Markets
Volatility on especially rate markets remained high yesterday. Markets in the end erased part of the fallout of the SVB and Signature Bank collapse & government deposit bailout. The jury is still out on whether these two regional bank failures are “isolated” events or whether larger systemic risks to financial stability loom. It puts the Fed in difficult position next week when it gathers following two months of hot labour market data and stubbornly high inflation readings. Yesterday’s core CPI printed marginally stronger at 0.5% M/M and 5.5% Y/Y with core services inflation showing no signs of slowing. The data argue in favour of accelerating tightening to 50 bps, but the regional banking crisis pleads for sticking to January’s 25 bps hike. The latter is the more likely and discounted scenario. Providing guidance for the rest of the year via the Summary of Economic Projections will be a tough call for Fed governors given the recent hiccup. Ceteris paribus, we think the Fed will use its regulatory macroprudential framework to map financial stability risks (expected May 1; ahead of May 3 policy meeting) and keep its eyes on the price(s). US money markets reverted to discounting a too dovish policy path going forward (<5% policy rate peak with 50 bps rate cut discounted by end 2023) in this scenario. US yields yesterday closed the session 9.2 bps (30-yr) to 27.4 bps (2-yr) higher with intraday moves even larger. Compared to last Wednesday’s close, US yields are still 30 bps lower at the 10-yr tenor and 80 bps at the 2-yr. German yields added 13.4 bps (30-yr) to 20.2 bps (2-yr) yesterday. A similar weekly comparison shows them being 23 bps lower on the 10-yr and 45 bps at the 2-yr. We expect the ECB to stick to its guidance of a 50 bps rate hike tomorrow (currently not completely discounted) while holding back on strong guidance for the May policy meeting. As for the US, European money markets are currently positioned way too soft with a policy rate peak of 3.50% by autumn. US equity markets rebounded 1% to (Dow) to 2% (Nasdaq) but came off intraday highs after the collision between a Russian fighter jet and a US drone. FX markets stomached the whole banking crisis best as again witnessed in yesterday’s rangebound EUR/USD-session between roughly 1.07 and 1.0750. There are more signs of cautious relief this morning with the front end of the US yield curve underperforming. Asian stock markets gain around 1.5%. Today’s eco calendar contains US PPI data, retail sales and Empire Manufacturing Survey. Markets are unlikely to be tempted to react on them. They’ll first want more evidence that the regional US banking issues don’t ask for another victim. Yesterday’s market action in this respect was constructive. UK markets will look to Chancellor Hunt’s annual budget release. EUR/GBP yesterday tried to find a way below 0.88 on strong labour market data, but failed to do so.
News and views
New Zealand’s annual current account deficit amounted to NZD 33,8bn in 2022. The current account deficit ratio jumped from 6.0% of GDP in 2021 to 8.9%, the highest deficit ratio since start of the series in 1988. The rise in the deficit was mainly due to a NZD 10bn widening of the goods and services balance and a NZD 2.7% rise of the income deficit. Imports of goods and services rose NZD 23bn (25.8%). Exports of goods and services rose only NZD 13,1bn (16.8%). “Since New Zealand’s borders opened more New Zealanders have been travelling overseas. The spending on both air transport and travel contributed to the rise in services imports for the year to December 2022,” institutional sectors senior manager Paul Pascoe said. In a comment on Bloomberg, S&P global was quoted that the New Zealand Credit rating could come under pressure as the deficit was much wider than the agency expected. S&P currently has foreign currency rating of AA+ and a AAA local currency rating for the country. The kiwi dollar eased slightly this morning to NZD/USD 0.622
A series of February China eco data published this morning showed a mixed picture on the pace of the recovery after the country abruptly changed its Covid-19 approach end last year. Retail sales in the first two months of the year were 3.5% higher compared to the same month last year (was minus 1.8% in Dec), broadly as expected. However, industrial production gaining 2.6% Y/Y lagged expectations. Fixed assets investment accelerated to 5.5% Y/Y. Residential property investment still printed negative (-5.7%) compared to the same month last year. The rise in fixed asset investment suggests that growth might remain dependent on persistent government support. The yuan this morning weakened slightly against a dollar that was marginally stronger overnight (USD/CNY 6.8875).
