On Friday, it was impossible for markets to decouple its reaction to the US payrolls from the developing story on Silicon Valley Bank. The US economy in February added an above-consensus 311 000 jobs. The unemployment rate rose from 3.4% to 3.6%, but at the same time participation rate improved from 62.4% to 62.5%. Average hourly earnings (AHE) were marginally softer at 0.2% M/M and 4.6% Y/Y). Even so, in times of market stability, these data probably wouldn’t have changed markets’ expectations between a 25 or 50 bps Fed rate hike on March 22. However, with financial stability issues from the SVB looming large, US yields nosedived for a second consecutive session. In a steepening move US yields again declined between 14.3 bps (30-y) and 28.4 bps (2-y). In the 10y sector, the decline was almost solely at the expense of lower real yields. US equities again lost between 1.07% (Dow) and 1.76% (Nasdaq). The Eurostoxx50 ceded 1.32%. The dollar remained in the defensive as markets still pondered how much room the Fed has left over to combat inflation. The US currency lost on a daily basis (EUR/USD close 1.0643, DXY 104.58), but finished well off the intraday lows. Moves in European bond/interest rate markets were less sharp. Still, the German yield curve also steepened with yields declining between 18 bps (2-y) and 12.1 bps.
During the weekend, the Fed and the Treasury took measures to ringfence the fall-out from the SVB collapse (and from other potential cases facing similar problems). In a statement, the Fed, the Treasury and the FDIC announced that it took measures to fully protected deposit holders from SVB and Signature Bank. The Fed also announced a new ‘Bank Term Funding Program’ that offers loans to banks under easier terms (collateral) and also relaxed (collateral) terms for lending through its discount window. Asian markets this morning show a mixed picture with some still facing follow-though losses from WS on Friday (Topix -1.51%). At the same time, China outperforms.
The US yield curve this morning continues its steepening move with the 2-y yield losing another 15 bps. Key question remains to what extent uncertainty on financial stability will change the trajectory of the Fed’s anti-inflation campaign. Markets now have downscaled expectations to a 25 bps hike later this month and 5.1% peak rate, compared to expectations for a Fed peak rate at 5.50/5.75% mid last week. Today, there are no important data on the calendar. The reaction of the Fed to the new financial stability issues is difficult to assess. Even so, the UK example in September last year, showed that this doesn’t automatically excludes further rate rises. At current levels, we have the impression that (more) than enough Fed tightening is priced out, especially if tomorrow’s US February CPI data would confirm persistence of (core) inflation. A rebound in US equity futures at least suggests markets see the weekend action from the Fed and the Treasury might go some way to address similar problems, if they were to occur. We don’t expect the developments in the US to change the ECB’s intention to raise the deposit rate by 50 bps on Thursday. The sharp loss of interest rate support at the short end of the curve keeps the dollar in the defensive. EUR/USD regained the 1.0695 intermediate resistance, with a next key reference seen at 1.0803 (14 Feb top). If the decline in ST US yields/scaling back of Fed tightening stops, the USD decline might gradually slow.
Germany has averted a postal strike after the country’s biggest postal group agreed to double-digit pay rises to compensate for decades-high inflation. The two-year deal covering 160 000 employees was agreed in last-minute negotiations and is the latest sign of how once supply-driven inflation has morphed into a domestic and demand-driven one. Wage negotiations in the euro zone has resulted to pay rises of 4.4% in 2022 and 4.8% this year, an ECB series showed. Chief economist Lane said this was higher than the level consistent with inflation returning to 2%.
Tyrowicz, the National Bank of Poland’s most hawkish policy member, called governor Glapinski’s call for rate cuts by the end of the year “irresponsible”. She referred to inflation being forecasted to only be at the (top of the) tolerance range in the third quarter of 2025. This long time frame and continued price stability risks should mute any talks about potential monetary easing, Tyrowicz said, adding that even if rates would be lifted to 7% is would probably not be enough to bring inflation back in a timely enough manner. She has consistently been outvoted in her call for higher rates. The Polish zloty in recent weeks appreciated to 4.67 but remains within the relatively narrow 4.65/4.80 trading range...