2023 Weekly Views

Highlights

Credit Suisse

Over the weekend, UBS agreed to buy Credit Suisse (CS) for $3.25bn. UBS will pay about CHF0.76 a share in its own stock, worth CHF3bn, up from a bid of CHF0.25 earlier on Sunday worth around $1bn that was rejected. CS stock closing price on Friday was CHF1.86. The SNB agreed to offer a CHF100bn liquidity line backed by a federal default guarantee to UBS. The government is also providing a loss guarantee of up to CHF 9bn, but only after UBS has borne the first CHF 5bn of losses on certain assets. The combination creates one of the biggest banks in Europe. UBS has $1.1tn of total assets on its balance sheet and Credit Suisse has $575bn. In a coordinated global response, the Fed in a statement along with five other central banks (including the BOE, the BOJ, the ECB and the SNB) announced that they would enhance dollar swap lines i.e., to increase the frequency of swap line agreements from weekly to daily, beginning March 20 and will continue “at least” through the end of next month. In doing so, the central banks indicated that the move would serve as an “important backstop” amid financial market unease, thereby helping to keep credit flowing to households and businesses.

Market update

CS bought by UBS

The S&P 500 closed the week at 3,916.64, +1.43% higher. The Dow Jones closed at 31,861.98, -0.15%, with the Nasdaq higher by +4.41%. The volatility index VIX closed the week at 25.51 up from 24.80. The Euro Stoxx 600 slipped -3.85%.

The 10-year UST closed at 3.43% down from 3.70% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -103bps. US Corporate Bond spreads: Investment Grade widened 20bps at 219bps and High Yield widened 79bps at 533bps. German 10-year Bunds yield closed at +2.11% down from +2.51% a week before. In Europe, Corporate Investment Grade spreads widened 37bps at 201bps and High Yield spreads widened 96bps at 540bps.

The US Dollar Index (DXY) depreciated -0.83% last week and closed at 103.71. The Euro closed at 1.0670 (+0.25% weekly); the Yen appreciated +2.36%, closing at 131.85 and the Swiss Franc depreciated -0.59%, closing at 0.9261. Gold closed at $1,989.25 appreciating +6.48%. Oil was lower, Brent closed at $72.97 (-11.85%) and WTI at $66.74 (-12.96%).

Macroeconomy

Signature Bank

After SVB’s failure, New York regulators announced the closure of Signature Bank, a commercial bank with private client offices in New York, Connecticut, California, Nevada and North Carolina. As of Sept., almost a quarter of its deposits came from the cryptocurrency sector. The Federal Deposit Insurance Corporation (FDIC) took control of Signature, which had $110.36bn in assets and $88.59bn in deposits in 2022. Federal authorities extended the guarantee to all deposits at both SVB and Signature Bank, while the Fed announced a new facility: the Bank Term Funding Program (BTFP). It will offer loans of up to one year to banks pledging Treasuries, agency MBS/debt, and other qualifying securities. This collateral will be valued at par (meaning that all the mark-to-market losses will be ignored for the purposes of these loans). BTFP will be backed by $25bn from the Treasury. Fed said the facility is large enough to cover all uninsured deposits at US banks.

US banks funding

The Fed released the weekly data on the use of its lending facilities. In total, there was $164.8bn of borrowing between the Fed’s discount window ($152.85bn) and the Bank Term Funding Program ($11.9bn). The previous discount window high was $111bn during the 2008 financial crisis (then usage was as much as 1.8% of deposits compared to 1% now). Bank lending standards had already tightened. Small and medium sized banks (<$250bn in assets) play a large role in lending, especially in CRE (commercial real estate). They make up 80% of CRE loans, half of commercial and industrial loans, and 45% of consumer loans. CRE loan growth has been extremely strong, while business and consumer loan growth has started to weaken. Investors are trying to assess the liquidity mismatch on US banks’ balance sheet vs. the amount of uninsured deposits. In aggregate, US banks own $5.7trn of mortgages, $2.8trn of agency MBS (25% of total outstanding) and $1.4trn of US Treasuries (6% of total outstanding). These three fixed-rate categories of assets represent 57% of banks liquid liabilities (deposits). Total deposits amount to $17.5trn, of which 45% are uninsured. US money market funds (MMFs) assets have surged by $121bn over the week, as depositors move their money out of banks into MMFs. The largest share was from institutional investors ($101bn). MMFs took $163bn out of the Fed’s reverse repo facility. This fall was compensated by the rise in banking reserves through the $300bn increase in credit lines.

US CPI

Core CPI accelerated in Feb., rising 0.5% m-o-m, vs. 0.4% expected. The y-o-y reading fell to 5.5% from 5.6%. Core services ex housing reaccelerated to 0.4% (5.2% annualized). Travel services inflation was strong with a large gain in both airfare and hotel prices. Recreation services inflation jumped by 1.2% m-o-m, the largest increase in three years. Housing inflation stays elevated with both rent and owners’ equivalent rent rising 0.7% m-o-m. The y-o-y growth rose further to 8.1%. Core goods inflation slowed to 0.0% m-o-m, entirely driven by a large -2.8% drop in used vehicle prices. Ex used vehicles, large household durable goods and apparel inflation remain strong despite elevated inventories relative to sales at retailers. Headline CPI slowed to 0.4% m-o-m and y-o-y fell to 6.0%. Energy prices fell and food inflation moderated.

ECB

The ECB delivered on its “intention” to raise policy rates by 50bps, bringing the deposit rate to 3.0%. The ECB did not commit to further rate hikes in Q2, noting that “the elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions”. The new reaction function notes that future decisions “will be determined by assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission”. The important bit is that financial and banking stress will be included as inputs into future decisions, with the ECB noting that its policy toolkit is “fully equipped to provide liquidity support to the euro area financial system if needed”. Investors do not expect additional hikes.

Central banks

The focus will be the FOMC meeting on Wednesday, with other central banks issuing decisions too (Brazil on Wednesday and Taiwan, Switzerland, Norway, and the UK on Thursday). Investors are expecting a 25bps hike with a 62% probability taking the upper end of the range to 5%. The Dot Plot (forward guidance) will be updated. We have seen significant volatility in rates with the MOVE index rising to its highest level since the global financial crisis. The collapse of SVB heightened concerns that further interest rate hikes by the Fed could strain the financial industry. Interest rates have declined sharply, with the 2-year Treasury yield experiencing an unprecedented two-day movement closing the week at 3.84%, not seen since the market crash in 1987. This has prompted many hedge funds with extreme short positions in short-term US bond futures to hedge or exit their positions, amplifying the volatility in the bond market. The Fed is expected to reach a terminal rate of 4.9% in May and then to start cutting rates this summer to 4% by end 2023.

What to watch

• Monday: Chinese President Xi Jinping’s visit to Moscow from Monday to Wednesday

• Tuesday: Germany: ZEW Survey (Mar.); Canada: CPI (Feb.); USA: Existing Home Sales (Feb.)

• Wednesday: UK: CPI (Feb.); FOMC Rate Decision and Fed Chair News Conference

• Thursday: BoE Bank Rate; SNB Policy Rate; US Initial Jobless Claims (Mar.18), New Home Sales (Feb.); Eurozone Consumer Confidence (Mar., prel.)

• Friday: Japan CPI (Feb.), PMI (Mar.); UK Retail Sales (Feb.), PMI (Mar.); Eurozone PMI (Mar.); US Durable Goods Orders (Feb.), PMI (Mar.)