Outlook: After the IFO today, this week brings Case Shiller tomorrow, GfK on Wednesday, a bunch of European CPI’s on Thursday, and the rest plus the eurozone CPI on Friday. Friday also brings German retail sales and US personal income and spending with the inflation that implies.

It’s not clear that data is going to rule the waves this week because nerves are frayed and probably fraying further as we wait for more shoes to drop—meaning more banks to disclose problems and maybe even fail. This is looking increasingly like a self-fulfilling prophecy. Conditions are calm at the moment but consider that the sale of Silicon Valley didn’t get done until the middle of last night and at a huge cost to the government, and never mind that the FDIC can just hike its fees.

Central banks are running full speed ahead to prevent the sense of a global crisis, but everyone wonders if a crisis mentality is not inevitable anyway. The Fed is mulling over whether to expand the emergency lending program instead of offering it upfront before the dirt hits the fan. We get comments from regional Feds all this week, but have to wait until after the PCE on Friday to hear from NY Fed Williams. Other Fed officials will testify before Congressional committees about the banking crisis. 

Even if an actual crisis is averted, a credit crunch is clearly loaming. It was looming back when the central banks announced giant hikes to come, but somehow we all missed the point that the banks might not be equipped to handle it. This was, apparently, misplaced confidence. The articles about central bank “blundering” don’t help, even if they are not entirely accurate. After all, announcing emergency measures can bring about the emergency.

Bloomberg has a scary piece this morning about how when the yield curve unbends—becomes less inverted—that’s when to start worrying. “Over the last several days, the 2-10 portion of the yield curve started steepening again. It's still deeply inverted, but it's jumped around 80 basis points since early March. But just because a deepening inversion of the curve is ominous doesn't mean the opposite is comforting. The direction has been reversing because short term rates (the 2s part) have been plunging, on expectations that the Fed is now done hiking, and will be cutting rates in short order.

“In fact, while everyone talks about the inversion as a recession signal… it's the un-inversion that really precedes each recession. Going back 40 years, each official declared recession was preceded by a sharp re-steepening of the curve, as investors raced to price in cuts to the short-term rate before the downturn.”

Well, maybe. The press and pundit world enjoy making dire predictions to shock and dismay while not always having the best logic or charts. All the same, as we wrote last week, we are starting to agree with the rate-cut forecasters that the Fed has already overtightened and will be dialing it back later this year. We can’t expect anything on rates until after the PCE inflation data (March 31) because the Fed has to keep up the story that inflation is the number one priority and financial market stability is just something it keeps an eye on. Were the Fed to admit the banking crisis might flare up again, it would be to admit the 25 bp hike was a mistake, and yet, it has to take non-rate action to deal with banking.

Reuters reports “At the heart of the U.S. problem remains depositor flight from smaller banks toward their bigger and better regulated rivals - and to money market funds, which have seen an inflow of more than $300 billion in the past month to a record $5.1 trillion. Deposits at small banks fell by $120 billion in the week to March 15, while borrowing jumped $253 billion. Many analysts now see the only viable solution as either big rises in deposit rates at smaller banks - where deposit rates lagged sharp Fed rate rises before the crisis hit - or a severe cutback on lending that could seed a credit crunch in the wider economy, or both.”

On maybe all this is just fear-mongering. The fate of the regional banks is not something the Atlanta Fed factors into its GDPNow estimate, the same 3.2% last Friday as the week before. We get a fresh update this coming Friday.

Longer run, there is an idea (from the FT) that instead of guaranteeing all bank deposits everywhere, the federal agencies should rush the digital dollar out the door so that everyone has his deposits at the Fed. This is a whole lot more complicated than the proponents like to accept, including who is going to invent the software and whether the public is willing to trust software companies more than banks. Given our experiences with the utterly opaque and non-responsive Microsoft, the answer is “no.”

Forecast: “First you say you will, but then you won’t.” So goes the lyrics of the old song. We have a 50-50 probability of an ongoing banking crisis. After the sale of Silicon Valley overnight, the 50-50 shifted to 60-40, but the fact remains that the government misjudged its ability to auction it off at a lesser cost. More bad things may be coming down the pike and at any moment we expect the conspiracy theory gang to start suspecting the Fed/Treasury/FDIC of concealing problems. Even if no other bank suffers problems and has to be rescued (or closed), the prospect of a credit crunch is very real. The bottom line is a non-zero probability of a shift in sentiment to risk aversion. It’s not yet clear that this favors the dollar, which is weird.

Tidbit: This coming Friday we get the PCE inflation data for Feb, expected at 5.1% from 5.4% in Jan but core the same 4.7%.

Last Friday morning we got the “underlying inflation gauge” (UIG) from the NY Fed. The full data set shows a drop by 0.3% to 4.8% in Feb. The "prices-only" version also falls by 0.3% m/m to 3.9%. The year-over-year is a drop of 0.4% to 6%.

“For February 2023, trend CPI inflation is estimated to be in the 3.9% to 4.8% range, a similar range compared to January, with a 0.3 percentage point decrease of both its lower and upper bounds.” As the chart shows, inflation in on a downward trajectory but still too high, not least in the context of the Fed’s 2% target.

Earlier this year there was talk of the Fed modifying the target, but the net result was a negative—the Fed can’t raise the target without doing irreparable harm to its reputation and also being accused of giving in to political interference.


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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