Markets remained volatile heading into the weekend, with large trading ranges for bonds and equities. In Germany, Deutsche Bank came under speculative selling pressure, which didn’t help market sentiment, although sentiment had recovered notably by the close. In the end, US equities showed modest gains for the session and, while US Treasury yields were lower on the day, they were well up from their lows. The USD was broadly stronger on Friday, and the NZD ended the week close to 0.62.
Deutsche Bank (DB) came under significant selling pressure on Friday night, with hedge funds seeing that bank as the next possible European banking casualty. The stock price was down almost 15% early in the trading session, which prompted a flurry of comments. German Chancellor Scholz tried to convey confidence in the bank, saying it had reorganised its business and is a very profitable bank. Some analysts called the selling pressure on DB as irrational while others also indicated they were not concerned about DB going the way of Credit Suisse. DB ended the day down 8.5%. The Euro Stoxx 600 index fell 1.4%, led by a 3.7% fall in bank stocks.
Sentiment around DB weighed early on US equities, but it wasn’t long before they trended higher through the rest of the session, with the S&P ending the day up 0.6%. There were no fresh concerns about the regional banks and early in the day Treasury Secretary Yellen convened a meeting of the Financial Stability Oversight Council, a panel that includes Fed Chair Powell and the head of the FDIC. After the market close, the Treasury released a post-meeting statement, noting that while some institutions have come under stress, the US banking system remains sound and resilient.
The release of the Fed’s weekly balance sheet showed banks borrowed $110b from the traditional discount window, less than the $153b demanded the previous week, a better sign for the US banking sector. It appeared that overnight borrowing had been transferred to the more generous new Bank Term Funding Programme, where the total rose to $54b from $12b the prior week.
In a separate report, US bank deposits fell by the most in nearly a year, dropping $98.4b in the week ended March 15 (the week SVB went under) to $17.5 trillion. Small-bank deposits fell by $120b, by far the biggest weekly drop on record in data dating back to 1970, highlighting the current stress on small banks as depositors shift money to larger banks or money market funds.
Global rates traded wide ranges again on Friday, with lows reached when concern about Deutsche Bank was at its peak. After falling as low as 3.28%, the 10-year Treasury yield ended the day down only 5bps at 3.38%. The 2-year rate fell to a fresh 6-month low of 3.55% before ending the day at 3.77%, down 7bps. Pricing for future Fed hikes continued to be pared back, with the next May meeting priced at just +6bps, before the chance of easier policy begins to be priced from the June meeting. This highlights the extent of fear around the banking sector turmoil and the risk of a decent reversal in direction of Fed monetary policy from the second half.
FOMC members began their round of post-FOMC meeting speeches and interviews. St Louis Fed President Bullard said that he raised his Fed Funds projection to 5.625% for 2023, consistent with three more rate hikes this year and putting him in a group of three members at that rate, but not as high as the most hawkish member who projected a fourth additional hike. Bullard said there could be a downside scenario (with a 20% probability) where financial stress gets worse, but that wasn’t his base case.
Richmond Fed President Barkin said that the case for raising rates last week was “pretty clear”, with inflation high and demand hadn’t seemed to come down. Atlanta Fed President Bostic noted that there was a lot of debate about whether to hike or not, but “there’s clear signs that the banking system is sound and resilient…and inflation is still too high”.
In currency markets, the USD was broadly stronger on Friday, with the DXY index closing the day up 0.6%. With attention on Deutsche Bank, the euro was the weakest of the key majors Friday night, falling from 1.0830 to 1.0760. The risk-off vibe drove the NZD back below 0.62 but it found some support just under that mark and ended the week near 0.62. The AUD followed a similar pattern and closed the week at 0.6645. For the week overall, the weak risk appetite backdrop weighed on the commodity currencies, with the NZD, AUD and CAD dragging the chain and the NZD down about 1% overall.
Economic data continue to play second fiddle to the bigger issues facing the market, but for the record, the NY Fed’s underlying US inflation gauge slowed to 4.75% in February from 5.1% in January, to reach the lowest rate since October 2021.
PMI data showed Euro area business activity growing faster than expected, driven by growth in the dominant services sector, with weaker growth for manufacturing – the services PMI rising to a ten-month high of 55.6, while the manufacturing PMI dropped to a four-month low of 47.1. Relative strength in services versus manufacturing was also a feature of the US and UK PMIs. There was no sign of the turmoil in the banking sector impacting on activity, although that should come in the face of tightening lending standards.
US durable goods orders were weaker than expected for both the headline and ex-transportation measures, down 1.0% m/m and flat respectively in February. UK retail sales volumes were much stronger than expected in February, rising 1.5% m/m.
The domestic rates market continued to get kicked around by offshore forces. NZGBs saw a steepening bias, with rates 8bps lower out to 5-years, the 10-year rate down 5bps and ultra-long rates showing even smaller falls. Swaps were 6-7bps lower across the curve, with 2-year swap down to a 6-week low of 4.87% and the 10-year rate down to 4.22%. Since the NZ close the net change in 3 and 10-year Australian bond futures has been small, suggesting little directional bias on the NZ open.
In the economic calendar for the week ahead, we’ll hear more from Fed speakers following the FOMC meeting last week. Khashari has already been out this morning saying that bank strains bring recession risk closer, and it was too soon to make any forecast about the next interest rate meeting in May.
Economic data continue to take the back seat to the larger financial market forces in play. We have more interest in developments in the US (and European) banking sector than the dataflow at present. In the week ahead, the FDIC will face scrutiny from lawmakers while the Fed’s weekly reports on its balance sheet and bank deposits and lending are now considered important releases.
Key economic releases will be US spending data and PCE deflators at the end of the week, China PMIs and Euro area CPI data. Domestically, the ANZ business outlook survey is the key release. The calendar starts off lightly, with Germany’s IFO survey tonight and a speech from BoE Governor Bailey.
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