Saturday Hark Back - 18 Mar 2023

Capturing the themes of the week when there’s time to digest them.

Powell beware the Ides of March as he finds himself caught between a rock and a hard place

“Only surprisingly weak data will prevent that outcome now.”

''Prepared to increase the pace of rate hikes if data warrants it''.

50 bps back on the table as an option for the Fed few weeks after discarding it completely.

Those were the phrases that we started our piece with last week and my they seem a lifetime away now.   Since then we have had three regional bank failures (SVB, Silvergate and Signature), as well as a European major (CS) adding more dates to its long goodbye tour seemingly keen to outdo Elton John’s farewell to the yellow brick road and to top it all another regional bank (First Republic) saved, for now, by the doyens of Wall Street. 

On top of that, there is the controversy surrounding Janet Yellen’s implication that the FDIC bailouts are now operating on a two-tier system whereby only the big banks are guaranteed insurance. See below the clip of the exchange between a Senator and Treasury Secretary Yellen this week. The money lines are:

"Will every community bank ... get the same treatment as SVB?” asked the Senator

"Banks only get the treatment if ... the failure to protect uninsured depositors would create systemic risk.”  Yellen’s replied.

The obvious conclusion to all this is that those in charge get to pick the winners and losers. I’m guessing that moving forward the Fed may want to take a look at the inflationary pressures arising from political donations!

Quite a week and one that makes Julius Caesar’s Ides of March seem like a walk in the park! Chair Powell I guess thinks if he had any luck he’d have bad luck but at this point, he only has himself and his fellow academics to blame. Years of QE and low rates had to come home to roost at some point and whether that’s now remains to be seen. 

Next week sees the March FOMC and what does he do? Stick to his “ECB guns” and fight the good inflation fight and hike 50bp and be damned, hit the middle ground and do a wishy washy 25bps and muddle through or pause or even cut rates?

Maybe this crisis will “help” him. The obvious outcome of bank runs and the financial stress we are currently seeing is a tightening of credit conditions and increased restrictions on lending with the obvious end game of a recession. You only have to look at the indicators from the US rates market to see that with US2y currently below 4% (they were well over 5% last week) points to a Fed cutting sooner rather than later. So maybe a banking crisis will kill the inflation genie for now but if the Fed don’t cure the underlying wrongs in the system, which are too many to mention, that genie will be out of the bottle sooner than you think “bigger and nastier” than ever. 

Anyway too much to mull over for now but I shall leave you in some more capable and informed hands below. 

WhatBitcoinDid - Bank runs and bailouts with Caitlin Long

MorningPorridge - The battle between market stability and chaos

The Gryning Times - The Fed is back in business

The Last Bear Standing - The death of QT

Capital Spectator - The Fed's big problem and just got bigger

Arthur Hayes - Kaiseki

That Yellen Clip

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ECB hold their nerve

ECB delivered the 50bp hike as expected looking beyond the banking stress and concentrating on the job in hand; the incoming data, whilst acknowledging the wider world when saying it was well aware of the “financial market tensions” and is ready to step in if needed with its “policy toolkit”. As the ECB’s Villeroy put it the “rate hike signals strong confidence in European banks”. We may want to join that one up on the dressing room wall at some point! Nevertheless, they have made their stand and so be it. What they didn’t do was give any future guidance as to the rate path. The market has tempered their expectations for further hikes however with expectations now leaning towards two further 25bp hikes in May and June to hit the 3.5% terminal rate by the summer. Let’s see.

I’m sure the Fed will have been assessing the market’s reaction to the ECB as it mulls its next move coming up next week.

All credit to the ECB for holding their nerve; they just better hope that their belief in the European banking sector is well founded.

ABNAmro - ECB review

 

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