Fed and US Treasury announce plans following SVB collapse
Investors take a 50bps Fed hike off the table, see likelihood of pause
US stock futures rally, dollar and Treasury yields extend slide
SVB crisis and Fed’s response revive pivot bets
The dollar fell against most of the other major currencies on Friday, accelerating its tumble at the start of this week.
The initial round of selling was triggered by the US employment report, which despite pointing to another month of stellar employment gains, also revealed a rising unemployment rate and slowing monthly wage growth. Just after Fed Chair Powell’s hawkish remarks before Congress, investors assigned a large probability for a 50bps hike at next week’s FOMC gathering, but the uptick in the unemployment rate and the slowdown in wages made them have second thoughts about that.
The second and more prominent episode of dollar selling was initiated as soon as the market opened for this week, and the catalyst was news that the Fed and the US Treasury will implement a range of measures to stabilize the banking system after the fallout from the collapse of the Silicon Valley Bank (SVB).
Following the turbulence and the Fed’s response, investors took bets for a double hike off the table, with some of them now believing that the Fed will not press the hike button at all. According to the Fed funds futures, market participants are assigning nearly even odds for a quarter-point increase or no action at all next week. What’s more, they dragged their implied terminal level down to 4.95% and returned to pricing in rate cuts by the end of the year.
US stock futures rally, gold hits one-month high
All three of Wall Street’s major indices slid more than 1% on Friday after SVB’s collapse, with the tech-heavy Nasdaq losing the most ground. Combined with a concurrent fall in Treasury yields and a surge in the CBOE VIX index to levels last seen in December, this points to nothing else than a flight-to-safety episode, with investors abandoning equities in favor of Treasuries.
The panic seems to have eased today following the announcement of contingency plans, with US stock futures rebounding strongly and recovering Friday’s losses, but that was before coming under renewed pressure around the European opening.
Gold prices surged to a one-month high just a few minutes after the open, hitting resistance at $1,895 before pulling somewhat back. The slide in the US dollar and Treasury yields, as well as some safe-haven inflows, helped the precious metal jump higher on Friday, but today’s early relief did not result in a notable retreat. It seems that investors’ change of heart with regards to the Fed’s future course of action could exert more pressure on the dollar and Treasury yields, and thereby keep gold supported, at least until tomorrow’s US CPI data.
US CPI data investors’ next major test
In such a dynamic market environment, it seems hard to confidently see a crystal-clear longer-term picture. It may be better to take things step by step, with the next item on the agenda that could shake investors’ estimates being tomorrow’s US CPI numbers for February.
The headline CPI rate is expected to accelerate its slide again, falling to 6.0% y/y from 6.4%, while the core one is anticipated to tick down to 5.5% from 5.6%. With the year-over-year change in oil prices falling deeper into the negative territory, a notable slide in the headline CPI rate seems more than normal and thus, investors may pay more attention to underlying inflation dynamics. Should the core rate slip by more than anticipated, market participants may feel more confident on the latest adjustment in their Fed bets and thereby the US dollar may extend its slide, while equities could recover a bit more.
That said, with the ISM business surveys pointing to persistent inflationary pressures during February, the risks may be tilted to the upside. But an upside surprise may not be enough to convince investors that a double hike could be the most likely outcome next week. Thus, the dollar could rebound somewhat, but not enough to warrant a lasting uptrend.