Marketmind: Central banks try to see through stress
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[March 23, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Even with a nod to greater banking stress, the major central banks all
seem determined to tighten the monetary screw another notch.
After the Federal Reserve settled on another quarter point rate rise
late Wednesday, the Swiss National Bank - in the eye of its own domestic
banking storm - followed suit on Thursday with a half-point hike to
1.5%. Norway's central bank raised rates by 25 bps.
And after a disturbing return to double digit inflation in the UK last
month, the Bank of England is now almost certain to lift rates by
another quarter point to 4.25% later on Thursday.
If these monetary policymakers felt higher interest rates were the main
cause of this month's banking shock, or that the fallout from it was
truly systemic and economically damaging, the decision to push ahead
with the hikes would seem perverse.
That they have pushed ahead suggests some confidence perhaps that the
financial firestorm is contained, unlike inflation. Whether that's down
to over focus on the rear-view mirror remains to be seen and what may be
coming down the pike best explains how markets are trying to react to
the latest policy twists.
Even though the Fed indicated one more rate rise may still be in the
works and no rate cuts are likely this year, markets are doubting that
stance yet again.
With Treasury Secretary Janet Yellen's pushback against suggestions of a
blanket insurance of all U.S. banking deposits unnerving investors again
after the Fed decision, few believe the financial stress has fully
dissipated. And no one is certain yet how it will hit lending and the
wider economy.
So markets have read the Fed move as a "dovish hike", preferring to
focus on aspects of the decision, such as the removal of wording in the
statement on "ongoing" rate hikes.
"Our view is that the Fed is at or near the end of the hiking cycle,"
PIMCO economists Tiffany Wilding and Allison Boxer told clients on
Thursday, stressing that small U.S. regional banks are key in providing
credit for small businesses that account for about 50% of overall U.S.
employment.
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An eagle tops the U.S. Federal Reserve
building's facade in Washington, July 31, 2013. REUTERS/Jonathan
Ernst/File Photo
After wild swings in rate futures markets and short-term Treasury
yields over the past month, the former now sees a 50% chance of
another quarter point Fed hike in May - but, facing down Fed
guidance, also more than half a point of cuts by year end.
Two-year Treasury yields settled just under 4% early on Thursday -
almost a full point below the new Fed funds rate target - and equity
and bond market volatility gauges have ebbed somewhat.
Even though stock markets swooned after the Yellen comments on
Wednesday, S&P500 futures were back up smartly ahead of Thursday's
open. European bourses and banking stocks were only a touch lower in
the face of the latest European rate rises.
The dollar hit its lowest since early February but regained its
footing ahead of the U.S. open and BoE decision.
Key developments that may provide direction to U.S. markets later on
Thursday:
* U.S. weekly jobless claims, Feb new home sales, Kansas City Fed's
March business survey, Chicago Fed's Feb activity index, U.S. Q4
current account
* Bank of England policy decision
* European Central Bank chief economist Philip Lane and ECB
policymakers Klaus Knot and Robert Holzman all speak;
* U.S. Treasury auctions 10-year inflation-protected securities
* U.S. corporate earnings: General Mills, Darden Restaurants,
Factset Research, Accenture
* European Union summit in Brussels
(By Mike Dolan, editing by Jane Merriman mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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