- Wall St. is using SVB crisis to pressure Fed to do limited or no more rate hikes
- CPI reading, due Tuesday, likely to show inflation slowed in February
- Odds growing that the Fed will only adopt 25-bps hike on March 22
A slow-boil U.S. banking crisis and the most definitive number on inflation in America will determine the pace and performance for most markets this week, including key commodities such as oil and gold.
The collapse of Silicon Valley Bank, which first made headlines late last week, threatens to deepen economic cracks caused by a sharp increase in interest rates by the Federal Reserve over the past year. That’s important because the Fed doesn’t immediately intend to stop raising rates due to the equally intimidating threat of inflation.
Wall Street is using the so-called SVB crisis as a backdrop to demand that the Fed do limited or no more monetary tightening until the central bank is certain that the economy is sound, and it won’t accelerate the country towards a recession. Fed officials argue that they have the tools to handle the SVB contagion and it’s more important that the fight against inflation continues with more rate hikes.
The Consumer Price Index for February, due on Tuesday, will likely decide whether the Fed goes with a 25-basis point, or 50-bps, hike at its March 22 rate decision.
The CPI is expected to have expanded 6% year on year in February from 6.4% in January and 0.4% for the month versus a previous 0.5%.
Core CPI, a reading that strips out volatile food and energy prices, is forecast to have risen 5.5% for the year to February from the previous annual reading of 5.6%. Month-on-month, the core number is expected to be flat at 0.4%.
If the forecasts are correct, the inflation data on March 14 will deliver no nasty surprises. That will be in line with the benign trend set by Friday’s non-farm payrolls, which came in just about 105,000 above expectations for February versus January’s monstrous beat of 332,000.
The dollar hit a near two-week low against a basket of currencies on Monday as markets reassessed their outlook for future Fed rate hikes. Traders were now pricing in a greater chance that the Fed will raise rates by 25 basis points for March 22, than 50 bps. Short-term Treasury yields also plummeted from recent highs, while long-term yields firmed on the prospect of a potential pause in further rate hikes.
And why is all these important for oil and gold?
Well, the past three months have shown the reason crude prices aren’t breaking out to $90 a barrel or gold recapture $1,900 an ounce highs is because of the Fed’s menacing talk on how far and high it can take rates to beat down inflation.
Crude prices finished last week down despite supportive U.S. crude inventory data as Fed Chair Jerome Powell said in testimony before Congress that the central bank was prepared to hike rates more than previously indicated if that’s what will bring inflation down.
Monday’s slump in the dollar and yields helped oil and gold trade in the positive.
By 2:12 ET (07:12 GMT), New York-traded West Texas Intermediate, was up 43 cents, or 0.6%, at $77.11 per barrel. The U.S. crude benchmark finished last week down 3.8%.
London-traded Brent crude was up 44 cents, or 0.5%, to 83.22. Like WTI, Brent was down 3.8% on the week.
Gold for April delivery on New York’s Comex was up $12.15, or 0.7%, to $1,879.35 an ounce, after hitting a six-week high of $1,893.15 earlier in the session. Last week, April gold rose 0.7%.
The U.S. Treasury and the Fed had over the weekend announced emergency funding measures for the banking sector, after the collapse and regulatory seizure of SVB last week. The White House also said it will ensure that depositors in the bank are made whole, and that SVB customers will have access to their deposits starting Monday.
Goldman Sachs analysts said that they no longer expect the Fed to hike rates this month, and expressed uncertainty over the path of monetary policy given the recent stress on the banking sector. The Fed will convene for an emergency, closed-door meeting later on Monday, the results of which are expected to provide more insight on the central bank’s actions going forward.
Until the February CPI reading is out, there’s no telling what we’re going to get hit with — both in terms of price pressures and the Fed’s commensurate response.
As the Fed has persistently found out over the past year, inflation in the U.S. has been stickier than gum found under the shoe.
“The terminal rate is likely to be higher than we expected,” Fed Chair Powell said last week, referring to the point at which the Fed would stop rate hikes, a level traders were speculating to be as high as 5.75% versus the current 4.75% peak for U.S. interest rates.
Notwithstanding the global tightness in oil supply — and China’s anticipated consumption surge with the end of COVID controls in the country — the Fed decision on interest rates has its own profound impact on crude prices, said analysts.
“The financial world is consumed with inflation worries,” economist Adam Button said in a post on the ForexLive forum. On Friday, Button reflected that just a year ago, U.S. crude’s West Texas Intermediate settled at a 14-year high of $123.70. “From the $130.15 peak, it's down 41%,” he said.
The CPI hit a 40-year high of 9.1% during the year to June 2022. It has moderated since, to an annualized growth of 6.4% in January, but remains well above the Fed’s target of just 2% per year.
To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March last year via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020.
As of Monday, Investing.com’s Fed rate monitor tool — an indicator of money market expectations for upcoming rate decisions — has assigned a near 60% chance of a 25 basis point hike at the central bank’s March 22 meeting.
Other economic data to watch in the coming week includes February figures on retail sales, producer price inflation, housing starts and industrial production.
The European Central Bank, meanwhile, looks set to hike interest rates by another 50 basis points at its meeting on Thursday after already raising rates by 3 percentage points since July in a bid to tame inflation.
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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.