Wall Trading Week: What to Expect as Markets Open

•  trendspotteam

•  Mar 19 2023
 

This week's focal point is Wednesday's interest rate decision and the projections for the Fed's interest rate path in the future. The market is speculating whether this will mark the end of interest rate hikes and if the interest rate will decrease later this year, as predicted by the market.

Following last week's deceleration in inflation to an annual growth rate of 6%, the markets are poised for the upcoming week's opening and are eagerly awaiting the conclusion of the two-day discussions by the American central bank, the Fed, on Wednesday. The current Fed interest rate futures indicate a 62% likelihood of a 0.25% interest rate hike, which would bring the range to 4.75% to 5%.

Of equal significance, the market will be keen to learn about the Fed members' outlook on the expected interest rate in the economy one year from now. Will the Fed maintain its belief that the interest rate will surpass 5%, or can we safely assume that the current phase of interest rate hikes is coming to a close? Moreover, the market will scrutinize the remarks made by Fed Chairman Jerome Powell during the press conference that will follow the release of the interest rate decision, half an hour later.

Additional data to be released this week

Tuesday will witness the publication of sales figures for existing homes, which are expected to rise by 2% to 4.17 million units, compared to 4 million in the previous month. Wednesday will see the release of crude oil inventory data, while Thursday will feature the publication of construction approvals and permits, current account indicators, initial claims for unemployment benefits, and sales figures for new homes. The sales of new homes are anticipated to decelerate to 648,000 units, down from 670,000 in the previous month.

Interest Rate Hike and Inflation Outlook

The Fed will raise the interest rate by 0.25% and the assumption is that this will be the last increase, but on the other hand there will not be a scenario of a rapid interest rate cut that is embodied in the markets, and this is because the inflation data continue to indicate its moderation, but it is doubtful that it will reach the target at least in the coming year.

The primary driver for the upswing in the index last week was primarily due to the housing segment, which pertains to the role of rental prices in the consumer price index. Given this, what steps will the Fed take on Wednesday? The prices for services have surged by 6% and 3.7% compared to a year ago, which is a notable acceleration from 2.7% seen just a month ago. These items in the index represent precisely the moderation that Powell is seeking. Powell finds himself in a challenging predicament - how to tackle inflation without instigating another wave of bank failures.

Inflationary pressures are subsiding, which still does not validate the market's current pricing for interest rate cuts in the middle of the year. However, it is highly plausible that the Fed has only one or two more interest rate hikes in its plans. Amidst the macro noise, we may have overlooked the producer price index data, which defied expectations and fell by 0.1% instead of increasing by 0.3%. Furthermore, the annual inflation rate experienced by producers in the past two months has been significantly lower than that of consumers, which will alleviate future inflationary pressures. The notion that "we have no choice but to raise prices" is no longer relevant.

Credit Suisse: Too Big to Fail, Regional US Banks: Not?

The magnitude of a bank's size is significant - Credit Suisse manages assets of about 1.4 trillion euros, which is equivalent to approximately 10% of the eurozone's GDP during good years. Consequently, it is apparent that Credit Suisse is too big to fail, and it is unlikely that regulators would permit its default. Conversely, regional banks in the US are not too big to fail; they frequently fail without attracting much attention. In the previous crisis years, precisely six years, 489 banks failed.

The primary factor that rendered SVB's story noteworthy is that, as a bank catering to the high-tech sector, the scale of its deposits was substantial, and their loss could potentially plunge the entire industry into a severe recession. Ultimately, regional banks are persistently susceptible to increasing interest rates as the bank loses money when the cost of financing is higher than the interest earned on the credit portfolio. Hence, even without the bank runs experienced by SVB or Signature, these banks would likely have become insolvent.

Banking Crisis Eases with Intervention from Fed

The banking crisis has triggered a negative response in the markets, and there is a growing concern about a potential contagion effect. However, the intervention of the Fed, the US Treasury Department, and the Swiss Central Bank, which provided aid and deposit guarantees, helped to ease some of the tensions. The anticipation that the crisis may lead to a cut in the Fed interest rate by the end of the year has also bolstered the bond markets.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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