March 23rd Financial News

Daily News

Summary:

The Fed raised interest rates by 25 bps, the market anticipation is " jumpstart" again; Powell: recent balance sheet expansion has nothing to do with monetary policy; Yellen: did not consider a "full" guarantee of bank deposits...

【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.

Source: Wells Fargo Securities

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Samantha Luan

Commodity

Energy- Large US product draws

The oil market saw a further recovery yesterday. ICE Brent settled more than 1.8% higher on the day, whilst WTI managed to settle above US$70/bbl for the first time in a week. The Fed's decision to hike rates by 25bp was the most priced-in outcome and so, as a result, provided little in the way of surprises to the market. Price action is weaker in early morning trading today, not helped by comments from US Treasury Secretary, Janet Yellen, who said that the government was not looking at providing blanket deposit insurance following recent developments in the banking sector.

Weekly EIA data was constructive. US crude oil inventories increased by 1.12MMbbls over the last week. However, there were fairly large declines in refined product stocks. Gasoline and distillate fuel oil inventories fell by 6.4MMbbls and 3.31MMbbls respectively. These large product draws were on the back of stronger domestic demand, while refined product exports were also stronger over the last week. At a little under 230MMbbls, US gasoline stocks are at their lowest level for this time of year in at least 5 years. As for distillate stocks, whilst they look more comfortable than last year, historically they are still relatively tight.

Metals – China to cut steel production

China is considering reducing its steel production by about 2.5% this year amid its existing policy to curb emissions. The target was proposed by officials at a meeting last week. Meanwhile, authorities in the Tangshan region have already asked steel makers in the region to adjust their output as per the regulations, after an orange alert was issued on 20 March. This would likely add further pressure on raw material prices. The most active SGX iron ore contract slipped below US$120/t for the first time in six weeks yesterday as Chinese steel demand disappointed despite peak construction season starting soon. As per the latest estimates from Mysteel, ten steel mills in China have lowered their prices of steel products.

Source: ING

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Alex

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs after the recent collapse of two U.S. banks.

Fed Chair Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of Silicon Valley Bank "failed badly," but that the bank's collapse did not indicate wider weaknesses in the banking system.

"These are not weaknesses that are running broadly through the banking system," he said, adding that the takeover of Credit Suisse seemed to have been a positive outcome.

The Federal Open Market Committee policy statement also said the U.S. banking system is "sound and resilient."

Even so, Wall Street ended sharply lower after Powell told a news conference that officials were still intent on fighting inflation while also eying the extent to which recent bank failures had cooled demand and slowed lending.

The much-anticipated rate hike by the Fed, which had delivered eight previous rate hikes in the past year, sought to balance the risk of rampant inflation with the threat of instability in the banking system.

But in a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed's latest policy statement no longer says that "ongoing increases" in rates will likely be appropriate.

The banking sector has been in turmoil after California regulators on March 10 closed Silicon Valley Bank in the largest U.S. bank failure since the 2008 financial crisis.

The collapse of the Santa Clara, California-based bank and Signature Bank, another U.S. midsized lender, prompted a rout in banking stocks as investors worried about other ticking bombs in the banking system and led to UBS Group AG's takeover of 167-year-old Credit Suisse Group AG to avert a wider crisis.

The Fed's relentless rate hikes to rein in inflation are among factors blamed for the biggest banking sector meltdown since the 2008 financial crisis.

"The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. "The Fed is probably thinking financial stresses are substituting for future rate increases."

Meanwhile, as beleaguered First Republic Bank considers its options, Treasury Secretary Janet Yellen said on Wednesday there is no discussion on insurance for all deposits.

She told a congressional hearing that the government "is not considering insuring all uninsured bank deposits." She also said the Treasury Department has not considered anything to do with guarantees for assets. First Republic shares closed down more than 15%.

As officials grapple with restoring confidence in the banking system, JPMorgan Chase & Co CEO Jamie Dimon is scheduled to meet with Lael Brainard, the director of the White House's National Economic Council, during the executive's planned trip to Washington, according to a person familiar with the situation.

Bank Supervision

The latest move to restore calm to restive regional bank stocks came as Pacific Western Bank, one of the regional lenders caught up in the market volatility, said it had raised $1.4 billion from investment firm Atlas SP Partners.

Shares of the bank closed down 17% even as it tried to assuage investor worries by saying it had more than $11.4 billion in cash as of March 20.

But less than two weeks after Silicon Valley Bank sank under the weight of bond-related losses due to surging interest rates, the CEO of hedge fund Man Group, Luke Ellis, said the turmoil was not over and predicted further bank failures.

Policymakers from Washington to Tokyo have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.

SVB's collapse kicked off a tumultuous 10 days for banks which led to the 3 billion Swiss franc ($3.2 billion) weekend takeover of Credit Suisse by rival UBS.

U.S. Fed Delivers Small Rate Hike Amid Global Banking Turmoil_1

In further fallout, a conservative Republican and a progressive Democrat in the U.S. Senate are introducing legislation to replace the Fed's internal watchdog with one appointed by the president, aiming to tighten bank supervision following the failures of SVB and Signature Bank.

Republican Rick Scott and Democrat Elizabeth Warren blamed the collapse of the two banks on regulatory failures at the U.S. central bank, which has operated up to now with an internal inspector general who reports to the Fed board.

The Fed was not immediately available for comment.

The Federal Deposit Insurance Corporation (FDIC) has moved the bid deadline for Silicon Valley Private Bank to Friday from Wednesday, a source familiar with the matter said on Wednesday. Earlier this week, the FDIC decided to break up Silicon Valley Bank and hold two separate auctions for its traditional deposits unit and its private bank after failing to find a buyer for the failed lender last week.

($1 = 0.9280 Swiss franc)

Source: Reuters

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Justin

Central Bank

Economic

It might not seem as though the sad demise of Credit Suisse has much to teach surveillance professionals. But look harder and it exposes many of the issues that have become apparent over the past half decade.

The failure of Credit Suisse is peculiar because it has not involved the revelation of hidden losses or a ‘black hole’ in the bank’s accounts, but instead the erosion and finally collapse of its reputation in the eyes of its customers. Banking is above all about trust and customers finally voted with their deposits.

The big picture lesson is clear enough: regardless of ‘tone’ from the top – and it’s behaviour, not tone, that counts – the culture of the bank seems to have remained firmly rooted in traditional (and outdated) concepts of Swiss bank secrecy that prioritise wealth concealment, anonymity and tax avoidance.

That culture is reflected in those multiple fines for failures in financial crime prevention and repeated exposure in media leaks of controversial financial activity. But it’s also reflected in the aftermath of failure: looking at the firing of Chief Compliance Officer Lara Warner in the wake of Archegos, or at the revolving door that has spat out her replacement Rafael Lopez Lorenzo and Head of Regulatory Compliance Julian Gooding, it’s hard not to conclude that compliance was treated as a scapegoat for cultural and control failings that went much deeper.

Blame the system?

But those cultural failings then pose a bigger question. Given the volume and granularity of global financial regulation around conduct, culture and financial crime in the last 15 years, how did one of the world’s most important banks continue to generate so many problems that it ended like this?

If regulators understand that culture drives conduct (and they do), isn’t the failure of Credit Suisse also the failure of a regulatory model obsessed with hyper-granular risk assessments and documented audit trails explaining why actions were and were not taken in relation to individual transactions?

Take the bank’s annual report describing the US Securities and Exchange Commission’s queries around cash flow restatements going back to 2019 in relation to the netting treatment of some securities’ lending and borrowing activities.

The report says, ‘management did not design and maintain an effective risk assessment process to identify and analyse the risk of material misstatements in its financial statements’. In a separate statement, auditors PricewaterhouseCoopers said that ‘management did not design and maintain effective controls over the completeness and the classification and presentation of non-cash items in the consolidated statements of cash flows’.

This is what’s wrong with much of the risk and control process in banks at present. There is no risk assessment process that can identify every possible risk in a business to this level of detail and nor should there be. There should be no need for a bank to define every possible mistake one could make in preparing the annual report of a global bank and then develop a risk and control framework to monitor for those mistakes.

These are not the kinds of ‘risks’ that belong in a risk control self-assessment. These are questions of professional competence and, in this case, understanding accounting rules. You don’t need a risk assessment checklist for them, devised by another department and debated by a committee. You need qualified staff whose work is checked by senior internal and external staff upon whose expertise you rely in matters of technical detail. Non-financial risk functions should be concerned with the bigger picture and they should not be building that from the bottom up to that degree.

Credit Suisse said its management team was developing a remediation plan to address the weakness and would ‘implement robust controls to ensure that all non-cash items are classified appropriately within the consolidated statement of cash flows’.

This granularity is ridiculous. The financial reporting and audit departments of banks are the controls that should ensure that all non-cash items are classified appropriately. In this case, the external auditors picked up the issue, which is their job, and the error (which was technical and did not invalidate the annual report under Swiss law) was rectified. If there was any real failure, it was that the external auditors did not pick the error up quickly enough so that a last-minute SEC query could then delay publication.

A regulatory problem

This is an example of the regulator-driven obsession with more rules and risk assessments that is paralysing banks with bureaucracy that cannot work. It is replacing reliance on good hiring and management with dependence on spreadsheets whose granularity gives the illusion of control while in practice swamping control teams with data they cannot use effectively.

It is creating a culture in which, no matter what banks and regulators say, risk and control teams are taking day-to-day ownership of risk because the business assumes those infrastructures can be relied upon to flag concerns instead of keeping track themselves. In practice, those teams are struggling simply to achieve basic regulatory compliance, let alone significant risk mitigation. And they are spending more and more time, as one compliance chief said recently, ‘writing reports about why we did not file a suspicious activity report’. (Imagine the infinity of reports that could be.)

With Archegos, the basic failure was simple: profitability from the relationship was low (tens of millions of dollars at most over several years), yet the risk exposure was reportedly more than $20bn, or half the bank’s equity cushion against potential losses, and it only held a tenth of that against the position. It shouldn’t need an RCSA to spot that. And how far up the material risk list was a $5bn loss in prime brokerage anyway? Upheavals are always the result of large surprises that, by definition, are not flagged early by risk and control systems.

Time to change tack

More layers of rules and controls are not the answer. Better big picture business management is. As the huge third-party report commissioned by Credit Suisse on Archegos showed, the key causes were staff turnover and the replacement of experienced professionals with juniors.

Sure, there were also failures of reporting and data systems, but the head of a prime brokerage unit should know whether they are running a $5bn risk or a $20bn equity exposure and whether a few million dollars is sufficient compensation. And they should be more concerned with the health of the bank than with their own payslip. That way they wouldn’t shrug off the concerns of risk and control teams.

So why did Credit Suisse ultimately fall? Yes, the regulators are driving a compliance culture that is unintentionally undermining management responsibility at business unit level and below. Yes, the obsession with ever more detailed risk assessments is a distraction from real material risks. Yes, the drive to regulate and put a number on every single aspect of banks’ operational processes, as though they were foreign exchange positions, is daft and doomed to fail.

And yes, maybe Credit Suisse was unlucky. With 2m customers you get a few bad apples. But it was unlucky a lot. And it kept being unlucky in the same way.

When your customers – many of whom will have been with you for their whole lives – pull the plug, it’s your culture that has gone wrong.

Source: Simon Brady

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Justin

Economic

The global economic outlook for 2023 has faced multiple mood swings. Another might now be in the offing. Spring projections are likely to start trending upwards. But the path forward faces major uncertainties. Forecasters are hardly to be envied.

Last autumn, gloom pervaded projections, with a global outlook weighed down by rising inflation, concerns over the continued pass-through from energy price hikes, rising interest rates, geopolitical fallout from Russia’s barbaric invasion of Ukraine and widespread near-term recession fears.

By January, modest optimism crept in because the worst was over, though the outlook was hardly upbeat. China had begun reopening, energy prices were down, winter temperatures were mild, energy inventories were holding up and inflation was peaking.

Figure 1. Global growth forecasts show modest optimism in January

Spring Global Growth Forecasts Are Looking Up_1

Source: International Monetary Fund World Economic Outlooks

While overall spring growth estimates are likely to be boosted a bit, recent developments may set in motion another mood swing. Critical conundrums are facing the largest economies and there are questions about how to gauge the uncertainties permeating the outlook.

In the US, stronger than expected consumer price data this year hit markets somewhat less concerned about inflation after several months of moderation. Strong payroll data painted a picture of far greater labour market strength than previously anticipated. These developments abruptly reversed last autumn’s downturn in short- and longer-term rates and easing in financial conditions, lifted expectations of the Federal Reserve’s terminal rate from roughly 5% to 5.5% and dashed market expectations of Fed 2023 rate cuts.

But in the last week, given the enormous market turmoil set off by developments at Silicon Valley Bank followed by Credit Suisse, growth may be set back and markets are dialling way back on terminal rate expectations. How this plays out fully is yet to be seen.

Juxtaposed against these latest market developments, there is now widespread questioning about how much progress is actually being made in reducing core inflation and how biting prior Fed hikes are, as well as rising doubts about the Fed’s ability to bring inflation down to 2% in the near future without significant pain. Forecasters seem even more inclined to expect a US recession but, prior to the collapse of SVB, the timing increasingly was being put off till the end of 2023 or 2024. Meanwhile, others were wondering if the US economy would face a Wile E. Coyote moment.

China’s rapid reopening has been widely perceived as the key factor bolstering the outlook. But expectations may be a bit heady. The National People’s Congress 2023 growth target of around 5% was viewed as modest, dashing hopes for a strong surge in Chinese growth. Despite talk of massive potential for personal ‘revenge’ spending, consumers may remain cautious, especially given a limited social safety net, and uncertainties surround the housing market.

Chinese macroeconomic authorities have exercised considerable restraint in recent years, keeping a lid on leverage and recognising that the investment-led growth model is increasingly flailing. That trend is unlikely to change and local government finances are strained. President Xi Jinping seems intent on bolstering centralisation and control. Low global growth will keep a lid on external demand. Chinese total factor productivity is quite low. US-China economic tensions will not help to boost confidence either.

The euro area is throwing curveballs at forecasters. Energy prices are lower than previously anticipated and energy supplies are in good shape. There is growing confidence the supply for next winter is secure. The February purchasing managers index was favourable. But the outlook isn’t bright. National statistics are creating a cacophony about the real economy and Germany may already be in mild recession.

Inflation is proving stickier on the upside than anticipated – 8.5% year over year in January. The European Central Bank had previously swung decidedly towards a hawkish mode – even doves were throwing in the towel. Debates had emerged about whether a 4% terminal deposit rate was a possibility, versus expectations of a 3.5% peak. But now, whether there is a lasting impact from Credit Suisse developments may be somewhat determinative.

Japan, after years of deflation and slow growth, is also raising red flags for global markets. With inflation around 3.5%, economists are debating whether Japan has broken the back of deflation and the 2% target can durably be met or whether mean reversion will set in. This debate is tied up with forthcoming spring wage developments. More significantly, the Bank of Japan’s new leadership is seen as likely to modify or end yield curve control, and how that unfolds could have potentially disruptive consequences for global bond markets.

Upward revisions to forecasts for emerging markets and middle-income countries also may not continue against a backdrop of mediocre global growth.

On balance, global forecasts may be marked up a bit this spring. But questions facing the outlook and markets – especially in advanced economies – are only growing. How will US and European rate hikes impact real activity and when? Will China’s rebound be cautious or robust? Will an end to YCC disrupt global financial markets? How will the latest US and European financial instability impact growth and monetary policies?

Source: Mark Sobel

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Justin

Central Bank

Economic

Headline inflation in February, up from 10.1% in January

A day before the Bank of England announces its latest decision, it is faced with an unwelcome resurgence in UK core inflation. Core CPI is back up at 6.2% (from 5.8% in January), and more importantly shows that the surprise dip in services CPI last month was a temporary one.

Policymakers have signalled this is an area they’re paying particular attention to, not least because service-sector inflation tends to be more ‘persistent’ (that is, trends tend to be more long-lasting than for goods) and less volatile. Inflation in hospitality is proving particularly sticky.

The caveat here is that the Bank has indicated it is paying less attention to any one single indicator, and is focused more on a broader definition of “inflation persistence” and price-setting behaviour. And in general, the data has been encouraging over the past month or so. The Bank’s own Decision Maker Panel survey of businesses points to less aggressive price and wage rises in the pipeline, and the official wage data finally appears to be gradually easing.

Core services inflation has bounced back after January's dip

UK Inflation Resurgence Points to Final 25bp Rate Hike This Week_1

We suspect the Bank will want to see more evidence before ending its rate hike cycle entirely, and that’s particularly true after these latest inflation numbers. We’re still narrowly expecting a 25bp hike on Thursday, and we think the BoE will take a leaf out of the European Central Bank’s book and reiterate that it has the tools available if needed to tackle financial stability, thereby allowing monetary policy to focus on inflation-fighting. This was the mantra it adopted last October/November during the mini-budget and LDI pensions fallout in UK markets.

However, assuming the broader inflation data continues to point to an easing in pipeline pressures, then we suspect the committee will be comfortable with pausing by the time of the next meeting in May.