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Good afternoon,

Suissetemic risk was the story of the banking sector this weekend. UBS bought Credit Suisse, worth $7B on Friday, for $3B in a government-brokered rescue plan.

But it’s a busy week of central bank prints and programming.

Let’s dive in.

Economy Heat Check

As of 3/17/2023 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.

• The Swiss National Bank reported an annual loss of $141.54B – the largest in the central bank's 115-year history (Reuters)

• Meta will lay off an additional 10,000 employees – four months after it decreased headcount by 10,000 (BI)

• Fed and global central banks move to boost dollar funding (BBG)

• Evergrande, the Chinese Developer, nears a landmark restructuring deal (WSJ)

• The London Metal Exchange discovered bags of stones, instead of the nickel, that underpinned some of its contracts (FT)

Performance Review

Firm updates your bank may be less inclined to disclose.

• UBS to buy Credit Suisse in $3.3B deal to end crisis (BBG)

  • UBS to Credit Suisse employees: Welcome, but there will be job cuts (EF)

• Credit Suisse's First Boston plan in doubt amid crisis talks (BBG)

• Citigroup trims exec’s pay after $200M in WhatsApp penalties (BBG)

• New York Community Bancorp is pursuing a deal to acquire failed Signature Bank (CNBC)

• Kim Kardashian’s SKKY Partners just hired its first senior associate — former Duke student body president and ByteDance associate.

• Ken Griffin says Citadel is in the process of negotiating an enterprise-wide license to use ChatGPT (BI)

• Warren Buffett discussed the banking crisis with Biden officials on Saturday (Reuters)

• FDIC moves toward breakup plan for Silicon Valley Bank (Reuters)

• Deutsche Bank cut graduate hiring last year, hiked hiring across India (EF)

• Adam Levinson is shutting down his hedge fund, worth billions, after being hit by losses amid ongoing bond market volatility (Yahoo)

Week Ahead: Signal to Noise

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

• Wednesday: FOMC rate decision (🐂); UK CPI (🐻)

• Thursday: US new home sales (🐻); BOE rate decision (🐂); Eurozone consumer confidence (🐻)

• Friday: European Flash PMIs (🐂)

Signals 🐂

FOMC Rate Decision

Strap in for a packed week of the usual jargon from central banks, particularly the US Fed. Fed Chair Powell is still caught in his pickle trying to balance the Fed’s fight against inflation and restoring financial stability. Economists were previously predicting more rate hikes, but a banking crisis has made most rethink.

Fed expectations are all over the place, with the pre-SVB fallout consensus of 50 bps. Now, most investors are between a hold (i.e. no hike) or a final 25 bps raise. How broader financial turmoil plays out leading to the FOMC decision could greatly influence how policymakers place their rate vote.

Basically, no one knows what's going to happen and everyone's watching the markets for signs of stress.

Keep an eye on the "Fed Put." Assets on the Fed’s balance sheet increased $297B over the last week – the largest spike since March 2020. Nearly half of the quantitative tightening since last April was just undone in a single week.

BoE Rate Decision

Not to be outdone, the Bank of England (BoE) meets a day after the FOMC on Thursday. Not only does it have recent turmoil in financial markets to contend with, but policymakers were already divided on the correct course of action prior to it.

The Bank of England was widely seen to be approaching the end of its tightening cycle before the current crisis in the financial markets. Now, there’s uncertainty as to whether the BoE will implement another 25 bps hike at its next meeting.

Absent the latest banking sector concerns, recent economic data (i.e. S&P Global, CIPS PMI), made for a compelling case to hike again. But now, many policymakers are of the view that inflation has peaked, hence, policy tightening can be paused.

European Flash PMIs: Eurozone, Germany, France and the UK

It goes without saying that the focus in Europe next week will be firmly on the banking sector and whether recent turmoil has had any ripple effects. But don’t let the collapse-baiting across the media distract from the impending indications of economic conditions in March, which will be released this Friday from the flash PMI data.

Last month's data surprised on the upside, leading to more aggressive rate trajectories for central banks. Obviously, that positivity was obliviated by the recent banking crisis. Economists are “waiting to see” if the recent strength in growth is sustainable. In the short term, that’s a hard no.

The latest SVB collapse dealt a significant blow to market sentiment, but chief on the minds of the ~300 money managers in the IMI survey is central banks’ policy outlook. In other words, the macro picture remains a key factor in guiding the policy outlook and prices. Keep a close eye on price gauges, particularly service sector input costs, which are mostly accounted for by pesky wages. You may also want to note business expectations indices.

Noise 🐻

US New Home Sales

Home sales is a primary data release you can expect to be drowned out by the FOMC. On Tuesday, existing home sales data is expected to show a modest rebound, and new home sales data.

Despite the modest coverage, home sales data has been having a moment you may want to begin monitoring more closely. The median US homeowner has spent 12.3 years in their home, down from a peak of 13.4 years in 2020 but up significantly from 6.5 years in 2005 (Redfin). More, the median price of a home sold in the US is 1.8% lower than last year, the largest YoY decline in over a decade (Redfin).

UK CPI

Economists will be waiting for the Bank of England (BoE) meeting on Thursday to make much of the UK’s CPI print on Wednesday. Inflation forecasts remain bearish, taking into account the challenging task of the BoE to hike rates while banking stocks attempt to fight off a wave of selling. Inflation remains in double digits, and GDP growth for Q4 revealed a contraction after the smallest of expansions in Q3 (0.1%).

UK core inflation is forecast to remain sticky, with no year-on-year change for the month of February. Headline inflation is anticipated to dip into single digits, with prices expected to have risen 9.8% compared to February last year. Core inflation (inflation excluding volatile food and fuel prices) is a better gauge of wide-spread price pressures particularly when energy prices have declined drastically.

The BoE will undoubtedly be monitoring the data print closely before deciding whether to hike by 25 bps. The alternative is to instead take a more cautious approach, given the massive volatility that has ensued after global banking fears.

Eurozone Consumer Confidence

It’s no secret European banking sector vulnerabilities will be in the spotlight next week (see Eurozone Flash PMIs above).

To recap, the ECB opted to hike by 50 basis points (as planned) last Thursday, despite recent events. But it refused to commit further. Comments from President Lagarde this week will be monitored very closely as the situation evolves. Flash PMIs on Friday will also be of more interest against the backdrop of recent events, so don’t expect much coverage on consumer confidence.

Undrafted

All other political positioning speeches and prints.

• Monday: EU foreign and defense ministers meet in Brussels; ECB President Lagarde speaks

• Tuesday: US existing home sales; UK Chancellor Hunt speaks; Chinese President Xi Jinping meets Russian leader Putin; ECB President Lagarde and Villeroy speak

• Wednesday: ECB Chairs speak; US Treasury Secretary Yellen appears at a Senate subcommittee hearing on 2024 budget; EIA crude oil inventory report

• Thursday: US initial jobless claims; EU leaders meet in Brussels; Secretary Yellen testifies on the budget to a House Appropriations subcommittee

• Friday: US durable goods; Japan CPI & PMI; BOE’s Mann speaks

Meme Bank

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