Monetary policy meetings
After two weeks of monetary policy meetings, investors do not expect any additional hike from the US Fed and just one hike of 25bps from the European Central Bank (ECB) and the Bank of England (BoE). This has led to a further fall in two-year sovereign bond yields after wild swings the week before. The US two-year yield closed at 3.77% on Friday. Market participants are increasingly concerned about the commercial and multifamily real estate (CRE) market. The amount of loans outstanding lies at $4’532bn, of which 39% is owned by banks and 34% is securitized through commercial or agency mortgage-backed securities. The maturity wall for CRE loans seems to be significant this year at about $700bn according to the Mortgage Bankers Association. Refinancing could prove more difficult given the US banks have signaled that they are tightening their lending conditions. This has translated into a significant widening of lower rated commercial real estate mortgage-backed securities (CMBS) spreads.
Pause in perspective
The S&P 500 closed the week at 3,970.99, +1.39% higher. The Dow Jones closed at 32,237.53, +1.18%, with the Nasdaq higher by +1.66%. The volatility index VIX closed the week at 21.74 down from 25.51. The Euro Stoxx 600 gained +0.87%.
The 10-year UST closed at 3.38% down from 3.43% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -131bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 218bps and High Yield widened 14bps at 547bps. German 10-year Bunds yield closed at +2.13% up from +2.11% a week before. In Europe, Corporate Investment Grade spreads tightened 11bps at 190bps and High Yield spreads tightened 10bps at 530bps.
The US Dollar Index (DXY) depreciated -0.57% last week and closed at 103.12. The Euro closed at 1.0760 (+0.84% weekly); the Yen appreciated +0.85%, closing at 130.73 and the Swiss Franc appreciated +0.68%, closing at 0.9198. Gold closed at $1,978.21 depreciating -0.55%. Oil was higher, Brent closed at $74.99 (+2.77%) and WTI at $69.26 (+3.78%).
The Fed hiked interest rates a further 25bps to put the policy rate in a target range of 4.75-5.00%, while saying in the statement that “additional policy firming may be appropriate”. This replaced "ongoing increases in the target rate will be appropriate". So a softening in language. The pace and asset makeup of QT was unchanged as expected - QT will continue on track, with the Treasury roll-off capped at $60bn per month, and the MBS roll-off capped at $35bn a month, same as in the prior months. The median dot plot projection showed fed funds ending 2023 at 5.1%, unchanged from Dec., and up by roughly one hike to 4.3% at the end of 2024. Despite the median remaining unchanged, there was some upward migration in the dot plot for 2023. In terms of economic projections, the Fed had Core PCE inflation up modestly both this year (3.6% from 3.5% in Jan.) and next (2.6% from 2.5% in Jan.) but saw risks as “broadly balanced” rather than “weighted to the upside” as we had seen last meeting. On the banking stress, Chair Powell said that the US banking system is sound and that the Fed programs are “effectively meeting” liquidity needs while policymakers are closely monitoring the situation. He also noted that the events of the past week are likely to weigh on lending standards and slow the economy, which may in fact necessitate fewer rate hikes than thought before. Chair Powell noted that some officials considered a pause in the days leading up to the meeting, however in the end it was a unanimous vote to hike rates.
Regarding bank liquidity, the Fed’s weekly balance sheet data showed that the use of the Fed’s discount window was down from $153bn to $110bn, while the credit deployed to SVB and Signature was up from 143bn to 180bn, and lastly the new emergency bank lending facility (BTFP) was up from $12bn to $54bn. So net of the two failed banks there was little change, indicating that banks were not finding it necessary to access cheap capital. In terms of Fed funding channels for foreign central banks, there was a $60bn increase in the Fed’s FIMA repo facility designed to provide emergency funding to a broad range of foreign and international monetary authorities. On deposit insurance, whether the government can provide full deposit insurance if the banking crisis escalates has come into intense focus, as Treasury Secretary Yellen flip flops on her stance. As of Thursday, Yellen noted that the Treasury would be prepared to take additional action if needed. To have full deposit insurance on all banks would need Congress approval, until they can enlist emergency powers (including the use of the Exchange Stabilization Fund) to bypass Congress.
The Swiss National Bank (SNB), despite Credit Suisse troubles, delivered a 50bps rate hike to take its key policy rate to 1.5% (in line with market expectations). In the policy statement, the SNB signaled that by doing so it was “countering the renewed increase in inflationary pressure”. The SNB did not rule out the need for additional rises to ensure price stability over the medium term. The SNB also reiterated its willingness to actively intervene in the FX market as necessary. The SNB raised its inflation forecast to an annual rate of 2.6% in 2023 (up from 2.4%) and to 2.0% in 2024 (from 1.8%). The SNB now expects that the consumer price index (CPI) will stand at 2.1% at the end of its forecast horizon (Q4 2025), slightly above its definition of price stability (a CPI of less than 2% per annum). The Bank of England (BoE) joined in hiking rates despite volatility. The BoE hiked its key Bank Rate by 25bps to 4.25% to take its cumulative tightening since December 2021 to 415bps. The tone of statement was neutral, leaving the option of more tightening but also highlighting inflation likely to undershoot forecasts. Norway's central bank hiked rates by 25bps to 3.00% as widely expected and raised the rate path to 3.60% before year-end. The central bank has raised rates by 300bps over the current tightening cycle. Future rate path is still contingent on economic developments. Weaker NOK or stronger economic pressures are seen as justifying higher policy rate to bring inflation down.
In the US, business activity expanded at the fastest pace in 10 months during Mar. Composite PMI reached 53.3, manufacturing PMI 49.3, and services PMI 53.8. Orders for durable goods dropped -1.0% (vs. +0.2% expected) in Feb., following a -4.5% drop in Jan. In Europe, Mar. composite PMI increased to 54.1 from 52.0. Manufacturing PMI was at 47.1 while services PMI rose to 55.6. Germany composite PMI was up to 52.6 in Mar. from 50.7, manufacturing PMI dropped to 44.4 and services PMI increased to 53.9. France composite PMI was up at 54.0 from 51.7, manufacturing PMI was also up at 47.7 and services PMI rose 2.4 points to 55.5. UK composite PMI deteriorated in Mar. to 52.2 from 53.1, manufacturing PMI fell 1.3 points to 48.0, and services PMI dropped to 52.8. Lastly, Japan composite PMI improved 0.8 points in Mar., to 51.9 while manufacturing PMI rose from 47.7 to 48.6 and services PMI increased to 54.2.
What to watch
- Monday: Germany IFO index (Mar.); Euro area monetary and credit aggregates (Feb.)
- Tuesday: US trade balance (Feb.); US Case-Shiller index (Jan.)
- Wednesday: Euro area ECB non-monetary policy meeting
- Thursday: Germany, Spain: preliminary HICP (Mar.); Euro area Business surveys (Mar.)
- Friday: Japan Tokyo CPI (Mar.); China NBS manufacturing PMI (Mar.); Euro area HICP inflation (Mar.); US personal income and spending (Feb.)