They Think It’s All Over
They Think It’s All Over
After an extremely fraught week which saw a top 30 bank having to be rescued and two of the major central banks raising interest rates by 25bp, a sense of nervous calm seemed to descend on the markets. The rescue of Credit Suisse went more smoothly than most envisaged. However, the fallout may be yet to come. The use of the instruments AT1, or CoCos, that the Swiss were using as a capital base has now been called into doubt. The Swiss regulator, FINMA, wrote down the value of them as part of the UBS takeover of Credit Suisse, which may yet raise issues for some of the larger British and European banks who have been using AT1 as tier-one capital and may now need to refinance, which could prove expensive in the current climate. In the words of the late Kenneth Wolstenholme, they think it’s all over, but the signs are still there that the final whistle on this particular banking crisis hasn’t been blown, and maybe, worse is to come in Europe.
Central Bank interest rate rises may be closer to being in extra time after both the Bank of England and the Federal Reserve moved them up by 25bp last week. The rate rises were discounted in the markets, and the respective currencies hardly moved. Of more interest was the ability of Jerome Powell to walk the tightrope between financial stability and monetary prudence, which he has done, with a bit of help from Janet Yellen along the way. The Bank of England and the Fed signal that we are approaching a pause in the tightening cycle. With several signs pointing to an impending slowdown in the US and the dampening effect on the economy that the crisis will have, it seems sensible for the Fed to pause for breath. Closer to home, however, with last week’s official figures showing that inflation is still running hot at 10.4% and retail sales holding up better than expected, the pause in the cycle may be premature.
The week ahead looks relatively quiet, with the key data releases left until Friday for release when like London Buses, they all come at once. The UK sees the release of the 4th quarter GDP, expected to show once again that we are bumping along a recessionary path, never quite in one and never quite out. The words and attitudes that central bank policymakers adopt this week will probably be of more importance and interest to the markets. There are scheduled speeches every day this week, with Andrew Bailey this afternoon, Christine Lagarde and Michael Barr ( Fed) being the pick of the bunch.
The release of preliminary March inflation data for the Eurozone is this week’s most important data point. The data is forecast to show the headline number retreating slightly, but the predicted rise in the core inflation number will be the number watch. Recently the ECB has been citing underlying price pressures to justify their hawkish stance. After hiking by 50bp recently, taking it more in line with the Fed, council members have been more restrained in their hawkish rhetoric. Still, any unpleasant upside surprise in the inflation data will make them more vocal again if the financial sector stabilises. The US also sees the release of the PCE deflator and, on Friday, the Michigan Consumer Sentiment and inflation expectations report. In the end, concerns over the durability of the financial system will remain paramount. Almost certainly, we will see a change in the tone from Fed spokespeople to reflect this and expect to hear more on the differentiation between monetary policy and financial stability. For the short term, currencies will be primarily driven by the perceived level of risk in a country’s banking sector. With this in mind, sterling and the Japanese yen could be the primary beneficiaries whilst the dollar and euro languish. Despite the shenanigans in the banking sector, the currency markets have remained mainly rangebound, which leads us to wonder whether this is the lull before the storm.
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