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Good afternoon,

Looks like banking took a page from basketball’s playbook and will be extending the madness past March. Bigger banks are still nearing deals for regional ones, and regulators aren’t finished with Credit Suisse quite yet.

Let’s dive in.

Economy Heat Check

As of 3/24/2023 market close, unless otherwise stated.

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Bad News Briefings

Market movers like to bury bad news on Friday afternoon, so we've decided to excavate them.

• Lawmakers to move forward with TikTok bill (Reuters)

• Microsoft-Activision deal gets lift as UK regulators narrow competition probe (WSJ)

• Fed's Kashkari says bank strains bring risk of recession closer (Reuters)

• Ethereum is at risk of losing its dominant status in DeFi (Forbes)

• Cheap diabetes pill could impact sales of Pfizer's COVID antiviral Paxlovid (SA)

Performance Review

Firm updates your bank may be less inclined to disclose.

• First Citizens close to deal for Silicon Valley Bank (CNBC)

• Credit Suisse could face disciplinary action, Swiss regulator says (Reuters)

• Banker fired over sexual harassment sues Barclays for $700K (Reuters)

• US said to evaluate expanding emergency lending for banks (BBG)

• Credit Suisse hires Ex-Deutsche Bank wealth management head as its new vice chairman for SE Asia (BBG)

• Credit Suisse dealmaking pair quit for PJT Partners and Santander (FN)

• Credit Suisse's head of European compliance is leaving (FN)

• Credit Suisse executives spent $2.4M on CS shares in the final months of 2022. Chairman Axel Lehmann accounted for half (BBG)

• JPMorgan, Citi, BofA told staff not to poach clients from stressed regional banks (Reuters)

Week Ahead: Signal to Noise

Next week’s market outlook and whether you should actually care.

• Monday, March 27: BoE Governor Andrew Bailey Speech at LSE (UK) (🐂)

• Wednesday, March 29: Australia Monthly CPI (🐻)

• Thursday, March 30: EU Flash inflation (Germany, Spain) (🐻); UK Q4 GDP, balance of payments and business investment (🐻)

• Friday, March 31: US Core PCE (🐂); Switzerland Consumer Price Index (🐂)

Signals 🐂

US Core PCE

With ongoing debate over persistent inflation and financial stability, the Fed will be hoping that we’ve neared the peak of prices rises. Concerns over the effects of higher rates, paired with the new hysteria over the banking system, didn’t make Powell’s job any more fun than he had fielding questions about critical race theory at Capitol Hill recently.

Friday brings the release of the Fed’s favorite inflation gauge – the Personal Consumption Expenditures (PCE) price index. It reveals how much Americans spent in February, and serves as another measure of inflation. Note, it won’t be as useful as usual because it doesn't include all the turmoil we saw this month.

As a reminder, core PCE unexpectedly increased 4.7% in the year up to January. At the same time, the January retail sales report revealed that consumer spending also surged. That double whammy sent the US 2-year yield up towards 5%. Since then, yields have collapsed on concerns over the stability in the banking system, with US 2-year yields set to see their biggest monthly fall since the financial crisis.

While personal spending is expected to slow from the 1.8% gain seen in January, the bigger question is whether we’ll see a similar slowdown in headline core PCE.

Switzerland Consumer Price Index (CPI)

Last month, the biggest concern on Swiss minds was how the resurgence in inflation would impact their aprés ski champagne tab after a strenuous two-run powder day. Friday’s Switzerland CPI print may be yet another chapter in the epic that’s become its economic environment as of recent.

As a reminder, Switzerland’s January CPI report kicked off a month of Swiss news that only got worse. The headline print was 3.3% year-over-year, versus expectations of 2.9% (previous 2.8%). That marked the highest reading since September 2022, and the first increase since August 2022. Inflation was either unchanged or had fallen since then. January’s print was the first of many surprises for the SNB, who were halfway to their vacation destinations after projecting an annual inflation at 2.4% for 2023.

When the Swiss National Bank (SNB) met last week, it increased interest rates by 50 bps, bringing borrowing costs to 1.5%. It was only September when the SNB brought interest rates out of negative territory by raising rates from -0.25% to 0.50%. With growth seemingly bottoming out and the persistent banking sector strains, yet another uptick in inflation is the last thing the central bank needs.

BoE Governor Andrew Bailey Speech at LSE (UK)

Despite the split-screen nonsense CNBC will most likely broadcast for FOMC member Barr’s Capitol Hill testimonies this week, the real tea will be across the pond for insights BoE Governor Bailey may reveal. The BoE hiked by 25 bps, but money markets and economists are divided over whether we’ll see another 25 bps hike or pause. Bailey’s speech at the London School of Economics (LSE) could provide some telling clues – or, at the very least, be a bit more stimulating content than the congressional questioning mess Fed Chair Powell recently endured.

Money markets may be “on the money” due to the UK’s surprise upside beat with inflation. But, if BoE’s Mann is to be believed, the central bank expects the uncomfortably high levels of inflation to fade fast. The BoE doesn't meet again until May, so Bailey’s speech is one of the few glimpses into what the bank may be thinking until then. Experts suspect Bailey to emphasize that incoming data will be the deciding factor between rates staying at 4.25% or rising to 4.5%, and guiding GBP accordingly.

Noise 🐻

EU Flash inflation (Germany, Spain)

As expected, the European Central Bank (ECB) raised its benchmark deposit rate by 50 bps to 3% this month. Despite the banking turmoil that has seen UBS absorb rival Credit Suisse, ECB President Lagarde and her Hermès scarf could care less about what consumers think. ECB policymakers felt compelled to go ahead with the planned rate hike, as core inflation rose to a fresh high of 5.6% in February. That being said, headline inflation has been coming down, falling to 8.5% in February – that’s down from 8.6% in January and 9.2% in December.

Nevertheless, policymakers have become more hawkish in their efforts to curb rising prices. Last week’s meeting placed a greater emphasis on responding to the data and monitoring “how the situation unfolds” ahead of further rate decisions. It’s unclear exactly what data the ECB was specifically referring to, raising the question of whether core CPI or financial stability is their chief concern.

UK Q4 GDP, balance of payments and business investment

The final estimate of Britain’s Q4 gross domestic product on Thursday is expected to confirm that there was no growth during the quarter. So nothing to write home about, but maybe to pour one out for. This means that the UK economy avoided a technical recession in Q4, after economic output shrank 0.2% in Q3.

The previous estimate suggested that the UK’s economy stagnated in Q4. But, a rebound in consumer spending during the World Cup in Qatar helped lift the numbers. (Don’t expect that trend to continue for Q1 GDP. The remaining English teams in the Champions League drew Bayern and Real Madrid, respectively). Recent retail updates indicate that consumers are still spending, albeit more cautiously. Interestingly, the construction sector is also showing signs of increased activity.

Business investment rebounded in Q4 after a slowdown in Q3. So although the UK may have avoided a recession for now, its economic outlook remains challenging with headline inflation running at 10.4% and consumer confidence still fragile.

Australia Monthly CPI

Australia’s inflation was relatively late to rise compared to its peers. It is also relatively late to peak…assuming it has. But, with the annual rate falling from 8.1% to 7.2% last month, consensus thinks it’s relatively safe to assume it has.

With RBA (Reserve Bank of Australia) cash rate futures implying a 95% chance of a hold at its next meeting, the RBA minutes backup RBA Governor Lowe’s comments for a pause. A pause seems to be the most likely scenario unless it sees a nasty uptick on Wednesday’s inflation report.

Undrafted

All other speeches and prints.

Monday, March 27:

• US: Dallas Fed manufacturing

• EU: German IFO

• China: Industrial profits

• Japan: Service producer price index; Monthly financial and economic statistics report

• Australia: Unicredit Bank Austria Manufacturing PMI

Tuesday, March 28:

• US: House price index; Richmond manufacturing index; FOMC member Barr testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs

• Canada: Monthly estimates of business openings and closures; Household actual final consumption

• EU: German consumer sentiment

• UK: BOE Andrew Bailey, Sam Woods and Dave Ramsden: Treasury Select Committee hearing on Silicon Valley Bank

• Switzerland: ZEW expectations

• Japan: Measures of Underlying Inflation

• Australia: Retail trade

Wednesday, March 29:

• US: Mortgage applications, home sales; Crude oil inventories; Conference Board consumer confidence; FOMC member Barr testifies before the U.S. House Financial Services Committee

• UK: BOE systematic risk survey results

• Switzerland: SNB quarterly bulletin

Thursday, March 30:

• US: Q4 GDP (final)

• Canada: Payroll employment, earnings and hours, job vacancies

• EU: Economic Sentiment Indicator

• Australia: Job vacancies

• New Zealand: Business confidence

Friday, March 31:

• US: Michigan consumer sentiment

• Canada: GDP month-over-month

• EU: EU unemployment; flash estimate inflation for the Euro Area; Inflation (France, Italy); German retail trade and labor report

• Switzerland: Retail trade turnover

• Japan: Tokyo CPI

• Australia: RBA financial reserves

Meme Bank

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