Another week of turmoil looms as the global banking crisis and central bank meetings – led by the US Federal Reserve and the Bank of England – hover over markets like a Sword of Damocles.
Even with continuing uncertainty, the Fed is likely will approve a quarter-percentage-point interest rate increase this week, according to market pricing and many analysts.
To not do so would suggest that things are worse than the Fed and other central banks are willing to disclose.
Perhaps the only event that could see the Fed stay its hand is if the weekend attempt to force a resolution of the situation at struggling Credit Suisse through a takeover or dismemberment of the bank by rival UBS, helped by the Swiss National Bank (see separate story) is delayed or derailed.
Rate expectations have been swinging wildly over the past two weeks, varying from a half a per cent rise to holding the line and even at one point some talk that the Fed could cut rates at its two-day meeting.
However, a consensus has now emerged that the Fed wants to signal that while they are can see the financial sector upheaval, it’s important to continue the leave markets with the strong understanding that the fight to reduce inflation continues.
As of Friday afternoon, markets were pricing in a 75% chance of a quarter-point increase to be announced early Thursday morning, Sydney time.
CNBC said the other 25% was in the no-rise camp, anticipating that the policymakers might take a step back from the aggressive tightening campaign that began just over a year ago.
Goldman Sachs says it sees no change in rates, as it expects central bankers in general “to adopt a more cautious short-term stance in order to avoid worsening market fears of further banking stress.”
“This might be one of those times where there’s a difference between what they should do and what I think they will do. They definitely should not tighten policy,” said Mark Zandi, chief economist at Moody’s Analytics who also thinks there’s no reason for a rise.
“People are really on edge, and any little thing might push them over the edge, so I just don’t get it. Why can’t you just pivot here a little and focus on financial stability?”
Zandi said it’s highly unusual and dangerous to see monetary policy tightening under these conditions.
“You’re not going to lose your battle against inflation with a pause here. But you could lose the financial system,” he said. “So I just don’t get the logic for tightening policy in the current environment.”
The AMP’s chief economist Shane Oliver wrote at the weekend “while we think a Fed pause at its FOMC meeting on Wednesday would make sense in response to banking stress, it’s more likely to hike the Fed Funds rate by another 0.25% taking it to a range of 4.75-5%. It probably sees deposit protection and its Term Funding Facility as enough for now to manage financial stability risks leaving it free to continue with rate hikes to deal with inflation”
This Fed meeting will see updated forecasts for the economy, inflation and interest rates (via the so-called dot plot). Normally that would grab centre stage as it would indicate how far Fed members see the US central bank boosting rates.
But the volatility and nervousness in the global financial system is now the dominant issue for everyone.
The Fed meeting and these market events will overshadow everything else in markets this week.
The Bank of England meets Thursday and will lift its key interest rate by 0.25% to 4.25%. UK inflation will also be issued this week (along with data on Canadian inflation). There’s also Japanese inflation data as well on Friday.
There’s also the mid-month surveys of business activity in some major economies such as Japan, Australia, the eurozone, UK and the US.
In Australia, the minutes from the last RBA meeting tomorrow will likely confirm the RBA’s somewhat less hawkish stance compared to February but will be watched to see just how open it is to a pause in rate hikes next month.
Business conditions PMIs for March (Friday) will also be watched to see if the recent improvement is maintained.
Among the earnings reports due this week – Brickworks and its major shareholder, Washington H Soul Pattinson, Premier Investments, New Hope Corporation, Gold Road Resources, Kathmandu and Sigma Pharmaceuticals.
