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Drop the Suisse, Just Sus

Drop the Suisse, Just Sus

It's cleaner. Credit Suisse is getting $54B in liquidity and the ECB is shaking up European liquidity with a 50 bps rate hike.

Alex Davis & Litquidity Capital
March 16, 2023

Together with

Good afternoon,

Credit Suisse was once again downgraded to Credit Sus as the Swiss shot it a ~$54B lifeline in liquidity. But the ECB has its own thoughts on European liquidity, announcing a 50 bps rate hike to 3.5% this morning.

Stateside, Jerome Powell outdid himself again. US CPI wasn’t the headline, and the Fed Chair still managed to make himself a main character.

Let’s dive in.

Economy Heat Check

As of 3/15/2023 market close, unless otherwise stated.

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Briefings

Stripe nearly halves valuation to $50B following $6.5B raise (Reuters)
US threatens to ban TikTok if parent ByteDance doesn't sell its stakes (WSJ)
T-Mobile scoops up Ryan Reynolds-backed Mint Mobile for $1.35B (CNN)
US approves $31B merger of two major railroads (NYT)
Virgin Orbit to pause operations and furlough employees (Reuters)
US building permits in February soar +13.8% to 1.524M (est. 1.34M; prev. 1.339M).
US jobless claims drop by most since July to 192K (exp. 205K), led by New York.
Argentina surpasses 100% inflation as an economic recession looms (BBG)

Performance Review

Firm updates your bank may be less inclined to disclose.

Credit Suisse to borrow up to nearly $54B from Swiss National Bank (WSJ)
Speculators build $16B bearish bet on Europe's banks (Reuters)
Goldman Sachs has bought SVB's bond portfolio (Reuters)
Bank of America received $15B+ in deposits following the failure of SVB (BBG)
HSBC cuts base pay for promoted bankers by 25% pre-UK banking reform (BBG)
Wells Fargo files $9.5B mixed securities shelf (SI)
SVB creditors form a group in advance of possible bankruptcy (WSJ)
First Republic Bank weighing options for its future, including a sale (BBG)
PwC introduces AI chatbot for 4,000 lawyers to speed up work (BBG)

Expectations Reset

The week in review.

ECB Rate Hike

Europe's central bank hiked interest rates by 50 basis points today. Earlier, ECB President Christine Lagarde had signaled that recent volatility in banking stocks had boosted chances of a smaller 25 basis point hike.

Markets stateside are now pricing in a 72.3% probability of a 25 basis point hike at the FOMC next week. The probability of no hike is at 27.7% (CME FedWatch Tool).

US Inflation (CPI)

The Consumer Price Index (CPI) for February showed once again that inflation rages in services at the worst levels in four decades, while inflation in many goods categories continue to back off. Headline CPI increased +0.4% month-to-month, +6.0% year-over-year.

Wall Street is really hoping that Fed Chair Jerome Powell will ease up on the monetary tightening after the recent bank panic. But inflation just won't play ball with J Pow. The Fed usually floods the economy with liquidity during financial panics and worries about the inflationary impact later, but this time it's not that easy.

With the rise in headline inflation, despite it being a less substantive rise than we’ve seen in recent months, there's still no escaping inflationary pain. So expect eggflation to continue when you’re budgeting for that March Madness party.

US Producer Prices (PPI)

Yesterday’s Producer Price Index (PPI) print fell by 0.3% in February, confounding predictions of a 0.4% increase. The unexpected drop was fueled by lower prices for energy and food, which apparently decided to take a break from skyrocketing for once.

But, the core PPI, which excludes volatile items like food and energy, increased by 0.1%. So, similar to core CPI versus headline CPI, we’re still seeing core inflation and core producer prices continue to increase, despite their respective headline numbers decreasing.

While it's unclear if this is a temporary blip or a sign of things to come, we can all breathe a sigh of relief (and maybe even treat ourselves to a slightly cheaper cup of coffee) for now.

US Housing Market

The US housing market couldn’t afford a fast pass and now it just won’t get off its rollercoaster ride. Yesterday’s latest National Association of Home Builders (NAHB) report indicated an unexpected rise in the US Housing Market Index (HMI) to 44.0 in March, beating expectations.

This third consecutive improvement, after a sustained decline in 2022, may bring some cheer to the single-family homes market. However, a sub-50 reading suggests that most respondents still view market conditions unfavorably.

Builders remain cautiously optimistic, but the traffic of prospective buyers is deeply subdued, continuing to be a drag on sales projections. The uncertain outlook is due to rising concerns that bank runs may drive more cases of insolvency and bankruptcy, dissuading buyers across the single-family market in the coming months.

UK Spring Budget

The UK dropped its spring budget yesterday, which is bound to make everyone who’s not on strike (everyone?) happy. The budget was delivered on the same day that teachers, transportation workers, civil servants and others were on strike across the country.

The government announced a string of funding injections into the its tech sector, including:

A new quantum computing hub
An annual £1M prize for AI research called the “Manchester Prize”
£3B in investments in “high growth” business in the next 10 years

For all non-techies, it also announced its “biggest-ever employment package”, including:

30 hours of free childcare for children over the age of nine months
Subsidized childcare for parents on Universal Credit
Energy price guarantees
Frozen fuel and pub pint duties

Still to Come

University of Michigan Sentiment, Friday

The collapse of two large banks this week has fueled anxiety and fear-gating across the media. But it remains to be seen whether news coverage of bank failures and stock market volatility will hurt consumer sentiment this month.

The first signal will come with the University of Michigan consumer confidence survey released tomorrow. Yesterday’s retail sales report pointed to a slowdown in consumer spending, particularly in clothing and furniture. Shoppers continue to contend with higher prices, as well as rising interest rates that boost borrowing costs.

Economists expect that the bigger impact on consumers will come through a further tightening in credit conditions. As the labor market softens in response to restrictive monetary policy, expect consumer attitudes to turn more cautious over time. The Fed, for now, may concentrate more on boosting confidence in the financial system than on its long-term drive to tame inflation.