Fed to Cut, Pause or Hike - Inflation Data Key

Selling on pause?

Selling in bank stocks continued Tuesday as Asian markets fell as the SVB fallout failed to end with an effective bailout and reassurances from the White House. After suffering heavy losses on Monday, European equity markets tried to make gains in early trading after a broad selloff in Asia overnight. We saw a sluggish start in mainland Europe, but the major bourses were up a bit, but London held losses in the first hour of trading on Tuesday. US stock markets were mixed yesterday with the Nasdaq actually eking out a gain of almost half a percent as growth/tech picked up some bid on lower rates. Treasury rates tumbled yesterday and have only seen very mild bounces off their lows – once in a generation type moves in bond markets will have left many offside so we could see some funds stressed. Futures in the US are firmer this morning as investors look to turn this around – is there more fear today than on Friday or Monday? That's hard to say – sometimes these things have a habit of creating a momentum all of their own.

US banks hit

The KRE regional banks ETF tumbled more than 12% on Monday but has risen almost 4% in the after-hours market. First Republic dropped 62% but has popped 14% in extended trading as investors try to figure out if there really is any deposit flight risk. The KBW Nasdaq bank index declined almost 12%. Big banks were also hit – Wells Fargo –7%, Bank of America –6%, with JPM and GS taking less of a hit but still falling. The point is the Fed and co have effectively backstopped every deposit so I don’t see what risk is left now except in serious headwinds to earnings as the cost of deposits will rise and regulation will surely tighten.

International fallout

ECB policymaker Yannis Stournaras: "We don't see SVB having an impact on Eurozone banks or the Greek ones.” Not directly anyway. The Bank of Japan also said the direct exposure of Japanese banks to SVB was limited. Nevertheless, European bank shares and then Japanese banks have fallen sharply. Credit Suisse fell another 4% as it identified ‘material weaknesses’ in its financial reporting controls – never rains but it pours for CS. Banks in London were mainly lower again with HSBC and StanChart both off by more than 1% in early trade.

Fed to cut?

Could the Fed cut rates at its March meeting? Markets have repriced terminal rates aggressively in the wake of SVB’s collapse and subsequent roiling of financial stocks. “In reaction to looming financial stability risks, we now expect the Fed to cut rates,” Nomura economists wrote Monday in a note. Barclays, Goldman Sachs and NatWest have called for the Fed to pause rate hikes. If the Fed even pauses, let alone cuts, it’s inflation-fighting reputation will be in tatters. Market pricing is at evens for 25bps or a pause. We saw how the Bank of England was able to deliver emergency stimulus to prevent financial instability without disrupting its longer term monetary policy goals.

Inflation

A lot will depend on today’s inflation data from the US. It’s not clear whether the Fed will pause or not – they have a lot to do in tackling inflation still, but financial stability can often trump any other consideration as this can bleed into the wider markets and then onto Main St. Headline consumer prices are seen +0.4% month-on-month in February, a slight slowing from the +0.5% in January; whilst the annual rate of headline inflation is expected to ease back to 6.0% from 6.4%. Core CPI is seen rising+0.4% month-on-month in February, matching the January pace, +5.5% year-on-year.