Risk appetite plunges. Market calls time on Fed rate hike cycle - much easier policy priced from June meeting; ECB hike for tonight pared down. NZD mixed despite warning from S&P on NZs massive current account deficit

Markets are in turmoil again, after a loss of confidence in Credit Suisse spilled over. Banking stocks are under pressure again, leading falls in equity markets, while credit spreads have widened significantly. Monetary policy tightening expectations have been pared back again with the market seeing the Fed needing to cut rates significantly within a few months. Bond yields have plunged, and the yen has significantly outperformed.  The USD is seeing some notable support as well, unlike earlier this week. The NZD is back below 0.62.

Fears of another global banking crisis have gripped the market, with focus on Credit Suisse overnight. One day after its auditor had identified “material weaknesses” in the bank’s financial reporting controls, the chair of its largest shareholder, the Saudi National Bank, was asked whether he was open to providing more capital to Credit Suisse if there was a call for additional funding to which the reply was “absolutely not”. This sparked a plunge in its share price, with spillover to the rest of the banking sector alongside a plunge in risk appetite. Credit Suisse appealed to the Swiss National Bank and the Swiss banking regulator for a public show of support to which there has been no response.

Credit Suisse is well capitalised, with a CET1 capital ratio of 14.1% at the end of last year and a liquidity coverage ratio of 144%. All that means little if there is a run on the bank and a large, systemically important bank at that. The Euro Stoxx 600 index fell nearly 3%, led by a 7% plunge in bank stocks. Interestingly, energy stocks have feared poorly as well, after a 6% plunge in crude oil prices, exacerbated by a wave of technical selling alongside supply-glut fears. Brent crude has fallen to a 15-month low, trading below USD72 a barrel overnight.

The S&P500 is currently down 1½%, led by a fall in financials and economically-sensitive sectors. Credit spreads have widened significantly, with US investment grade spreads up 16bps and high yield spreads up towards 50bps.

US economic data were soft, with PPI data showing no inflation in February, flat to weaker retail sales after the surge in January, the Empire manufacturing survey plunging to minus 24.6 and the NAHB housing market index higher but remaining historically low. Relative to expectations, the PPI data were much lower than the consensus, with the soft outturn and downward revisions seeing annual inflation for the core measure at 4.6% y/y, undershooting by a chunky 0.8 percentage points. Retail sales were slightly stronger than expected and included some upward revision to January. The focus on the fragility of the global banking sector continues to overshadow the data, but it is fair to say that the “totality” of the data, phrasing referred to by Powell, wouldn’t have justified upscaling the pace of rate hikes anyway.

The evolving banking crisis has left the market pondering the appropriateness of further Fed hikes from here with next week’s meeting priced at just +10bps now.  Fear about the outlook now sees the Bank cutting rates by June, with 100bps of easing priced from the assumed peak in May through the rest of 2023. The 2-year Treasury yield is currently down 36bps to 3.89%, after trading down to as low as 3.71%.  The curve has steepened, with the 10-year rate down “only” 23bps to 3.46%, after trading down to 3.38%.

The banking sector woes, which have now engulfed Europe, puts the ECB in a tough spot when it meets in less than 24 hours. Still, pricing for the meeting is at +29bps and, unlike the US, there is no chance of easier policy priced for 2023.

In currency markets, the yen has seen safe-haven flows, with USD/JPY down 1% on the day to below 133 and NZD/JPY down nearly 2% to just over 82. Unlike earlier in the week when the USD also came under pressure because of plunging US rates, the currency has also seen a safe-haven bid, with the DXY index up over 1%. The change in focus to European banking woes has weighed on the euro, with EUR/USD down 1.7% to 1.0550.

The NZD has trended lower overnight, pushing down below 0.62, with mixed trading on the crosses, outperforming the AUD, GBP and EUR, despite S&P’s warning yesterday after the ugly current account deficit. The ratings agency noted that the deficit was much wider than expected and the sovereign rating could come under pressure if the deficit is persistently weak.  The current account data showed a further significant lift in the deficit to 8.9% of GDP for last year, the worst outturn since the mid-1970s. We expect a further push higher, through 9% of GDP this year.

The domestic rates market showed some significant uplift in yields in response to global forces, which will be significantly reversed today.  But for the record, NZGBs were up 18-19bps across the curve, underperforming on a cross market basis and underperforming against swaps. The latter were up 10-13bps, apart from a chunkier 19bps lift in the 2-year rate to 5.22%.

Economic data over the next 24 hours will play second fiddle to the bigger global forces out there.  NZ Q4 GDP data are expected to show a modest contraction after the surprisingly strong 2.0% q/q gain in Q3.  Old news for sure, but a negative outturn changes the starting point calculus for any update to the RBNZ’s projections, which have factored in a gain of 0.7%. Australian labour market data are expected to be strong. The ECB meets tonight where, until recently, a 50bps hike was near-guaranteed but the banking system woes have seen pricing for the meeting drop to +29bps. The ECB will try to maintain a hawkish outlook in response to inflation pressures but will also need to recognise the current turmoil in financial markets which it will be monitoring closely.