords for five years and put them on the rental market.

Oil fell to a three-month low due to concerns about inflation and US bank closures. It was the biggest one-day percentage decline since early January. Moreover, both contracts also fell into a technical oversold zone for the first time in weeks.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 2.16%, China’s FTSE China A50 (CHA50) fell by 0.64%, Hong Kong’s Hang Seng (HK50) ended the day down by 2.27%, India’s NIFTY 50 (IND50) fell by 0.65%, and Australia’s S&P/ASX 200 (AU200) ended Tuesday down by 1.41%.

In China, the latest economic data showed that industrial production rose by 2.4% last month (expectation of 2.6%). The improvement in production from the previous month indicates that industrial activity is still recovering after the country’s zero COVID policy was lifted. Retail sales also rose, indicating that consumer spending is also on the road to recovery. Fixed-asset investment rose by 5.5% in February (expected 4.4%). This indicates that businesses are investing heavily in anticipation of an economic recovery this year. The unemployment rate rose slightly, from 5.5% to 5.6%. Overall, the economic data showed that the country’s recovery is gaining momentum, but not at an even pace.

The minutes of the Bank of Japan’s monetary policy meeting showed that it is important to continue easing monetary policy. The BoJ expects the economy to recover this year, and inflation is likely to slow down by the last half of the next fiscal year.

New Zealand’s balance of payments deficit reached its highest level in 34 years. The deficit between what the economy earns and what it spends reached $33.8 billion for the year, a record 8.9% of GDP. The increase in the deficit is mainly due to increased imports of goods and services. The size of the balance of payments deficit matters to the rating agencies, which could downgrade New Zealand by making borrowing more expensive if there are fears that the situation will get out of hand.

S&P 500 (F) (US500) 3,919.29 +63.53 (+1.65%)

Dow Jones (US30)32,155.40 +336.26 (+1.06%)

DAX (DE40) 15,232.83 +273.36 (+1.83%)

FTSE 100 (UK100) 7,637.11 +88.48 (1.17%)

USD Index 103.67 +0.08 +0.08%)

• – Japan BoJ Monetary Policy Meeting Minutes at 01:50 (GMT+2);
• – China Retail Sales (m/m) at 04:00 (GMT+2);
• – China Industrial Production (m/m) at 04:00 (GMT+2);
• – China Unemployment Rate (m/m) at 04:00 (GMT+2);
• – French Consumer Price Index (m/m) at 12:00 (GMT+2);
• – Eurozone Industrial Production (m/m) at 12:00 (GMT+2);
• – UK Annual Budget Release at 14:30 (GMT+2);
• – US Producer Price Index (m/m) at 14:30 (GMT+2);
• – US Retail Sales (m/m) at 14:30 (GMT+2);
• – US NY Empire State Manufacturing Index (m/m) at 14:30 (GMT+2);
• – US Crude Oil Reserves (w/w) at 16:30 (GMT+2);
• – New Zealand GDP (q/q) at 23:45 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.