Investors Cautious on U.S. Stocks, Even Though Fed Hikes May Soon End

Stocks

Summary:

The end of the Federal Reserve's bruising rate hiking cycle may be in sight, yet investors are finding plenty to worry about when it comes to the U.S. stock market.

In its first meeting since the collapse of two U.S. banks this month and the downfall of ailing European lender Credit Suisse, the Fed on Wednesday raised interest rates by a quarter of a percentage point and indicated it was on the verge of pausing further increases in borrowing costs.

It was a message long awaited by many investors, after the S&P 500's fall by nearly a fifth last year as the Fed launched its most aggressive monetary policy tightening cycle since the 1980s. Yet some fear the rapid rises in rates are only starting to ripple through the U.S. economy, and remain wary of jumping into stocks amid banking sector turmoil, a downbeat outlook for corporate profits and a looming recession.

"Macroeconomic policy and the outlook for the economy is more complicated than it was two weeks ago," said Anthony Saglimbene, chief market strategist at Ameriprise Financial, who is holding a lighter than normal equity allocation.

"In that highly uncertain environment, you need to navigate it by being a little bit more cautious and a little bit more defensive," he said.

Stocks fell on Wednesday, with the benchmark S&P 500 closing down 1.65% after swinging between gains and losses during Fed Chairman Jerome Powell's press conference following the meeting. The Nasdaq Composite lost 1.6%.

Adding to the market unease were comments from Treasury Secretary Janet Yellen, who told lawmakers on Wednesday that the Federal Deposit Insurance Corporation (FDIC) was not considering "blanket insurance" for deposits arising from recent strife in the sector.

Banking industry stress could trigger a credit crunch with "significant" implications for an economy that Fed officials projected would slow even more this year than previously thought, Powell said.

Analysts at Capital Economics, who believe a recession is likely this year, wrote: "While ... the exact impact of the banking turmoil is uncertain, we are now more confident that the Fed's forecasts for economic growth will prove too optimistic."

Meanwhile, though the Fed's latest policy statement no longer said that "ongoing increases" in rates would likely be appropriate, Powell said that inflation remained well above the Fed's goal and that policymakers were unlikely to cut rates this year, an outlook at odds with that of many investors.

Futures markets are now pricing a Fed funds rate of around 4.25% by year-end, compared with the range of 4.75% to 5% that took effect on Wednesday.

"Sure equities would like a Fed pivot or a point that the Fed would slow down rate hikes, which I think is what they got," said Charlie Ripley, senior investment strategist at Allianz Investment Management, who has recently increased his allocation to cash. "Powell also said he doesn't view that rate cuts are plausible at some point this year, so this whole higher-for-longer theme is likely what's playing out."

Uncertain outlook

Stocks have been resilient this year in the face of uncertainty, with the S&P 500 up 2.5% since the end of 2022.

Many investors' portfolios remain light in equities, a market condition some view as a positive for stocks because of the potential for powerful buying when the market mood shifts. Deutsche Bank's measure of aggregate equity positioning saw its biggest drop in 15 months last week, the bank's strategists said in a March 17 note.

A drop in Treasury yields from recent highs has also given a tailwind to stocks, especially to big tech and growth names that are heavily weighted in the S&P 500. Yields move inversely to bond prices.

Still, some investors believe yields may head higher again. Sonal Desai, chief investment officer of Franklin Templeton Fixed Income, said she was skeptical about the recent rally in Treasuries, because inflation remained high.

"I think there's more volatility to come, without a doubt," said Desai, who expects the benchmark U.S. 10-year yield will rebound to 4% this year from its current 3.45%.

Corporate profits are another potential trouble spot, with S&P 500 earnings expected to post year-over-year declines in the first and second quarters after falling 3.2% in the fourth quarter of 2022, according to Refinitiv IBES.

That may not even fully reflect the fallout from a potential slowdown brought on by the banking crisis, should lending slow, as many analysts now expect.

"I don't think the market is going off to the races," said James Ragan, director of wealth management research at D.A. Davidson. "There is going to be some pressure on earnings going forward."

Source: Yahoo

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Cohen

The fall of Credit Suisse has dealt a serious blow to Switzerland's credentials as the world's leading wealth management centre, experts warn, calling into question its reputation for stability, regulation and corporate governance.

Battered by years of scandals and losses, Credit Suisse had been fighting a crisis of confidence for months, before its demise was sealed in just a matter of days last week when Swiss authorities brokered a takeover of the bank by larger rival UBS.

UBS itself needed to be rescued by the government in 2008 after a disastrous foray into U.S. mortgage securities.

The Credit Suisse collapse and its aftermath "is going to be very damaging," said Arturo Bris, Professor of Finance at the International Institute for Management Development (IMD) in Lausanne, adding it could benefit rival financial centres.

Switzerland manages $2.6 trillion in international assets according to a 2021 Deloitte study, making it the world's largest financial centre ahead of Britain and the United States. But it faces competition from other centres including Luxembourg and in particular Singapore, which has grown rapidly in recent years.

"The bankers in Singapore are going to be uncorking the champagne bottles," Bris told Reuters.

Switzerland's credibility as a stable, predictable country had been upended by moves like the decision to wipe out the holdings of Credit Suisse bondholders, he said.

Under the takeover deal, holders of Credit Suisse AT1 bonds will get nothing, while shareholders, who usually rank below bondholders in compensation terms, will receive $3.23 billion.

While Credit Suisse's AT1 prospectus made clear that hybrid (AT1) holders would not recover any value, few anticipated the bank's demise.

The Swiss Bankers Association has attempted to put a brave face on the crisis, presenting the rescue engineered by the government, central bank and regulator as sign of strength.

"The Swiss financial sector was able to address a major issue of a significant player," SBA Chairman and former UBS CEO Marcel Rohner told reporters on Tuesday.

"In that sense I also see a prosperous future for the financial centre because we have hundreds of very well capitalised banks and very successful wealth management and asset management banks."

Still, the number of banks has fallen, down to 239 in 2021 from 356 in 2002. Staff numbers since 2011 have slipped to 91,000 from 108,000. Credit Suisse Collapse Threatens Switzerland's Wealth Management Crown_1

Credit Suisse Collapse Threatens Switzerland's Wealth Management Crown_1

Credit Suisse Collapse Threatens Switzerland's Wealth Management Crown_2

Others were more skeptical about the future, highlighting a reluctance to confront mistakes at Credit Suisse or take responsibility for the aftermath.

"There are a lot of open questions: the use of emergency law overriding the views of shareholders or the treatment of bond holders," said Stefan Legge, head of tax and trade policy at the University of St. Gallen's IFF Institute for Financial Studies.

"Maybe some people are a bit delusional – and really believe they are doing a great job."

Switzerland invoked emergency legislation to allow a public liquidity backstop (PLB) which will provide up to 100 billion Swiss francs in liquidity to Credit Suisse as the PLB was not yet part of Swiss law.

But perhaps most controversially, the emergency law allowed the takeover to go ahead without shareholder approval.

Legge said the collapse should serve as a wake-up call, and could see new laws to improve corporate governance introduced.

Switzerland has few mechanisms for holding top bankers individually responsible for mismanagement, unlike centres such as Britain where senior managers can face criminal sanctions.

Unions and politicians have also reacted angrily to the rescue, which could leave the taxpayer having to cover up to 9 billion francs in losses.

Long Decline

Switzerland's outsized banking sector has been under pressure for years following a decline in banking secrecy as other countries sought to clamp down on tax evasion by citizens.

The financial sector's contribution to the Swiss economy has also slipped, falling to 8.9% of Swiss GDP in 2022 from 9.9% in 2002 as industries like pharmaceuticals became more important in a country with the third highest GDP per capita in the world, according to IMF data.

Credit Suisse Collapse Threatens Switzerland's Wealth Management Crown_3

BAK Economics, a Swiss research institute, said the fallout from the debacle would be contained within the banking sector. It estimated up to 12,000 Swiss jobs being lost, although the impact on the broader economy would be limited.

Jan-Egbert Sturm director of the KOF Swiss Economic Institute at ETH Zurich, a university, predicted the economic impact of Credit Suisse's demise would amount to a loss of around 0.05% of GDP per year.

Switzerland's long banking tradition and structural advantages meant the country would remain heavily involved in banking in future, he said, with investors still choosing it for its stability and the strength of its Swiss franc currency.

Still competition was getting fiercer, and the recent events would eventually see Singapore overtake Switzerland, warned IMD's Bris.

"I think it's only a matter of time."

Source: Yahoo

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Devin

Political

Former Turkish economy tsar Mehmet Simsek's refusal to return to politics has left President Tayyip Erdogan's ruling party scrambling to rebuild its economic credibility less than two months before landmark elections, insiders and analysts say.

Erdogan, who has led Turkey for two decades but is trailing in opinion polls ahead of the May 14 vote, had personally appealed to Simsek to return to the government and take up a top role, several people familiar with the matter said.

Some AK Party (AKP) members had wanted Simsek to champion the party's latest rhetorical pivot to more free-market policies, after years of unorthodoxy under Erdogan that had hammered the lira currency and sent inflation soaring.

But after a Monday meeting at AKP headquarters, Simsek, well-respected by international investors, said on Twitter he was not interested in "active politics" after having stepped down as deputy prime minister in 2018.

Yet he is ready to provide any type of support in his area, he added.

The episode shows the difficulty of rebranding a government whose policies have set off a cost-of-living crisis and left the economy and financial markets heavily state-managed, analysts and investors say.

"Simsek's refusal to join the ranks is neither the first nor the final indicator of dwindling support for the government," said Ertan Aksoy, of Aksoy Research polling company.

AKP spokesperson Omer Celik said after the meeting that Erdogan did not offer Simsek a formal posting but that "all the mechanisms and duties of the party" were open to him.

A senior government official told Reuters the AKP was somewhat divided with some members opposed to Simsek's return, and described the outcome of the Erdogan meeting as "undesirable". The party may now need to revise its economic platform ahead of the election campaign, he added.

An AKP official who was not also authorised to speak publicly said Simsek's return would have boosted the party's polls. "We are having trouble regarding the economic picture right now. There is no arguing about that," the person said, adding new steps are needed.

Another party official said its revised election manifesto could include more "balanced" or "mixed" policies, rather than the free-market orthodox approach that some had sought.

The AKP declined to comment on whether it was revising its economic strategy ahead of the vote. Simsek declined to comment on his meeting with Erdogan.

'Dwindling support'

Erdogan's determination to slash interest rates to stoke economic growth sent inflation above 85% last year. The lira has shed 80% of its value versus the dollar in five years, a period in which foreign investors largely fled the big emerging market.

The economic cost of the devastating earthquakes that struck Turkey’s south on Feb. 6 is estimated to be around $104 billion, adding to pressures on the economy.

The opposition bloc - which pledges to roll back Erdogan's economic policies - received a boost on Wednesday when a big pro-Kurdish party said it would not run its own presidential candidate, raising prospects it could unite.

Two recent polls by MAK and Turkiye Raporu show the opposition presidential challenger Kemal Kilicdaroglu between 4 and 9 percentage points ahead of Erdogan.

"The AKP ... is surprised and in a state of heavy panic. It is pressing all the buttons at the same time," Turhan Comez, chief adviser to opposition IYI Party leader Meral Aksener, said on Halk TV on Tuesday.

Though a self-described "enemy" of interest rates, Erdogan has occasionally endorsed free-market policies in recent years. But he then shifted tone again and has adopted a model prioritising production, exports and targeted cheap credit.

Such pivots - including firing market-friendly central bank governor Naci Agbal after only four months in 2021 - have left investors deeply sceptical.

Investors are "extremely cautious" about any pivot by Erdogan's government given "multiple past head-fakes", said Blaise Antin, head of EM sovereign research at asset manager TCW in Los Angeles.

Polina Kurdyavko, head of emerging markets and senior portfolio manager at BlueBay Asset Management, said the economic challenge was "not easily solvable regardless of who comes to power and regardless of what policies you implement".

Source: Yahoo

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Alex

Central Bank

Brazil's central bank cited rising inflation expectations as it kept interest rates unchanged for the fifth consecutive policy meeting on Wednesday, drawing concern from the government and weakening bets of imminent monetary easing.

The bank's rate-setting committee, known as Copom, maintained its Selic benchmark interest rate at 13.75%.

The decision, which defied intense pressure from the new government of President Luiz Inacio Lula da Silva to reduce borrowing costs, matched the expectations of all 30 respondents in a Reuters poll.

"Taking into account the uncertainty of the scenarios, the committee remains vigilant, assessing if the strategy of maintaining the Selic rate for a long period will be enough to ensure the convergence of inflation," policymakers wrote in their policy statement.

"The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets, which have shown additional deterioration, especially at longer horizons," they added.

Finance Minister Fernando Haddad criticized the statement, saying it was "very concerning," and the central bank's next decision could put the country's fiscal position "at risk."

"Copom even signals the possibility of an increase in the interest rate, which is already the highest in the world today," he told reporters, in reference to policymakers' insistence that they would not hesitate to resume hikes if disinflation did not happen as expected.

Haddad also said Brazil's inflation is more controlled than that of other developing countries, and that inflation expectations could rapidly be reduced in light of new events.

David Beker, head of Strategy for Latin America at Bank of America, said in a note to clients he still sees the easing cycle beginning in May, but with "higher risks of a delay, given the tone of the statement."

Several economists expected the central bank to mention challenges to the global economy, which could potentially create space for rate cuts to begin earlier than previously anticipated, after high-profile U.S. bank closures and the Credit Suisse rescue.

The central bank acknowledged the worsening global environment amid banking turmoil, but emphasized recent data on global activity and inflation have remained resilient.

The bank also noted the process of monetary policy tightening in major economies continued to advance, following the Federal Reserve's decision to continue raising U.S. interest rates.

"Given the expectation, I found the statement to be more hawkish," said Gustavo Arruda, Director of Research for Latin America at BNP Paribas.

"It will probably decrease the probability of interest rate cut scenarios in the next policy meetings," he added, predicting rates unchanged until May next year.

While policymakers emphasized the government decision to resume fuel taxes has helped to improve public accounts, they said highly volatile financial markets and long-term inflation expectations beyond their targets "require further attention when conducting monetary policy."

Inflation has cooled to 5.6% in the 12 months through February, but it is still far above this year's 3.25% official target. Meanwhile, the central bank's inflation expectations have risen to 5.8% for 2023 and 3.6% for 2024. Next year, the target is 3%.

Lula has repeatedly called for lower borrowing costs, describing the current Selic rate "irresponsible" on Tuesday. In a sample of the criticisms that will follow, his chief of staff, Rui Costa, said late on Wednesday that the policy decision "only increases unemployment and the suffering of the Brazilian people."

Lula put off a proposal for new fiscal rules to keep a lid on public debt levels – one of several upward inflation risks flagged by the central bank.

Source: Yahoo

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Samantha Luan

Commodity

Commodity Futures Trading Commission (CFTC) data released on Tuesday shows just how badly hedge funds and speculators were wrong-footed by the violent reversal in near-term interest rate expectations triggered by the U.S. and Swiss banking crises.

Their record net short position in three-month Secured Overnight Financing Rate (SOFR) futures of 1.17 million contracts was slashed to 329,638 contracts in the week through March 14.

That meant around 80% of funds' collective bet that the Fed will continue raising rates towards the 6% zone was wiped out in a week, easily the largest weekly position reversal on record. Funds Suffer Record Reversal on Record U.S. Rate Bets_1

Funds Suffer Record Reversal on Record U.S. Rate Bets_1

Funds Suffer Record Reversal on Record U.S. Rate Bets_2

Expectations of a 6% fed funds rate have long faded. The Federal Reserve on Wednesday raised its policy rate by 25 basis points to a 4.75-5.00% range, a move many are viewing as a 'dovish hike.' After the decision and Chair Jerome Powell's press conference, implied SOFR rates across the 2023 curve fell as much as 20 bps, and Bank of America economists lowered their terminal rate outlook by a quarter point.

CFTC positioning data is now up to date, after a cyber-attack on the derivatives platform of ION Group delayed trading firms' reporting earlier this year.

A short position is essentially a wager that an asset's price will fall, and a long position is a bet it will rise. In bonds and interest rates, yields and implied rates fall when prices rise, and move up when prices fall.

Hedge funds take positions in short-dated U.S. rates and bonds futures for hedging purposes and relative value trades, so the CFTC data is not reflective of purely directional bets. But it is a pretty good guide.

Trend-following and macro funds, and Commodity Trading Advisors have been slammed by the sudden rates reversal, with some suffering losses well into the double digits, according to banks, traders and media reports over the last couple of weeks.

It is difficult to nail down hard numbers, but these losses will almost certainly be running into several billions of dollars.

In Through the Out Door

Hedge fund industry data provider HFR's Macro/CTA index was down 3.60% in March and its Macro Systematic Diversified CTA index was down 7.39%, both for the month through March 20.

The latest CFTC figures also revealed how the recent surge in volatility has put speculative accounts trading three-month SOFR futures out of the market. Or out of business.

Funds Suffer Record Reversal on Record U.S. Rate Bets_3

The total number of traders in the week ending March 7 was 676, and in the following week that fell by 19. That doesn't sound like a big change, but it represents 3% of all players in the space and is the biggest week-on-week fall to date.

It would not be a huge surprise if more were to follow, given the severity of the whiplash in rates markets.

Implied 2023 rates peaked around 5.70% on March 8 - coinciding with CFTC funds' record short SOFR position - before troubles at Silicon Valley Bank and Signature Bank sowed the seeds of what snowballed into a global banking crisis.

Implied rates then plunged as much as 200 basis points as traders drastically redrew their Fed outlook. The two-year Treasury yield posted its biggest fall since Black Monday in 1987 and U.S. bond market volatility surged the most since 2008.

Source: Reuters

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FastBull Featured

Daily News

【Quick Facts】

1. The Fed raised interest rates by 25 bps, as the market expectations once again "jumped the gun".

2. Powell: Recent balance sheet expansion has nothing to do with monetary policy.

3. Wall Street believes the Fed's rate hike has been as hawkish as possible when the banking industry is in trouble.

4. Yellen: No consideration for a "full" guarantee of bank deposits.

5. Lagarde: No clear evidence that potential inflation is on the downside.

【News Details】

1. The Fed raised interest rates by 25 bps, as the market expectations once again "jumped the gun".

The Fed announced on Wednesday to raise interest rates by 25 bps, and the statement removed the wording of "continued rate hikes", leaving the market's first reaction to be a dovish interpretation that the Fed is about to end the current cycle of rate hikes in May. From the dot plot, although the Fed abandoned the "higher" policy path, it still adhered to the "longer" path, and did not hint at a rate cut in the dot plot. In other words, the dot plot is definitely more hawkish than the interest rate path expected by the market. Powell also stressed at the conference that there is no intention to cut interest rates according to the current economic path.

However, it seems that the market expects to "jump the gun" again, indifferent to the hawkish medium-term interest rate path in the dot plot and Powell's remarks that there is no intention to cut interest rates for the time being. The statement must have been watched for the removal of the "continued rate hike" wording.

The interest rate swap market shows that the probability of the Fed raising rates by another 25 bps in May is only slightly more than 50%. At the same time, the market expectation of a rate cut further deepened, and traders believe that the effective federal funds rate will fall to about 4.18% in December.

2. Powell: Recent balance sheet expansion has nothing to do with monetary policy.

Bank borrowing surged last week, most notably to a record $153 billion through the discount window credit, causing the Fed's overall cash and bond reserves to jump to $8.7 trillion a week ago from $8.4 trillion on March 8. This undid the Fed's months-long efforts to reduce its influence in the bond market.

In response, Fed Chairman Jerome Powell said that the sharp reversal of the Fed's efforts to reduce the size of its balance sheet in the wake of the Silicon Valley Bank collapse does not mean that its holdings are being used to provide new stimulus to the economy. The balance sheet expansion is actually temporary lending to banks and there is no intention to directly change the stance of monetary policy.

3. Wall Street believes the Fed's rate hike has been as hawkish as possible when the banking industry is in trouble.

Wall Street widely expected the Fed to raise rates by 25 bps, and it did. But stock market investors disputed the conflicting messages: policy guidance changed from "continued" rate hikes to "some additional" policy tightening, although Chairman Powell said the Fed was not tied up. Although Powell said at a press conference that policymakers had considered suspending interest rate hikes before the meeting, the Fed remained focused on high inflation risks while keeping an eye on developments in the banking system.

Win Thin, head of global foreign exchange strategy at BBH, said, "Given the continued pressure on the banking sector, the Fed has been as hawkish as possible, with a statement similar to that of the European Central Bank in my view. What the Fed is trying to say is that the tightening cycle will likely remain intact once we overcome the banking sector pressures."

4. Yellen: No consideration for a "full" guarantee of bank deposits.

U.S. Treasury Secretary Yellen spoke at a Senate hearing on Wednesday afternoon on the subject of the "FY 2024 budget review" about whether the current $250,000 insurance deposit limit should be raised.

Yellen said that the Biden administration is not considering a significant expansion of bank deposit insurance or providing depositors with a "full" guarantee. The statement means that the United States regional and small and medium-sized banks to get the possibility of comprehensive federal intervention is very small.

But Yellen pointed out that, in response to the current market turmoil, the Biden administration is not considering expanding the scope of deposit insurance, because it requires congressional legislative approval, the Treasury Department is difficult to act unilaterally.

5. Lagarde: No clear evidence that potential inflation is on the downside.

The ECB's March interest rate resolution statement said that the Governing Council's future interest rate decisions will be determined by three factors: an assessment of the inflation outlook based on emerging economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

In a speech delivered on Wednesday, ECB President Lagarde further elaborated on these three factors.

Inflation outlook: The ECB's latest forecasts put headline inflation at 2.1% and core inflation at 2.2% in 2025, down from the December forecast, but the confidence intervals around these forecasts are now unusually wide. Many of the assumptions in the forecasts (fiscal policy, energy prices and food) are volatile.

Potential Inflation: So far, no clear evidence has been seen that potential inflation is on the downside. Measures of potential inflation are still strengthening. If this continues and aggregate demand picks up, price pressures could shift from imports to domestic, keeping overall price pressures high. Payroll developments will be key. The labor market is quite tight. Payrolls growth could lead to a more sustained cost-push shock.

Policy transmission: To ease inflationary pressures, monetary policy will have to work strongly in a restrictive direction. This process is just now beginning to take effect. The first stage of monetary transmission - from policy measures to the financing and monetary environment - is already having a significant impact. The second stage - from the tightening of the financing and monetary environment to demand - is now subject to more uncertainty.

Inflation remains high and uncertainty about the road ahead has increased. Therefore, it is critical to have a sound strategy in place.

【Focus of the Day】

UTC+8 16:30 SNB interest rate resolution

UTC+8 16:40 ECB Governing Council member Yannis Stournaras to speak

UTC+8 20:00 BOE interest rate resolution

UTC+8 20:30 US Q4 Current Account

UTC+8 23:00 BOE monetary policy member Mann to speak

UTC+8 23:30 ECB Governing Council member Centeno to speak

UTC+8 00:00 ECB Chief Economist Lane to speak

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Devin

Central Bank

Summary

· The Bank of England and Swiss National Bank both make monetary policy announcements tomorrow, March 23.

· Our base case is for the Bank of England to raise its policy rate 25 basis points to 4.25% this week, and then pause tightening. However, an unexpected quickening of inflation has added some uncertainty to that outlook. In the absence of a closer, or finely balanced, vote in favor of a rate hike, or a softening in the Bank of England's language, we will be inclined to adjust our outlook towards further tightening, an adjustment that could also be positive for the pound.

· In Switzerland, growth appears to be bottoming out and there has been an uptick in inflation. While Swiss markets have been dominated by banking sector strains over the past week, with some sense of relative calm restored and after the European Central Bank's rate hike last week, we still expect the Swiss National Bank to raise its policy rate by 50 basis points to 1.50% at this week's announcement.

Bank of England to Hike, But Will They Signal More To Come?

The Bank of England (BoE) announces its monetary policy decision on March 23, with market participants focused on both the size of any potential rate hike and any signals of potential future rate hikes. Our base case has been for the Bank of England to hike its policy rate by 25 basis points to 4.25% at this week, a view with which we are still comfortable. In recent days, as banking sector strains in the U.S. and Switzerland led to unsettled global markets, market discussion has centered on whether the Bank of England could even pause at this week's meeting. However, with those strains alleviated to a modest extent, further tightening now seems very likely at this week's meeting.

A more interesting question, in our view, is whether there will be any further tightening beyond this week's meeting. Our base case has been that this week's rate increase will be the last of the current cycle. The Bank of England's economic projections, which forecast a moderate U.K. recession and below-target inflation over the medium-term, are consistent with a pause from the Bank of England after this week. In our view, some key policymakers have also been quite balanced in their comments and are looking for opportunities to pivot towards a pause. For example, Governor Bailey recently said in early March, "I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more".

Bank of England & Swiss National Bank Both Set to Hike_1

A moderate slowing in inflation over the last few months had opened the door slightly ajar, in our view, to a Bank of England pause. However, that pause has been thrown into doubt by the U.K. February CPI. U.K. inflation was an upside surprise, with the headline and core CPI unexpectedly quickening to 10.4% and 6.2% year-over-year, respectively. Today's Federal Reserve monetary policy decision may also be a factor—while it is not our base case, if the Fed does hike rates at its meeting, it could potentially make it easier for the Bank of England to deliver additional rate hikes after this week as well. Hence, while we are reasonably confident the BoE will hike rates 25 basis points this week, we will be scrutinizing the accompanying statement closely for signs of a pause (or not) going forward. In particular:

· The Bank of England voted 7-2 at its February meeting to hike rates, with the two dissents in favor of holding rates steady. We look for a closer vote split (6-3 or 5-4) as a hint that this week's hike could be the last. However, if the vote remains decisively in favor of a rate increase, more hikes could be forthcoming.

· The BoE also said it "will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labor market conditions and the behavior of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required." (Note: Our bolding). Should the BoE once again highlight these persistent inflationary risks, that would be a signal of further tightening in our view.

To sum up, we will be looking for a closer vote split and a softening in the Bank of England's language to support the view of a potential pause. In the absence of those elements, we will be inclined to adjust our outlook towards further Bank of England tightening, and adjustment that could also be positive for the pound.

Swiss National Bank to Hike Despite Banking Sector Strains

Early last week, we wrote on the Swiss economy, highlighting that growth appears to be bottoming out while CPI inflation has shown a renewed uptick, as the trimmed mean CPI rose 2.3% year-over-year in February. This led us to anticipate a 50 basis point hike from the Swiss National Bank (SNB) at its March 23 announcement.

Since then, Swiss markets have been dominated by banking sector strains, which ultimately saw authorities engineer a takeover of Credit Suisse by rival firm UBS. The deal led the SNB to provide 100 billion francs of liquidity support for UBS, and the Swiss government to provide a guarantee of 9 billion francs against potential losses.

With those developments having restored some relative calm to markets (the emphasis here is very much on the relative rather than the calm), and with the European Central Bank having raised its policy rate 50 basis points last week, we still expect the SNB to raise its policy rate by 50 basis points to 1.50% at this week's meeting.

Moreover, while Swiss growth could be softer than previously expected, CPI inflation will likely remain mildly elevated above the central bank's 2% inflation target for the time being. If the SNB does raise rates 50 basis points this week, even in the context of recent market events, we believe it will also deliver a 25-basis point rate hike at its June meeting amid what we expect will be calmer markets conditions.