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Summary

• After slowing through most of 2022, there are signs that Swiss economic growth is in the process of bottoming out. Sentiment surveys improved at the start of this year, while the growth outlook for the Eurozone—Switzerland's main export partner—has also become more constructive. We now no longer forecast the Swiss economy to enter recession in 2023.
• There has been a renewed uptick in Swiss inflation in early 2023, including core inflation measures. This has prompted SNB President Jordan to say monetary policy is still too loose, and that further tightening is likely. Against this backdrop, we not only see a 50 basis point hike from the Swiss National Bank (SNB) in March, but also another 25 basis point hike in June, which would see a peak policy rate of 1.75%.
• We forecast SNB rate hikes to lag those of the European Central Bank, and also fall short of market-implied pricing. Thus, we view our more hawkish outlook for SNB monetary policy as consistent with moderate franc weakness versus the euro.

Swiss Growth Stabilizing in Early 2023

The Swiss economy slowed through most of last year, but as we turn the corner in 2023 there are signs growth is bottoming out and prospects for economic activity are improving. The low point (or slow point) for Swiss growth was arguably Q4-2022, when GDP was flat for the quarter on a sequential basis, but growth was steady at 0.8% year-over-year. The details within the Q4 GDP report were mixed. Domestic spending showed moderate gains, including a 0.3% quarter-over-quarter gain in consumer spending and a 1.0% gain in investment spending, but overall economic growth was held back by a 2.0% drop in exports.

There are reasons, however, to expect improving Swiss activity as 2023 progresses. As energy prices have receded, the outlook for the Eurozone has improved. Strengthening economic prospects for the Eurozone are a very important development for Switzerland, given the importance of the Eurozone as a trading partner, with some 38% of merchandise exports directed to its Eurozone neighbors. The closely followed KOF leading indicator has begun to reflect that improving outlook, rising to 100.0 in January from a recent low of 89.3 in November. Swiss consumer confidence (released at a quarterly frequency) has also improved, rising to -30.2 in Q1 from -46.5 in Q4. Only the manufacturing PMI has failed to show any meaningful improvement, printing at 48.9 in February. That said, considering a more resilient outlook for the Eurozone economy and improving confidence surveys locally, we see a stronger Swiss growth outlook for 2023 than previously. We forecast the Swiss economy to grow by 0.3% in 2023—modest, but still better than the 0.1% gain we forecast a month ago. While the growth outlook revision is modest, we also no longer forecast the Swiss economy to fall into recession this year. Lifting our recession forecast is especially notable, as we still believe the Eurozone and other European economies could experience a short-lived contraction in 2023.

Swiss Inflation Ticking Higher Again

In addition to signs of stabilizing growth, the early part of this year has seen a renewed uptick in Swiss inflation. Headline CPI inflation quickened to 3.4% year-over-year in February, up from a recent low of 2.8% in December. Higher prices for airfares, package holidays, rents and gasoline were reason behind the acceleration. Importantly however, there have also been signs of broadening price pressures. Core CPI inflation as published by the Statistics Office firmed to 2.4% in February. Meanwhile, the trimmed mean CPI measure calculated and published by the Swiss National Bank (SNB) firmed to 2.2% in January, the fastest pace since 1993.

Given this renewed, albeit modest, rise in inflation, the Swiss National Bank has signaled the need for further monetary policy action. In an early March speech, SNB President Jordan said the “SNB’s monetary policy is still too loose to return inflation back to price stability in the medium term”, adding the central bank “cannot exclude that we have to tighten further.” Likely referring to the rise in core inflation measures, Jordan said it was not always possible to avoid second and third round effects in terms of price increases. Finally, Jordan said that in addition to raising interest rates, the SNB could also sell foreign exchange (i.e. buy the Swiss franc) as a means of containing inflation.

Given higher Swiss inflation, the guidance from the Swiss National Bank, and our outlook for further rate hikes from the European Central Bank, we expect the Swiss National Bank to raise interest rates by more than previously forecast. At its March meeting, we expect the SNB to raise its policy rate 50 basis points to 1.50%. We now also see a further 25 basis point increase in the policy rate at the June meeting, which would see the SNB Policy Rate peak at 1.75% for the current cycle. While the pace of rate hikes from the SNB is expected to lag those from the ECB, we view that as appropriate considering the scope of the inflation problem the Swiss central bank faces is far less pronounced than that faced by the ECB. We also note that our forecast for a peak SNB policy rate of 1.75% also falls short of market-implied pricing, which sees a peak policy rate closer to 1.94%. Thus, we still view our more hawkish outlook for SNB monetary policy as consistent with moderate franc weakness versus the euro, given that we expect SNB hikes to lag both those of the ECB as well as hikes implied by market pricing.

• Headline and "core" ex-food and energy CPI both lower, at 6% and 5.5%
• Details firmer: price pressures broadened, and Powell’s preferred measure ticked higher
• Firm inflation print confronts gathering concerns over financial instability as the Fed draws closer to ending the hiking cycle

February’s inflation report came slightly above consensus expectations, with headline CPI growth ticking lower to 6.5% year-over-year. Food inflation at 9.5% was still elevated but has also continued to moderate after peaking in August 2022. Energy CPI growth slowed to 5.2% year over year, the slowest pace in two years, thanks to declines in fuel oil and utility gas prices. Excluding those more volatile components, “core” inflation slowed to 5.5% year-over-year. The monthly increase however, reaccelerated to 0.5% from January on a seasonally adjusted basis again with 70% of the gain driven by an increase in rent costs. Offsetting some of that strength was weakness in used cars and medical services, both of which saw prices decline again in February.

Details behind the CPI prints were firmer. Based on our diffusion measure, the breadth of inflation pressure in the U.S. widened in early 2023 after improving through much of last year. Powell’s preferred inflation gauge – core services ex-rent also grew at a faster 0.5% monthly pace, matching the increase in core CPI. Moving forward, the fact that most of the near-term strength in monthly CPI still reflects past increases in market rents suggests core readings should continue to come down. BLS estimated that the CPI rent measure lags market observed rents by roughly 4 quarters – yearly growth in those market rent measures has already peaked in February 2022.

Strong labour market outturns since the beginning of 2023, alongside elevated wage gains and renewed strength in consumer spending have all been adding upward pressure to the outlook for inflation through this year and next. But much of the impact from monetary tightening to-date has just started to surface – the collapse of three U.S. regional banks over the weekend that rattled bond markets is a prime example. Market pricing after this morning’s report is leaning toward a 25 bp hike for next week’s Fed’s meeting.

On Friday, March 10, the 16th largest US bank suddenly burst. The bankruptcy became the second largest in history among American commercial banks. In this article, we look at what happened and how it could affect all of us.

History of the bank

Forty years ago (in 1983), a bank appeared in California. It decided to serve mainly big-headed guys who created new promising businesses and raised much money from venture investors.

The business occurred in Silicon Valley, and the bank was called Silicon Valley Bank (SVB). This business model was highly successful as, for the next few decades, startups rowed money literally with a shovel and put this money in the bank.

In 2020-2021, the technology industry in the United States experienced another boom: under the slogan of combating covid, the Federal Reserve threw unprecedentedly huge amounts of money into the financial system. A significant part of it went precisely to fast-growing tech companies. The Nasdaq-100 index has almost doubled in these two years, and startups raced to conduct initial public offerings (IPOs) and raise money directly from venture capital investors on an industrial scale.

As a result, the business of SVB, which serves all these tech startups, also grew. Its client deposits more than tripled over that period (as did the bank's stock price) to reach roughly $200 billion by early 2022, making Silicon Valley Bank the 16th largest bank in the US (and second in California).

Any bank, of course, is happy when they bring a lot of money to it. But with big money comes a big responsibility: you have to decide where to invest them so that they earn a nice profit in the pocket of the owners of this bank.

What to do with the money?

The classic business model of any bank is to collect more deposits at a lower rate and distribute this money to reliable companies in the form of loans at a higher rate. In the case of Silicon Valley Bank, this was problematic. Most startups from Silicon Valley do not look much like "safe businesses" with stable cash flows. Moreover, these startups had enough money. In 2020–2021, investors lined up to fill such companies with cash.

Therefore, SVB decided that the money would be logical to invest in the stock market. Of course, they did not go to buy Tesla shares with leverage - that would be too much. However, they decided to buy reliable bonds from the US government (US Treasuries) or mortgage-backed debt securities with suitable collateral in the form of real estate.

And now, let's remember what yields gave reliable dollar bonds during that period:

Yield on US government bonds as a percentage (vertical scale) depending on their maturity (horizontal scale) in 2020-2021

The US Federal Reserve then drowned the interest rate to almost zero (to save the economy from covid horrors), so placing money in reliable US Treasuries on the horizon of a year or two could bring about zero profit.

So, the bankers from Silicon Valley Bank thought that you wouldn't earn much by investing at 0%. The solution was simple - the bankers invested most of the capital into longer bonds with a 5-10 years maturity, which at that time had a yield slightly above 1.5% per annum.

How rising rates killed bonds

Any financier knows that when you buy long bonds, you take on the risk of rising interest rates.

Why is this happening? Suppose a company issues a $100 value bond with a 1% coupon (the market level at the time), maturing in 50 years, and you buy it. A year later, the level of rates increased, and now these companies are lent at 2% per annum.

Can you sell your bond to someone for $100? Of course not. But for $50, such a bond will be bought from you without any problem. After all, a coupon of $1 per year will yield 2% on the “current market value” of the paper at $50.

This happened in 2022 when the US Federal Reserve raised the interest rate from about zero to almost 5%.

As a result, the bond portfolio of Silicon Valley Bank showed a drawdown from 9 to 17%, which already, as it were, exceeded the size of the bank’s capital (the difference between existing assets and liabilities).

Investors caused the bankruptcy

It is interesting that, in itself, this loss has yet to be fatal for the bank. Accounting standards allow losses to be recognized after a while. And there is even logic in this: because of the rate increase, the bonds sink not forever but temporarily. If you hold them until maturity, they will recover over time, and everything will be ok.

But this logic only works if the bank has "the ability to wait." And here is the time to remember that most of the deposits in Silicon Valley Bank can be withdrawn by the customers at any time.

The systematic outflow of such deposits from the bank began in mid-2022. The tech industry began to decline, and attracting new investors' money was no longer easy.

But for SVB, this felt like a gradual activation of a time bomb. The faster the outflow of deposits became, the clearer that simply “sitting out to maturity” in these bonds would not work. Sooner or later, they would have to be sold at a loss to receive funds to return money to customers.

This is what happened. In 2023 the bank had to start selling these long bonds at a loss, and then it suddenly became very clear to everyone that there would not be enough money for everyone. Venture start-ups from Silicon Valley began to call each other and advise urgently to remove all the money from Silicon Valley Bank.

The concentration of SVB in one sector played a cruel joke on the bank: if they had many small retail clients, they might have passed. But since IT startups in the Valley communicate very closely, there was a full run on the bank when everyone tried to get their money out early (because the last one in this line may not get anything).

As a logical result - on March 10, banking regulators in the United States began, de facto, the bankruptcy procedure for SVB.

What is next?

The collapse of the SVB has undermined investor confidence in the US banking sector. Clients began withdrawing money from other banks, fearing a repetition of the situation, and already on Monday, some banks lost from 20% to 80% of their share price.

Such behavior of investors can provoke more than one bankruptcy — the following contenders: the American First Republic Bank, Pacific Westerns, and Western Alliance.

During the weekends, the US officials clarified that the situation is manageable and promised "cheap" loans for the banking sector. As a result, the US dollar declined as cheap loans involved running a "printing press". Moreover, markets are now pricing the Federal Reserve to leave the rate at the same level on March 22, which could send the US dollar even deeper.

Many investors turned to Bitcoin, which rose 14% on Monday as US stock indices fell. This trend could continue if the banking story continues and the Fed keeps stimulating the economy with bailout money.

Conclusion

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Daily Pivots: (S1) 132.02; (P) 133.53; (R1) 134.76; More...

USD/JPY's recovery from 132.27 extends higher today and with break of 134.68 minor resistance, intraday bias is turned neutral first. Fall from 137.90 could still extend lower and break of 132.27 will target 61.8% retracement of 127.20 to 137.90 at 131.28. Break of 137.90 resistance is needed to confirm resumption of the rally from 127.20, or risk will stay mildly on the downside.

In the bigger picture, rebound from 127.20 should have completed at 137.90 as a corrective move, with strong break of 55 day EMA. The down trend from 151.93 (2022 high) is not over yet. Break of 127.20 will resume this down trend and target 61.8% projection of 151.93 to 127.20 from 137.90 at 122.61. This will now be the favored case as long as 137.90 resistance holds.

Daily Pivots: (S1) 0.9057; (P) 0.9133; (R1) 0.9194; More...

Intraday bias in USD/CHF remains on the downside for the moment. Decisive break of 0.9058 low will resume larger down trend from 1.0146. Next target is 61.8% projection of 1.0146 to 0.9058 from 0.9439 at 0.8767. On the upside, above 0.9218 minor resistance will turn intraday bias neutral and bring consolidations first, before staging another fall.

In the bigger picture, fall from 1.1046 (2022 high) is should still be in progress with 38.2% retracement of 1.0146 to 0.9058 at 0.9474 intact. Rejection by 55 week EMA is also a medium term bearish sign. Break of 0.9058 will resume such decline towards 0.8756 support (2021 low). But overall, such fall is still as a leg in the long term range pattern from 1.0342 (2016 high). So, downside should be contained by 0.8756 to bring reversal. For now, this will remain the favored case as long as 0.9439 resistance holds.

Daily Pivots: (S1) 1.2087; (P) 1.2143; (R1) 1.2240; More...

Intraday bias in GBP/USD stays on the upside at this point. Rise from 1.1801 is still in progress. As noted before, the corrective pattern from 1.2445 should have completed with three waves to 1.1801. Further rally should be seen to retest 1.2445/6 resistance zone next. On the downside, below 1.2045 minor support will delay the bullish case and turn intraday bias neutral first.

In the bigger picture, price action from 1.2445 are seen as a corrective pattern to rise from 1.0351 medium term bottom (2022 low). Resumption is expected as a later stage and firm break of 1.2446 will target 61.8% retracement of 1.4248 (2021 high) to 1.0351 at 1.2759. This will remain the favored case as long as 38.2% retracement of 1.0351 to 1.2445 at 1.1645 holds.

The Consumer Price Index increased 0.4% month-on-month (m/m) in February, in line with the consensus forecast. The 12-month change continued to edge lower, falling to 6.0% (down from 6.4% the month prior).

Energy prices fell 0.6% m/m, as energy services (-1.7% m/m) were lower on the month – largely due to a sharp 8.0% m/m decline in utility gas service. Meanwhile, gasoline prices edged higher by 1.0% m/m. Food prices moderated slightly from January, rising 0.4% m/m but remain 10.2% higher on a year-over-year (y/y) basis.

Core inflation (excludes food & energy) was up 0.5% m/m – a slight acceleration from January's gain of 0.4% m/m and a tick higher than the consensus forecast. Compared to last February, core inflation is up 5.5% - a tenth of a percentage point lower than the 5.6% recorded the month prior.

Price growth across services (+0.6% m/m) accelerated on the month, as shelter costs rose 0.8% m/m thanks to strong gains from rent of primary residence (+0.8% m/m) and owners' equivalent rent (+0.7% m/m). Lodging away from home (+2.3% m/m) also accelerated on the month.

• Stripping out shelter and medical services, the cyclical service component (aka "super" core) rose 0.8% m/m – an acceleration from the 0.65% gain in January.

Core goods prices were flat in February, largely owing to another sharp decline in used vehicle prices (-2.8% m/m). However, most other goods categories continued to register sizeable gains last month, with home furnishings (+0.8% m/m), apparel (+0.8% m/m), new vehicle prices (+0.2% m/m) and recreation commodities (+0.4% m/m) all meeting or exceeding January's gains.

Key Implications

Inflationary pressures refuse to go away quietly. The three-month annualized change on core rose to 5.2% in February, marking the second consecutive month of acceleration. Over the near-term, it is unlikely that we see much reprieve. Much of the disinflationary force on goods prices has been the result of falling used vehicle prices, but with the wholesale Manheim UVPI having shown steady gains in recent months, it's unlikely that we see further price declines in the months ahead. Unless we see more disinflationary pressure from other categories, goods prices will again start making positive contributions to core inflation. Making matters worse, the cyclical component on services continues to accelerate and will require some cooling in the labor market before we see these pressures ease. Based on last Friday's employment numbers, this is still a way out.

The recent flow of economic data continues to point to an economy that can certainly support further increases in interest rates. However, the collapse of two regional banks in just the last few days has exposed a vulnerability across a small sub-segment of the banking sector. As a result, market pricing for next week's FOMC decision has narrowed significantly, with a 25 basis-point hike only 75% priced. Prior to the collapse of SVB, markets had attached a similar probability to a 50-bps hike! Provided there's no further contagion, and financial market confidence is restored over the coming week, we suspect the FOMC will likely push ahead with another 25-bps hike. That said, it has become abundantly clear that the Fed will need to balance both the economic and financial stability implications with each further increase in the policy rate.

Daily Pivots: (S1) 1.0672; (P) 1.0710; (R1) 1.0771; More...

EUR/USD's rally from 1.0523 is still in progress and intraday bias stays on the upside. As noted before, corrective decline from 1.1032 should have completed at 1.5023, ahead of 1.0482 key support. Break of 1.0803 resistance will bring retest of 1.1032 high next. On the downside, below 1.0649 minor support will turn intraday bias neutral. But risk will stay on the upside as long as 1.0523 support holds, in case of retreat.

In the bigger picture, as long as 1.0482 support holds, rise from 0.9534 (2022 low) should continue to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. However, sustained break of 1.0482 will bring deeper fall to 61.8% retracement of 0.9534 to 1.1032 at 1.0106, even as a corrective pull back.

Dollar weakened slightly in early US session, following the release of economic data which showed that consumer inflation slowed in February to the level as expected. The absence of an upside surprise in the CPI readings means that Fed should be in a more comfortable position to address uncertainties over the banking system. This could make a 50bps rate hike look much less necessary to policymakers, while the markets have already priced it out. US futures rose after the release, indicating a potential rebound. However, Treasury yields remained steady.

In the currency markets, Canadian Dollar is the strongest performer today so far, followed by New Zealand and Australian Dollars. Yen was the worst performer, reversing all gains made against all currencies except the greenback. Euro and Dollar were the next weakest performers. Euro, in particular, is lacking some firepower as the markets question whether ECB will deliver on its promise of a 50 basis points rate hike this Thursday.

Technically, a major focus is still on whether Dollar would break through near term support levels against commodity currencies, to alight with the near term bearish outlook against others. The levels to watch include 0.6694 resistance in AUD/USD, 0.6725 resistance in NZD/USD, and 1.3664 support in USD/CAD. Decisive break of these levels is need to confirm underlying weakness in Dollar.

In Europe, at the time of writing, FTSE is up 0.55%. DAX is up 1.63%. CAC is up 1.42%. Germany 10-year yield is up 0.1451 at 2.403. Earlier in Asia, Nikkei dropped -2.19%. Hong Kong HSI dropped -2.27%. China Shanghai SSE dropped -0.72%. Singapore Strait Times dropped -0.08%. Japan 10-year JGB yield dropped -0.0226 to 0.283.

US CPI slowed to 6.0% yoy in Feb, core CPI down to 5.5% yoy

US CPI slowed from 6.4% yoy to 6.0% yoy in February, matched expectations. That's also the lowest reading since September 2021. Core CPI (all items less food and energy) slowed slightly from 5.6% yoy to 5.5% yoy, matched expectations, and was the lowest since December 2021. Energy index rose 5.2% yoy while food index rose 9.5% yoy.

For the month, CPI rose 0.4% mom while core CPI rose 0.5% mom. Food index rose 0.4% mom and energy index decreased 0.6% mom.

UK payrolled employment rose 98k in Feb, unemployment rate unchanged at 3.7% in Jan

In February, UK payrolled employment rose 98k or 0.3% mom. Comparing to the same month a year ago, payrolled employment rose 1040k or 3.6% yoy. Median monthly pay rose 6.7% yoy. Claimant count dropped -11.2k versus expectation of -12.4k.

In the three month to January, unemployment rate was unchanged at 3.7%, better than expectation of a rise to 3.8%. Average earnings excluding bonus rose 6.5%, below expectation of 6.6%. Average earnings including bonus rose 5.7%, matched expectations.

Australia Westpac consumer sentiment unchanged at 78.5, second sub-80 read in a row

Australia Westpac Consumer Sentiment Index was unchanged at 78.5 in March, a second month of extremely weak reading, near historical lows. Areas of most concern remain inflation, interest rates, and the economy.

Westpac noted that there were only one month of sub-80 reading during the COVID pandemic and the global financial crisis period. Runs of sub-80 have only been seen during the recession during the 1980s and 1990s.

Regarding RBA policy, Westpac will wait after release of data on employment, inflation, spending, and confidence, before deciding to change the expectation of a 25bps hike in April. But Westpac maintained the forecast of another 25bps hike in May.

Australia NAB business confidence fell to -4, conditions down to 17

Australia NAB Business Confidence dropped sharply from 6 to -4 in February. Business Conditions dropped from 18 to 17. Looking at some details, trading conditions were unchanged at 27. Profitability conditions dropped from 18 to 14. Employment conditions rose from 11 to 12.

"Overall, the survey confirms the ongoing resilience of the economy through the first months of 2023, though we continue to expect a more material slowdown in demand later in the year when the full effect of rate rises has passed through," said NAB.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0672; (P) 1.0710; (R1) 1.0771; More...

EUR/USD's rally from 1.0523 is still in progress and intraday bias stays on the upside. As noted before, corrective decline from 1.1032 should have completed at 1.5023, ahead of 1.0482 key support. Break of 1.0803 resistance will bring retest of 1.1032 high next. On the downside, below 1.0649 minor support will turn intraday bias neutral. But risk will stay on the upside as long as 1.0523 support holds, in case of retreat.

In the bigger picture, as long as 1.0482 support holds, rise from 0.9534 (2022 low) should continue to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. However, sustained break of 1.0482 will bring deeper fall to 61.8% retracement of 0.9534 to 1.1032 at 1.0106, even as a corrective pull back.

Economic Indicators Update

US CPI slowed from 6.4% yoy to 6.0% yoy in February, matched expectations. That's also the lowest reading since September 2021. Core CPI (all items less food and energy) slowed slightly from 5.6% yoy to 5.5% yoy, matched expectations, and was the lowest since December 2021. Energy index rose 5.2% yoy while food index rose 9.5% yoy.

For the month, CPI rose 0.4% mom while core CPI rose 0.5% mom. Food index rose 0.4% mom and energy index decreased 0.6% mom.

Full CPI release here.