The Credit Suisse liquidity stopgap helps restore some calm in the run-up to the ECB meeting

Markets

The Credit Suisse liquidity stopgap helped restore some calm in the run-up to the ECB meeting. The central bank pushed through with its flagged 50 bps rate hike despite recent financial stability concerns. They lifted the deposit rate from 2.5% to 3% as inflation is projected to remain too high for too long (>2% over policy horizon). From now on, Lagarde and co shift to data-dependence when it comes to future policy decisions. Not only in order to assess the inflation outlook, dynamics of underlying inflation and the strength of monetary policy transmission, but also to monitor current market tensions closely and stand ready to respond as necessary to preserve financial stability in the euro area as well as price stability. Regarding the former, the statement suggests providing liquidity support if needed. At the press conference ECB Lagarde said that the central bank has a lot more ground to cover if the inflation baseline persists and uncertainty would remove around financial tensions. Overall, the ECB’s tone remained hawkish on inflation. There’s no trade-off between price stability and financial stability with the ECB ready to address each in its own manner. The first via interest rates, the second via liquidity tools. Financial markets remained extremely stoic from the release of the press statement up until the end of Lagarde’s Q&A session. Afterwards, we finally saw European bond yields come off intraday lows. German yields closed the session 16.7 bps (30-yr) to 20.2 bps (2-yr) higher. Money markets currently discount a final 25 bps rate hike in May or June which is way too conservative in our view. Daily changes on the US curve varied between +5.7 bps (30-yr) and +27.1 bps (2-yr). The ECB’s reaction function might give a glimpse on what the Fed will do next week. In that scenario, also US markets are currently way too dovish positioned. EUR/USD closed at 1.0610 from an open at 1.0577.

Focus shifted during US trading hours to the First Republic Bank, another regional bank which suffered significant deposit outflows in the wake of the SVB and Signature turmoil. Other banks were obviously on the receiving end of these transactions and – in an effort to stave off liquidity concerns and boost confidence – yesterday made a combined amount of $30bn of uninsured deposits back in First Republic. The Treasury Department, Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a joint statement that “this show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system.” The rescue action has echoes to the handling of the 1998 LTCM crisis. US equity markets opened with losses, but closed 1.2% (Dow) to 2.5% (Nasdaq) higher. Asian risk sentiment remains constructive overnight. EUR/USD rises from the 1.06 area towards 1.0650. Today’s eco calendar is irrelevant. Focus remains on financial stability risks. Liquidity efforts in the US and Switzerland should help to put the recent volatility/scare to bed. Next week’s Fed meeting is the next high profile event.

News and views

The French government used a special constitutional procedure (Article 49.3) to get its plan approved to raise the French retirement age to 64 year. This procedure allows the proposal to by adopted without a vote in the National Assembly. The procedure requires that the French government survives a vote of confidence in Parliament related to the topic. Otherwise the bill wouldn’t become effective and the government would have to step down. The opposition also has other procedures at its disposal to delay the reform, including a review by the Constitutional Court or starting a procedure that might result into a referendum.

Data Published by the Fed showed that banks borrowed a combined $164.8bn from two Federal reserve backstop facilities in the week that ended March 15. Banks borrowed $152.85bn from the discount window, up from $4.58bn in the week up to March 08. Banks also borrowed $11.9bn form the Fed’s new Bank Term Funding Program that was put in place last weekend. Rating agency S&P affirmed its AA+ long term credit rating for the US. The stable outlook reflects the U.S.'s institutional checks and balances, strong rule of law, and free flow of information that contribute to stability and predictability in economic policies. It also assumes that Congress will either raise or suspend the debt ceiling to ensure that the Treasury can remain timely on its debt service obligations.

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