The immediate question facing the markets is whether the collapse of Silicon Valley Bank (SVB) will impact the Fed’s monetary policy stance and override any concerns from Friday’s February job numbers and tomorrow’s Consumer Price Inflation report.
US investment analysts say that while the collapse of SVB shouldn’t have a big impact, it has triggered a surge of concern about the size of unrealised losses on holdings of government and private bonds in US and other companies because the rapid interest rate rises by the Fed have driven down bond values commensurately.
For that reason markets are going to remain jittery over coming days – already US property trusts (called REITS) are coming into focus after some of them saw big falls in the prices of their securities on Friday because they are known to be carrying unrealised losses on their books.
Small and some medium regional banks are also on investor watch lists, while globally there’s concerns in Australia and the UK about the way some tech start-ups were involved with SVB.
This will all make the looming rate rise expected from the European Central Bank (ECB) on Thursday a bit more problematic, especially if there’s no sign of the market concerns being laid to rest.
Thursday also sees the final economic data drop from China for January and February figures on retail sales, investment, unemployment and industrial production.
And in Australia the focus will be on February’s jobs data on Thursday and on monthly consumer and business conditions and confidence reports tomorrow from the NAB and Westpac.
The jobs report will be the more important and AMP’s chief economist Shane Oliver wrote at the weekend. “We expect employment to rebound by 70,000 following the impact of seasonal distortions in December and January that saw more people than normal indicating that they had a job to go to but were not in employment or looking for work.”
“This is likely to also result in a rebound in participation such that while the unemployment is likely to edge back to 3.6% but still be up from its November low of 3.4%.
“Consumer confidence for March might improve slightly following less hawkish RBA commentary but it’s likely to remain around recessionary levels. The February NAB business survey is likely to see weaker confidence and conditions.”
Still in the region and NZ releases its December quarter GDP data this week – Moody’s says a tiny rise of 0.1% is forecast.
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The US jobs report for February was a puzzle – more jobs than expected, a small rise in the jobless rate and a small rise in wages – all seen as a limited lifeline for nervous markets.
Next up would have been the CPI tomorrow – but then the Silicon Valley Bank collapse injected itself and by the end of the day had analysts and economists wondering if this meant the Fed’s rate rise might be smaller than planned, or not happen at all if US financial stability remained under question.
Edward Moya, senior market analyst at Oanda said that with the Silvergate closure, the likelihood of the central bank moving back to a half-percentage point interest rate hike at the Fed’s meeting next week is unlikely.
“At the end of the day, traders are seeing this cooling/hot payroll report as confirmation that Fed policy is restrictive and that their tightening work is almost done,” Moya said. “If we didn’t have SVB’s failure and contagion risk the case for a half-point rate hike would be valid.”
“The focus will fall on SVB contagion risks and Tuesday’s inflation report,” he added. “As long as we don’t see a scorching hot inflation report, the Fed should continue with its quarter rate point hiking pace.”
Economists at Moody’s see inflation easing. Most US economists say it could be around 6% (annual rate).
The AMP’s Shane Oliver said it was quite possible the problems at SVB and Silvergate “may reflect the start of broader problems in the US banking system.”
“This is quite possible as Fed rate hike cycles by tightening financial conditions invariably trigger financial stresses (think the tech wreck and GFC) and troubles in start-up companies and crypto businesses and nervous depositors in banks who fund them are not that surprising in this environment and given what’s happened to crypto over the last year.
“At this stage it is too early to tell if problems at these lenders reflect just isolated problems or are indicative of wider potential problems impacting the US banking system. Either way banks are likely to see a tougher environment ahead as growth slows and higher rates cause more financial stress for borrowers.
“And it is a sign that Fed tightening has got traction and the Fed may be close to the top on rates.”
Dr Oliver says the CPI is expected to rise 0.4% month on month or an annual rate of 6% which would be down from 6.4% in January. He said core CPI inflation is expected to edge down to an annual 5.5% from 5.6%.
Producer price inflation data on Wednesday is also expected to have slowed to 5.4%% from 6% in January. Dr Oliver says US retail sales are expected to have slowed in February, housing data will be flat while industrial production on Friday is expected to show a small rise in February.
The ECB is forecast to lift rates by 0.505 to 3.5% and signal more increases to come with the zone’s core inflation still rising.
Chinese data due Thursday will confirm the economy has re-opened after the tough zero Covid lockdowns last year but like the trade and inflation data last week, this week’s figures for retail sales, production and investment will be solid, but not earth shattering.
