Marc Chandler – The Fed Has Gone From Behind The Curve On Inflation, To Behind The Curve On Recession
Marc Chandler, Managing Partner at Bannockburn Global ForEx and Editor of the Marc To Market website, joins us for a detailed review of market expectations and reactions to the FOMC meeting earlier this week and the ongoing concerns about the banking sector, both in the US and in Europe.
We start off with some of Marc’s main takeaways from Jerome Powell’s press conference, after the Fed hiked the anticipated 25 basis points to continue fighting stickier and higher inflation, yet in the face of continued investor outflows from the financial sector. The US Invesco KBW Regional Banking ETF (KBWR) was down over 30% in just the last 7 weeks, and European AT1 ETFs are down 21% in 7 weeks in a row, and down 8.5% on just this Friday. We note the market expectations between trends in the breakevens for inflation and in the expectations transitioning to a “Powell Pause” and now multiple rate cuts projected in the 2nd half of this year. Marc outlines that the gap has never been so wide between what the market is anticipating and what the Fed is forecasting, and feels both sides have slightly exaggerated expectations. We discuss that the Fed has gone from behind the curve on inflation, to now behind the curve on the developing recession.
Next we discuss some thoughts on to the Fed’s balance sheet expansion over the last few weeks, and whether this is wiping out the reduction in their balance sheet from their ongoing pledge for quantitative tightening. Marc distinguishes that the increase in their balance sheet is not due to the quantitative easing, and is more a liquidity loan to shore up banks and their depositors for the short-term, but the market still sees the expanding balance sheet as inflationary, while the financial woes and falling interest rates and bank lending will be deflationary. We wrap up discussing the flight to safe have assets like bonds, the Japanese Yen, and gold over the last few weeks, but not really the US Dollar, and Marc has some nuanced thoughts on each sector.
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The Dollar Jumps Back
Marc Chandler – Marc To Market – March 24, 2023
“The pendulum of market expectations has swung dramatically and now looks for 100 bp cut in the Fed funds target this year. That seems extreme. At the same time, the dollar’s downside momentum has stalled, suggesting that the dollar may recover some of the ground lost recently as the interest rate leg was knocked out from beneath it. The euro twice in the past two days pushed through $1.09 only to be turned away. Similarly, sterling pushed above $1.23 but has failed to close above it. The Dollar Index snapped back after dipping below 102.00 yesterday for the first time since February 2. It ended a five-day drop. Follow-through dollar buying has left the intraday momentum indicators stretched ahead of North American open.”
“Bank shares remain under pressure today. There is concern that Asian banks AT1 assets have similar clauses as the Swiss banks…”
http://www.marctomarket.com/2023/03/the-dollar-jumps-back.html
Peter Schiff @PeterSchiff 3:10 PM · Mar 23, 2023 – Twitter
“#Powell claims the FDIC has all the #bank deposits covered, but who’s insuring the #FDIC? They’re broke. The #Fed will have to bail out the FDIC, print #money, and inflate the #economy.”
Small banks lost $120 billion in deposits during SVB tumult
Big banks benefitted from chaos, taking in $67 billion in new deposits while regional lenders struggled
David Hollerith · Senior Reporter Yahoo Finance – Fri, March 24, 2023
“Small and mid-sized banks lost $120 billion in deposits in just one week as turmoil gripped the regional banking world, according to new Federal Reserve data, while customers sought safer havens at the country’s largest financial institutions.”
“The dramatic movements happened during a tumultuous period marked by the seizures of Silicon Valley Bank and Signature Bank on March 10 and March 12, which sparked fears of potential runs at other banks.”
“As regional and community banks lost $120 billion during the week ending March 15, the 25 biggest banks raked in $67 billion in new deposits on a seasonally adjusted basis, according to new Fed data released Friday. The net outflow from all banks was $98 billion, an annual drop of 5.8%. Total industry deposits of $17.5 trillion was the lowest count since September 2021.”
Gold Nears Breakout after the Fed Signals an End to Rate Hikes
David Erfle – Friday March 24th, 2023
“After witnessing the 2nd and 3rd largest bank failures in U.S. history happening back to back, depositors withdrew a total $42 billion from U.S. banks last Friday. In contrast, the precious metals market recorded a net inflow totaling $5.9 billion, which was the second largest weekly inflow into the safe-haven sector since the 2008 global financial crisis.”
“Gold Futures blew through the key $2000 level by early Monday morning as the financial contagion spread to Europe. Over the weekend, UBS agreed to buy troubled rival bank Credit Suisse on Sunday in a state-backed takeover for 3 billion Swiss francs ($3.23 billion) and assume up to $5.4 billion in losses. This shotgun merger engineered by Swiss authorities amounts to a commitment of a third of the country’s GDP to rescue its banking system.”
“In a global response not seen since the height of the pandemic, the Federal Reserve said it had joined central banks in Canada, England, Japan, the EU, and Switzerland in a coordinated action to enhance market liquidity.”
“Banks continued to borrow from the Fed at historic levels approaching the 2008-2009 financial crisis in the past week. Banks also borrowed $53.7 billion under the Bank Term Funding Program, the freshly created lending program by the Fed to offer more cash at generous terms.”
https://mailchi.mp/d9293990dda3/david-erfle-weekly-gold-miner-sector-op-ed-1601745
Betters Now Think the Fed Will Cut Interest Rates a Full Point This Year
Dramatic volatility in interest rate expectations continues. The market now expects many interest rate cuts this year.
Mish Shedlock – 03/24/2023
A good quote someone recently just shared that ties in well to this discussion on banking concerns:
“In a boom, credit begins to look like money. Forms of credit become much more liquid, they become much more usable to make payments with. And in contraction, you find out that what you have is not money, it’s credit actually. In a contraction, you find out that gold and currency are not the same thing. That gold is better. You find out that deposits and currency are not the same thing. That currency is better.”
– Mehrling