March 22nd Financial News

Daily News

Summary:

U.S. stocks close sharply higher as banking liquidity concerns ease; UBS raises its inflation forecast for the U.S. this year; Fed's probability of a 25 bps rate hike in March climbs to 87.1%...

【Quick Facts】

1. U.S. stocks closed sharply higher as banking sector liquidity concerns eased.

2. Credit Suisse's $150 billion debt graph emerged.

3. Chinese and Russian heads of state signed a joint statement.

4. Economists: the Fed's suspension of interest rate hikes could trigger further fears.

5. UBS raises its inflation forecast for the U.S. this year.

6. The probability of the Fed raising interest rates by 25 bps in March rose to 87.1%.

【News Details】

1. U.S. stocks closed sharply higher as banking sector liquidity concerns eased.

Last week, two U.S. regional banks collapsed in a row, followed by the bailout of First Republic Bank and the takeover of Credit Suisse, sending the banking sector into severe decline and fueling fears of spreading turmoil in the financial sector, which in turn reinforced global anxiety over the increased likelihood of a recession. However, widespread concerns about banking liquidity eased this week, with the banking sector continuing to rally and all three major U.S. stock indexes closing sharply higher.

2. Credit Suisse's $150 billion debt graph emerged.

Bloomberg terminal data show that as of March 20, Credit Suisse's (parent company and subsidiaries on a consolidated basis) total debt balance of more than $ 150 billion. Its debt graph shows that its corporate debt occupies an absolute proportion (loans, senior debt and treasury bonds are rare or even absent), with over 3,800 corporate bonds in existence and over 1,200 holders. Of these, AT1 bonds account for roughly 11% of Credit Suisse's overall corporate debt. Moody's moved Credit Suisse from the negative watch list to the positive watch list, confirming UBS's unsecured debt rating at A3 and downgrading its outlook to Negative from Stable. Fitch has downgraded Credit Suisse's Additional Tier 1 (AT1) debt rating to "C" from "BB-". In addition, the European Central Bank expanded its investigation into banks' exposure to Credit Suisse.

3. Chinese and Russian heads of state signed a joint statement.

Chinese President Xi Jinping and Russian President Vladimir Putin signed the Joint Statement of the People's Republic of China and the Russian Federation on Deepening the Comprehensive Strategic Partnership for Coordination for the New Era and the Joint Statement of the President of the People's Republic of China and the President of the Russian Federation on the Development Plan of the Key Directions of Russian-Chinese Economic Cooperation before 2030, which emphasizes the settlement of the Ukrainian crisis through peace talks.

4. Economists: the Fed's suspension of interest rate hikes could trigger further fears.

Daniel Berkowitz, a professor of economics at the University of Pittsburgh, said there is a view that the recent turmoil in the banking sector could lead to a tighter loan environment, which is equivalent to another rate hike by the Fed. Berkowitz said he would not be surprised by a strategic pause in the Fed's rate hikes, but it is possible that the Fed believes that a pause in rate hikes will send a signal to the market that the current condition of the U.S. banking sector is worse than it looks and could trigger further fear.

5. UBS raises its inflation forecast for the U.S. this year.

UBS economists said in a research note that the current U.S. inflation rate is likely to be higher than previously expected, although it remains on a downward trend. UBS raised its annual U.S. core personal consumption expenditure inflation forecast for 2023 by 0.25 percentage points to 2.75 percent. That compares with the Federal Reserve's target of 2 percent. Economists said that the factors that depress price increases include "economic weakness, slowing wage growth, slowing market rents and flat import prices. The base effect will also become an important driver of inflation decline in the next four months.

6. The probability of the Fed raising interest rates by 25 bps in March rose to 87.1%.

According to CME "Fed Watch": The probability of the Fed keeping interest rates unchanged in March is 12.9%, and the probability of raising interest rates by 25 bps to the 4.75%-5.00% range is 87.1%; the probability of keeping interest rates unchanged by May is 3.9%, the probability of raising interest rates cumulatively by 25 bps is 35.5%, and the probability of raising interest rates cumulatively by 50 bps is 60.5%.

【Focus of the Day】

UTC+8 15:00 UK CPI monthly rate (Feb)

UTC+8 16:30 A number of ECB officials spoke one after another

UTC+8 22:30 U.S. EIA crude oil inventories as of the week to March 17 (million barrels)

[TBD] U.S. Treasury Secretary Yellen and U.S. Secretary of State Blinken appear before a Senate subcommittee hearing

[Next day] UTC+8 2:00 Fed releases interest rate resolution and summary of economic expectations

[Next day] UTC+8 2:30 Fed Chairman Powell holds monetary policy press conference

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Cohen

Economic

Global freight movements continued to dwindle in the first two months of 2023 as manufacturers and distributors struggled to reduce excess inventories and cope with rising interest rates and increased caution among buyers.

Container flows fell further in January and February compared with the same months a year earlier, showing the inventory-liquidation cycle was not over yet:

· Singapore's seaborne container shipments were down 6% in February compared with a year earlier, one of the steepest falls since the first wave of the pandemic.

· Japan's air cargo through Narita airport, used for higher-value and more time-sensitive merchandise, was down 33% in January after a 24% year-on-year drop in December.

· London's Heathrow handled 6% less air cargo in January than a year earlier after moving 11% less in December.

In response, freight rates have slumped to the lowest level since the first wave of the pandemic, which peaked in April and May 2020, as volumes have shrivelled and excess capacity has emerged.

In the spot market, the cost of moving a box from China to the West Coast of the United States by sea has tumbled to just over $1,000 per forty-foot equivalent unit (FEU) down from almost $16,000 a year ago.

The spot rate from China to North Europe has fallen to less than $1,400 per FEU from almost $14,000 a year ago, based on the Freightos Baltic Exchange index.

Most shipping containers are moved onwards inland by road or rail so there has also been a sharp drop in the number of units transferred.

In the United States, the number of containers hauled on the major railroads in the first 10 weeks of 2023 was down by 9% compared with the same period in 2022. Global Freight Slump Deepens at The Start of 2023_1

Global Freight Slump Deepens at The Start of 2023_1

Global Freight Slump Deepens at The Start of 2023_2

Global Freight Slump Deepens at The Start of 2023_3

Global Freight Slump Deepens at The Start of 2023_4

Global Freight Slump Deepens at The Start of 2023_5

Global Freight Slump Deepens at The Start of 2023_6

Global Freight Slump Deepens at The Start of 2023_7

Some of the drop in freight has been driven by the rotation back to spending on hospitality, travel, leisure and other services and away from merchandise after the pandemic.

The extent of that reversal has caught manufacturers and retailers by surprise and left them holding an enormous volume of excess raw materials, work-in-progress and unsold products.

More recently, persistent inflation, rising interest rates and a darkening economic outlook have begun to weigh on sales of expensive, interest-sensitive items such as vehicles, computers and housing-related products.

Since the start of the March, the eruption of a banking crisis in North America and Europe is likely to tighten credit conditions and deepen the pull back in the short term.

Postponing purchases of durable goods is one of the easiest ways for businesses and households to reduce spending and conserve cash.

As a result, it now seems probable that inventory liquidation and cautious buyer behaviour will continue to weigh on freight movements through at least the second quarter.

Thereafter a freight recovery depends on the United States, Europe and the other major economies averting a full-blown recession.

Source: MLP

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Political

Donald Trump will try to turn any indictment to his advantage by stoking anger among core supporters over what they see as the weaponization of the justice system, though it may also push more Republicans tired of the drama around him to look for another presidential candidate.

A Manhattan grand jury could bring charges as soon as this week against the former Republican president for alleged hush money payments made to porn star Stormy Daniels during his 2016 presidential campaign. Trump has denied having an affair with Daniels, whose legal name is Stephanie Clifford.

While the prosecution of a former president is unprecedented in U.S. history and places Trump in legal peril, it will likely be viewed by his most loyal supporters as politically motivated and only harden their determination to back him in the 2024 Republican primary, party officials, strategists and political analysts told Reuters.

"I think this will strengthen the resolve of his supporters," said Ford O'Connell, a Republican strategist who represented Trump in many media appearances during the 2020 presidential campaign.

But to win the party's nomination, Trump will likely have to broaden his support beyond the 25%-30% of the Republican electorate generally thought to be in his corner no matter what, especially if the field of Republican candidates narrows in the coming months. An indictment could make it difficult for him to broaden his appeal.

Larry Sabato, director of the Center for Politics at the University of Virginia, said some Republicans could be swayed by the charges to back Florida Governor Ron DeSantis or another potential candidate without Trump's legal baggage, which has grown considerably since he left the White House in 2021.

"It’s not good for Trump, the question is how bad for Trump it is," said Sabato. "There could be multiple indictments ... it begins to add up to a major problem."

Trump's campaign has accused the Manhattan District Attorney's office, as well as prosecutors pursuing separate cases against him in Georgia and at the federal level, of doing the bidding of Democrats out to stop his re-election campaign.

People close to Trump said his campaign would seek to frame the indictment as proof that all prosecutions - including his two impeachments in Congress - are unjustified attempts by the "Deep State" to undermine him and his supporters.

Trump will have more social media outlets to get his message across after YouTube became the latest platform to reinstate him on Friday. Trump was cut off from YouTube, Facebook and Twitter following the Jan. 6, 2021, attack by his supporters on the U.S. Capitol. He has now been reinstated on all three, giving him a powerful megaphone to rally his base, as he did effectively during his 2016 White House run.

It is unclear how Trump's rivals for the Republican nomination will approach the indictment, although several have already made clear they view any attempt to charge Trump as politically motivated.

Sam DeMarco, chair of the Republican Party in Pennsylvania's Allegheny County, said candidates will likely allude to the need for less drama without explicitly calling Trump out.

DeSantis got a taste of that on Monday when he criticized what he said was the politicization of the Manhattan DA's office but also took a veiled swipe at his rival. Trump responded aggressively with an innuendo-filled post on his Truth Social platform.

'Teflon don'

DeMarco said Republicans would view the Manhattan indictment as political, given that federal prosecutors reviewed the Daniels case in 2018 and decided not to charge Trump, although it is Justice Department policy not to indict a sitting president.

Republicans would take a similar view of any charges arising out of the ongoing investigation in Fulton County, Georgia, into Trump's effort to overturn his 2020 loss to Democrat Joe Biden there, said DeMarco, who plans to vote for DeSantis should he run.

Trump has defied predictions of his demise numerous times since he launched his bid for the White House in 2015. Sometimes called "Teflon Don" for his record of skirting accountability, Trump once bragged that he could gun down someone in the middle of Manhattan and not face consequences.

Trump defeated Democrat Hillary Clinton in 2016 despite the emergence of the infamous "Access Hollywood" tape in which he made vulgar comments about women. And in 2018, when he was president, he paid no apparent political price for the Stormy Daniels affair, even as his lawyer went to prison for arranging the payments and pointed the finger at Trump.

Trump remains the front-runner in the 2024 Republican field, with the support of 44% of Republicans in a Reuters/Ipsos poll completed on Monday, ahead of DeSantis' 30% support.

Source: STL Today

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Alex

25, no change, or maybe 50?

Every Fed meeting is the most important since the one before, but rarely in recent memory has a decision - and guidance - been more in the balance than Wednesday's.

There are no major economic indicators or policy events in Asia scheduled for Wednesday, meaning markets there will probably take their cue from the 'risk-on' tone globally on Tuesday and then go into a pre-Fed holding pattern.

The U.S. central bank delivers its interest rate verdict with inflation well above target but declining, the labor market its strongest in years but creaking, the most volatile U.S. fixed income markets in decades and lending set to slow thanks to a banking crisis that erupted barely two weeks ago.

Rates traders are putting an 80% probability on a 25 bps rate increase and 20% on a pause. There are still calls for the Fed to make a clear distinction between price and financial stability, and go ahead with an inflation-busting 50 bps hike.

The Fed's decision and latest economic projections come days after coordinated action from U.S. authorities to ring-fence domestic banks, a renewed push for broad-based reform of the banking system and coordinated global action to maintain the global flow of dollars.

The fog of uncertainty is understandably thick.

What seems clearer is that markets are on a more positive footing than they were only a few days ago, before the UBS-Credit Suisse shotgun marriage, united central bank front on FX dollar swap lines and Treasury Secretary Janet Yellen's latest remarks on strengthening banks and protecting depositors.

U.S., European and Asian stocks all rallied strongly on Tuesday, commodities rose and bonds fell - shares in First Republic Bank rose a record 30%, GameStop surged 32% and the two-year Treasury yield had its biggest rise since 2009.

Hoping Powell Sheds Light in Fog of Uncertainty_1

But if we have learned one thing from banking crises past, it is that they are never resolved in a matter of days. This has further to run, and the full economic sand market impact of the credit crunch many think is coming has yet to be felt.

Over to you Chair Powell.

Here are three key developments that could provide more direction to markets on Tuesday:

- UK inflation (February)

- Australia composite leading indicator (February)

- U.S. Federal Reserve policy decision

Source: Yahoo

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Samantha Luan

Stocks

Asian shares staged a cautious bounce on Wednesday with hopes a global banking crisis would be averted vying with uncertainty over the outlook for U.S. interest rates as the Federal Reserve holds a high-stakes meeting on policy.

Efforts by U.S. Treasury Secretary Janet Yellen to calm nerves seemed to be working with bank shares rallying overnight. Government officials were also pondering increasing the limit on deposit insurance, though there was no agreement on this as yet.

Strains were still evident among regional U.S. banks with shares of First Republic Bank sliding on suggestions the government might be involved in a rescue deal, perhaps disadvantaging shareholders.

The unease left both S&P 500 futures and Nasdaq futures barely changed. EUROSTOXX 50 futures edged up 0.2%, while FTSE futures rose 0.1%.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.9%, with Chinese blue chips up 0.3%. Japan's Nikkei firmed 1.6% led by a rebound in beaten-down bank stocks.

The still brittle mood was evident in the latest BofA survey of global fund managers which found pessimism near its worst in the past 20 years amid fears of financial risk and a flight from bank stocks.

All of which puts the Fed in a tough position as it decides whether to raise interest rates later today.

Goldman Sachs, for one, argues the banking stress will cause a tightening in lending that is essentially the same as a rate hike so a pause would be warranted.

Analysts at JPMorgan, on the other hand, stand with the majority and flag a rise of 25 basis points in part because postponing a move until May would threaten the Fed's inflation-fighting credibility.

They note the Fed could still soften its forward guidance by dropping its reference to "ongoing increases", much as the European Central Bank did last week.

QT And Dot Plots

An added complication is whether the Fed temporarily stops selling its holdings of Treasury debt, known as Quantitative Tightening, and what Fed members do with their dot plot forecasts for future rate hikes.

The latter will be a key focus as the market is all over the place on the policy outlook.

Having even priced in the risk of a rate cut last week, futures now imply an 86% chance of a quarter-point rise to 4.75-5.0%. Then again, a couple of weeks ago the market had been wagering on a half-point hike.

Investors have also swung back to expecting a further increase in May, but also imply some chance of a cut as early as July and rates at 4.25-4.50% by year-end.

How Fed Chair Jerome Powell navigates all this in his 1830 GMT news conference could well determine the course of markets for the rest of the week.

Bond investors will be hoping he can instil some calm given the wild volatility of recent days. Two-year Treasury yields were hesitating at 4.14%, having made a remarkable round-trip from 5.085% to 3.635% in just nine sessions.

European bonds have gone along for the ride. German two-year yields overnight recording the biggest daily jump since 2008 as markets went back to pricing in more ECB hikes.

That jump helped lift the euro to a five-week high of $1.0789 overnight, and it was last holding firm at $1.0770.

The dollar went the other way on the yen, where yields are still tightly controlled by the Bank of Japan, and rose to 132.50. Safe-haven demand for yen had seen the dollar as low as 130.55 early in the week.

In commodities, the mild improvement in risk sentiment saw gold ease back to $1,943 an ounce and away from Monday's top around $2,009.

Oil prices eased a touch in early trade, having rallied 2% overnight. Brent dipped 22 cents to $75.12 a barrel, while U.S. crude fell 27 cents to $69.40.

Source: Reuters

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Justin

Central Bank

Already facing uncharted territory, the Federal Open Market Committee’s job is only getting tougher. It faces innumerable conundrums: assessing the economic outlook and how recent financial turmoil impacts that, the rate decision, financial stability considerations and communicating decisions. This FOMC meeting from 21-22 March will come with a new dot plot – it may end up heightening confusion.

What to make of the economic outlook?

In the period prior to Silicon Valley Bank developments, the US economy was running hotter than expected. Continued strong labour markets underpinned growth relative to expectation, with forecasts of a US recession often being pushed towards end-2023. Inflation, despite having come down for months, was proving stickier than expected on the downside – getting to 2% was viewed as a more difficult and protracted task. Expectations about the terminal rate had shifted to 5.5% from around 5%, and the Fed Funds rate – after peaking – was viewed as on hold for the remainder of 2023.

Will financial turmoil impact this outlook?

Then along comes the SVB upheaval, major deposit shifts, a collapse in US Treasury yields and plummeting market expectations regarding the Federal Funds rate outlook for the rest of the year. But will the turmoil persist and how might it affect the real economy? This is obviously a huge unknown.

If markets steady in time without much real impact, the FOMC’s outlook for the rest of the year could revert to its pre-SVB thinking on inflation/labour market dynamics. But if volatility persists, including deposit flight from community and regional banks, credit contraction might be in the offing. The FOMC’s timing is smack in the middle of peak volatility and uncertainty and it has little more insight than anybody else.

What to do with the Fed Funds rate?

While a few weeks ago a 50-basis point hike seemed a good bet, now it appears the FOMC faces a coin toss between not hiking and raising by 25bp. Good arguments can be put forward for both.

No rate hike would give the FOMC time to assess the situation, without precluding action when more information becomes available. A pause would further allow authorities to assess the lagged impact of the rapid rate hikes that have already taken place.

In contrast, a 25bp hike would respond to sticky price data. The Federal Reserve must keep its eye on inflation. If the FOMC pauses now, will it be harder to explain resumed rate hikes if needed? Moreover, while financial stability concerns are relevant to the macro outlook, especially if credit contracts, financial stability per se is not part of the Fed’s dual mandate of maximum employment and price stability.

Financial stability considerations and the Fed

Fed officials have long emphasised that monetary policy and financial stability considerations should be separated. Monetary policy should be guided by the dual mandate. Financial stability should be tackled with strong micro and macro prudential policies. Of course, if the financial stability upsets the growth and employment outlook, it relates to the attainment of the dual mandate.

Separation is nice in theory, but it may come up short in practice. Rate cuts/hikes and financial stability are interrelated. The US’s financial stability tools are inadequate. The Financial Stability Oversight Council is weak and overpopulated. The Dodd-Frank ‘designation’ process has been gutted. The US does an inadequate job overseeing non-bank financial intermediation, particularly given the labyrinthian regulatory structure that undermines accountability. The SVB collapse shows again that a ‘small’ bank can potentially trigger systemic contagion and it appears that on-the-ground banking regulators missed obvious red flags.

How to communicate amid the confusion?

Fed Chair Jerome Powell will have the unenviable task of explaining the FOMC’s decisions. Whatever those may be, the case for acting one way or another is arguably balanced and actions will easily be second-guessed. If the Fed pauses, it may be accused of paying too little attention to inflation. If it hikes, given the circumstances, it will be accused of overdoing it, as Senator Elizabeth Warren has already charged.

Powell faces the challenge of how to position the Fed for forthcoming meetings when the outlook faces so many unknowns. He may be pressed on whether the Fed failed in its supervisory role, whether blanket deposit guarantees should be issued and the deposit cap upped and whether quantitative tightening should proceed. While trying to maintain options and keep the Fed’s eyes on inflation fighting, the potential for missteps and market volatility will be even greater than usual, which is the last thing the Fed wants.

Source:Mark Sobel

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Justin

Central Bank

Economic

Taken by surprise by the resurgence of inflation, the European Central Bank started raising rates last summer and is still in the process of doing so. At her press conference on 16 March, President Christine Lagarde started her remarks with: ‘Inflation is projected to remain too high for too long.’ She then announced a 50 basis point increase in interest rates, the seventh in a row.

This firm stance, after a week of tremors in the global banking sector, was supported by an overwhelming majority of governing council members; only ‘three or four’, she said (out of 26), voted against her proposal. This was a remarkable demonstration of consensus and resolve by a very large committee.

Out of the spotlight, meanwhile, there is a huge elephant in the monetary policy room: the central bank’s balance sheet. Years of massive expansion have deposited a staggering €4tn of idle liquidity in the pockets of euro area banks. Until that stash of cash goes away, the ECB can only raise rates by subsidising the deposits it receives from banks. The remuneration on its deposit facility was raised from minus 0.5% last July to 3%, on a riskless basis. It will probably go beyond that. This is a hefty subsidy to bank shareholders: except for them, nobody today can access a risk-free rate of 3% in the open market.

This is a dangerous course. The assets the central bank holds against these deposits yield returns far below the funding cost. Calculations by Daniel Gros, a senior fellow of the Centre for European Policy Studies, show that this is enough to wreck the accounts of the ECB and its constituent national central banks in the years ahead. Bundesbank President Joachim Nagel must have felt some embarrassment recently as he announced to the German public that the losses of the German central bank last year do not cover provisions. This is an accounting euphemism to say that the central bank may need financial support from the government, and indirectly from the national taxpayer.

Economic textbooks say that central banks cannot go bankrupt, but this is another euphemism. It is easy to think of situations where the central bank and the money it issues – the euro in this case – loses support and reputation among public opinions and political circles, some of which in Europe edge towards populism. When this happens, the loss of central bank independence is just around the corner.

The only way for the ECB to stay clear of danger is to keep its deposit facility rate low. But this is compatible with the intended monetary policy course only if the bank liquidity and the central bank’s outright portfolio of securities – two amounts which are roughly equivalent – are reduced in parallel, and fast. The ECB has started scaling down its securities holdings at a pace of €15bn a month on a net basis. This is not sufficient. Other things being equal, it would take some 27 years to reabsorb all the liquidity that is around through this channel alone. The ECB cannot afford to wait that long.

One way to accelerate the process is to re-activate a long-term liquidity-management instrument introduced by the ECB in 2014, the so-called ‘targeted long-term financing operation’, but in reverse. The new reverse long-term operation would auction out rights to swap central bank deposits for long-term securities on a long-term basis according to the maturity of the bonds. Auction participation would be voluntary but incentivised. Banks deciding not to swap out their central bank deposits would be penalised by a lower deposit rate. Swap rights could be calibrated by taking into account the balance of each bank at the deposit facility

Calculations suggest that an auction mechanism so designed would induce profit-maximising banks to swap away large amounts of their deposits in exchange for temporary (but long-term) government bond holdings.

Regardless of the specific mechanism chosen, one thing is clear: a coherent package of measures and incentives lowering the deposit rate and reducing bank liquidity alongside the central bank’s portfolio is the only way the ECB can maintain monetary control and salvage, together with its own accounts, its operational flexibility and independence. The issue is urgent. Most national central banks of the euro will soon present their accounts for 2022. At that time, the monetary policy elephant and its impact on European taxpayers will be apparent. The ECB would be better off having answers when this happens.