Markets to Watch This Week: Post-Hike Bank Tremors

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

Market Moves Over the Past Week

Over the past week, equity markets proved (largely) resilient. The Federal Reserve (Fed) hiked alongside three other G10 central banks amid the ongoing bank turmoil (Chart 1). Further money market inflows ensured US Treasury yields fell once more while USD also fell with only AUD and NZD weaker in G10 (Charts 2 and 3).

Dominique had expected the Fed to stay on hold. However, the Fed hiked rates by 25bp, in line with market expectations, largely due to signs that the Fed’s measures to stabilise the banking system were working. At this stage, it is far too early to call the all clear, but incremental data is positive.

In addition to the move, the US central bank eased forward guidance (to: ‘The committee anticipates that some additional policy firming may be appropriate’). Also, it left the end-2023 FFR unchanged (at 5.1%) in the new Summary of Economic Projections and became more confident on downside risks to inflation. Looking forward on the Fed, they have signalled one more hike while Chair Jerome Powell rebuffed 2023 rate cuts as ‘not in our base case’.

The Bank of England scored a cautious toneas the statement noted much of the February inflation outturn seemed to be a one-off (led by food, restaurants and clothing prices) while services inflation fell below expectations. Elsewhere, an improved economic backdrop and stronger-than-expected rise in employment was weighed against a faster-than-expected decline in private sector wage growth and declining household and business inflation expectations.

Remaining European central banks were more hawkish. The Swiss National Bank (SNB) followed the European Central Bank (ECB) with 50bp of their own (an upside surprise to market expectations). Going forward, the SNB will probably seek to match the ECB in a bid to tame any imported inflation and currency weakness.

Meanwhile, Norges Bank delivered a hawkish 25bp. They stated the high chance of a May hike they forecasted at least another to follow in the summer.

What to Watch

This week, data related to bank health will overshadow other releases in the US while preliminary European inflation could set markets on the path for further ECB hawkishness. Several key releases will follow down under, too.

With the US all but clear of another banking crisis, Dominique will focus on updated Fed balance sheet and money market fund (MMF) asset figures (Wednesday). Here, she expects only a small change in Fed lending to banks, signalling further stabilisation, as well as continued inflows into MMF due to the differing rates between banks and MMFs. John has a lighter week ahead on the earnings front, ending with commercial banks’ balance sheets (Friday).

The ECB are weighing largely on incoming inflation prints (Thursday and Friday). Henry is watching March CPI readings for signs of a normalisation in the month-on-month non-energy rate (Belgium, Spain and France all produce preliminary core readings). On the specifics, March typically sees a lot of core sectors re-pricing. However, a lot of this was already done in January, so March may undershoot versus seasonal normal. We warn this may prove temporary and will not take much from it.

The Reserve Bank of Australia (RBA) has placed great reliance on four data points for the next meeting (4 April). Two support a hike, the other two are due this week. Retail sales (Tuesday) are expected to increase +0.1% MoM (current). This would be taken as a positive by the RBA; it would suggest a continued sideways trend in consumption. More weight rests on CPI (Wednesday). The February print covers a larger portion of the quarterly basket and will shed more light on services CPI. Education adds upside risk, travel adds uncertainty either way.

Lastly, the ANZ Survey (Thursday) will provide the Reserve Bank of New Zealand an early insight into the progress of services inflation and what impact Cyclone Gabrielle had.

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.