Markets to Watch This Week: Yields Sink Ahead of US CPI

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

Market Moves Over the Past Week

Last week was hectic. Yields sunk across G10 as the US labour market update and Silicon Valley Bank (SVB) bankruptcy disappointed markets. The US 2Y was the biggest loser (-27bp), with the 10Y close behind.

In FX, safe havens like CHF (+1.7%) benefitted while risk-sensitive currencies like AUD (-2.8%), SEK (-2.3%) and NOK (-2.3%) took the brunt of the impact (Charts 1, 2 and 3).

Friday’s US labour update fell short of expectations. While February job growth was much higher than expected, and twice as fast as before the pandemic, markets latched onto a weaker-than-expected unemployment rate and average hourly earnings.

Also on Friday, the FDIC placed SVB under receivership after a run on its deposits. Depositors’ concerns over losses triggered the run. SVB lending was concentrated in the tech sector, and capital flows to the sector have dried up since the Fed started raising rates. As a result, SVB lost deposits, and the quality of its loan book came under scrutiny. In addition, a large share of SVB deposits was above the FDIC insurance limit of $250,000 so they were more likely to leave the bank if doubts over its solvency arose.

Markets have liked the SVB rescue package. Essentially, all deposits are now insured, and mark-to-market losses on securities have been shifted to the Fed. Stocks have bounced, and the dollar is weaker. We do not see risks to the broader banking system, but trouble could be brewing in the nonbank sector.

Federal Reserve (Fed) expectations shifted to a 25bp hike, down from 50bp, after the SVB and NFP events. The market is then pricing one more 25bps for a peak Fed of 5.25% before they start easing in the second half of 2023. The market appears to think that though a bank crisis has been averted, there has been enough of a scare and potential slowdown in credit growth that the Fed will ignore other inflationary pressures to end its easing cycle soon.

The Reserve Bank of Australia hiked the policy rate by 25bp to 3.6% and dovishly revised forward guidance, as we had expected. We continue to expect a 25bp hike in April, though markets are only pricing 8bps over the next two meetings.

Meanwhile, the Bank of Canada was relatively tame. It kept the policy rate at 4.5% and downplayed labour market tightness.

What to Watch

Turning to the week ahead, markets will concentrate on US CPI (14 March), the UK labour market update (14 March) and Spring Budget (15 March), and European Central Bank (ECB; 16 March).

The big event for the US will be CPI on Tuesday. Consensus expects 40bp for core MoM, and Dominique agrees. Watch for signs that used car prices are troughing, following the Q4 trough in Manheim auction prices.

On Tuesday in the UK, the market is looking for the unemployment rate to rise 3.8%. Even a miss would be roughly consistent with the BoE’s very flat February MPR expectation. Wage growth will most likely prove the more important release, with eyes turned to the private sector; risks point to the upside.

The Spring Statement is on Wednesday. It is expected to show a smaller deficit than previously guided. Further-out, however, the picture may be bleak, and the UK’s Energy Price Guarantee could well be kept at £2,500 post April (currently scheduled to rise to £3,500).

The ECB updates its policy and forecasts on Thursday. That almost certainly means a 50bp hike and guidance of more to come. Henry expects 50bp in March and May. The real risk to the dovish side is that President Christine Lagarde fails to deliver the hawkish tone the market is gunning for. On the face of it they are still in ‘data-dependent’, ‘no-forward-guidance’ mode. Higher core HICP, GDP and wage growth forecasts should give them reason to sound more hawkish, but Lagarde has a good record of underdelivering.

Watch Andrew and Dominique discuss the SVB bankruptcy and what caused it, Powell’s testimony to Congress, the Fed’s data-dependent approach, Dom’s current view of CPI and the rest of her views for the upcoming week!

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.