Wall Street is in a chaotic state. Investors are digesting the ability of regulators and the tools they have on hand to contain the collapse of Silicon Valley Bank. Over the weekend, we heard from numerous regulators such as FDIC, the Fed and the Treasury that all deposits are safe.
Likewise, less liquid banks like the Signature Bank in New York were also shut down. Banks also had an emergency lending fund to meet their depositors’ withdrawal requests. This funding literally provides a backstop to regional banks’ liquidity and contains the spread of confidence collapse.
Subsequently, we heard President Biden assuring the “safe” banking system of America and that all SVB’s customers’ deposits are sound.
What does it mean for the Fed’s next interest rate hike?
Market participants are quick to pare down the aggressiveness of interest rate hikes. They still see some risks to the balance sheet of small regional banks after the fallout of SVB. Goldman Sachs was fast to call out for a no rate hike in the upcoming March FOMC meeting, while others believe it seals the deal for a 25 basis point increase which is now priced at a 58.3% chance with almost no analysts predicting a whopping 0.50% hike.
This is seen in the 2-year Treasury yield, a barometer of market participants’ expectation of the fed fund rate. It has dropped drastically from above 5% last week to hover above the 4% mark.
Despite this turbulent time, we continue to believe that the absence of firm evidence in CPI data that showed a continuous slowdown in inflation, the Fed will gravitate towards a milder 0.25% rate hike and deliver its twin mandate statement once again.
What are our dishes today?
At 8.30 pm, we will have our Core CPI day, which is expected to see growth remaining at 0.4%. The CPI for year on year basis should see a moderation from 6.4% to 6.0%.
Given the recent hot figures such as PPI and the still relatively strong and resilient labour market, there are growing talks of an upside surprise. That could provide a complicated situation for the Fed to navigate the twin mission of inflation fight and financial system stability.
It is 14 March, Tuesday, at 8.55 am in Singapore and 8.55 pm in New York. Our positions remain shaky, but as with every trader’s mistake, it is time to review greater risk management in trade.
From your lovely trading buddy.
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