Markets to Watch This Week: BoE and Fed to Pause

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves Over the Past Week

A tumultuous week for the global banking system seemed only to hit rates as bond market volatility reached its highest since the Global Financial Crisis (Charts 1, 2 and 3). The policy-sensitive 2Y treasury yield had fallen 112bps WoW by Wednesday before closing the week at 3.81% (-79bps WoW). The last time US 2Y yields saw a WoW decline of more than 112bps was in October 1987, and the last time it declined more than 79bps WoW was in September 2001. Bilal returns heavily overweight cash.

Equities and FX proved comparatively docile. Global indices fell 3% at most, with the S&P 500 and Nasdaq 100 securing positive returns. JPY rose the most in G10. The Federal Reserve (Fed) reacted and launched the Bank Term Funding Programme (BTFP), backstopped by $25bn. It allows banks to raise term funding by putting up collateral, such as US Treasuries, at par value, even if it currently trades below that.

Meanwhile, CHF fell across G10 (excluding vs NOK) as traders digested Credit Suisse’s takeover by UBS. Notably, markets were disappointed by Credit Suisse AT1s being written down to zero, bringing the value of AT1s into question (AT1s are a tool designed to reduce the impact of bank failures). Already, other bank AT1s are selling off, with the Invesco AT1 ETF dropping another 12% today, on top of the 9% drop last week.

Sat behind this all, the European Central Bank (ECB) delivered a reasonably hawkish 50bpand announced no new facilities to support banking sector liquidity. Meanwhile, forward guidance was limited to a data-dependent approach to future policy rate decisions. Since, the hawks have been strong in voice, though all have stopped short of declaring their intent to vote for 50bp in May.

Amazingly, this chaos pushed bitcoin to outpace other assets, delivering 23% over the past week and returning to its bull trend.

What to Watch

This week, markets will concentrate on the Fed and Bank of England (BoE) meetings.

We expect the Fed pauses on Wednesday, despite markets leaning toward another hike (64% chance of moving), as it balances two concerns:

1. Showing that there is no financial dominance,
2. Worsening the confidence crisis.

On the first, it must show that its capacity to implement its inflation mandate remains unconstrained by the current financial instability. Failure to do so would undermine its inflation-fighting credibility. And on the second, in this current context, a rate hike could be seen by market participants as a sign that the Fed does not have their back and trigger another bout of deposit flight from smaller banks.

The BoE is on Thursday. We have long thought the BoE is overpriced and would pause in March, we just needed the data to confirm our suspicions – noting incoming labour data alongside February inflation as key. The labour market data proved insufficient to suggest that the BoE will be concerned their MPR forecasts were too dovish.

Meanwhile, there is a high bar for inflation to surpass on Wednesday and consequently force the BoE to hike. Services inflation will prove the most important part. A MoM rate below 1.3% MoM would place the YoY trajectory lower than what the BoE had forecasted – tough challenge when February services is typically the second weakest monthly reading while momentum has slid over the past half a year.

Watch Andrew and Dominique discuss the biggest takeaway from last week, whether the Fed’s pause will prove transitory, what data investors should watch out for this week, and much more!

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.