Market Wrap.

When liquidity undermines solvency.

Cycles in financial assets seem to need confidence knock in order to signal a genuine turn and the adage of CB’s not being concerned about moves until the moves make CB’s concerned is also a much rolled out signal for turns in trends.
The problems faced by Silicon Valley Bank (SVB), and any financial institution or banks with bond heavy assets, are therefore red flags for the consequences of CB tightening that seems rather obvious now that it has occurred.
They highlight the effects of the past 12 months of Fed hiking (of 450bps already) are still evolving, but have been precipitated by Fed Chair Powell’s warning that there could be further and faster policy moves to come if the economy fails to show signs of reacting.
Forthcoming data releases will be even more intensely followed. Today’s US February NFP/Employment report and next week’s US CPI release are clearly the key data points of interest in the short term, though markets will also be acutely more aware of any further signs of financial stress. The tail off is stocks and squeezing in bonds is likely to continue into next week.
US yields have already pulled back some -25bps from highs this week across the curve, pulling estimates of Fed’s terminal rate back below 5.5%, 2yr yields back below 4.80% (having tested 5.08% this week) and 10yr are threatening 3.80% (tested 4.09% earlier this month).
The unwinding of yield moves is causing sharp squeezes in European bonds, as it did in Asia (ACGB 10yr yield fell -13bps to 3.58%). Bund yields notably retreated after gearing up for the anticipated “significant tightening” from ECB who meet next week.
2yr Bund yields have pulled back a further 18bps today to test 3.10%, 10yr -15bps to test 2.50%.
10yr Gilt yields are some -10bps lower to test 3.67% and 2yr -12bps to 3.69%.

European bourses had fallen some -2%, led by banking declines, but have stablised into US trading (DAX -1.35%, CAC 40 -1.2%, FTSE 100 -1.75%).

USD is relatively stable as markets address the need to revert to core capital and liquidity controls supporting USD whilst the turn in rates has seen a more nuanced directional push for FX.
AUD is flat at 0.6590, NZD +0.35% at 0.6125, EUR flat at 1.0585. GBP has outperformed post less weak than feared production data and is testing 1.2000 (+0.65%).
JPY did have a notable intra-day swing as BoJ announced unchanged policy (unanimous) at Kuroda’s last policy meeting with a stressing of still watching for the effects of their YCC tweak in December and is now trading -0.4% at 136.70.

Japan’s Feb. PPI also showed a further slide in pricing pressures, sliding -0.4%m/m to 8.2%y/y (est. -0.3%m/m and 8.4%y/y from 9.5%y/y in Jan.).

NZ 4Q Manufacturing Activity was indicative of the slowing of the economy after a bumper 3Q, with a slide of -0.4%q/q thought the volume profile was more pronounced with a fall of -4.7%q/q.
Feb. BizNZ PMI edged firmer though, to 52.0 from a slightly firmer Jan. reading of 51.2.

Although the fallout from SVB is grabbing headlines, AU media continue to focus on the AUKUS deal (and its cost) ahead of Biden meeting Albanese and Sunak on Monday.

Despite the tense response in AU-Sino military relations from the AUKUS agreements, AU-Sino trade negotiations continue to thaw. Chinese media report that WA Premier McGowan is to visit mainland China next month and though specific trade discussions are still finding headwinds, they are set to continue with two more rounds of trade negotiations being lined up.

UK’s Jan. monthly production data dump showed a slight firming in the service sector (+0.5%m/m, est. +0.3%m/m) which more than offset soft industrial production (-0.3%m/m, est. flat) and allowed Jan. GDP to edge +0.3%m/m (est. +0.1%m/m). The ONS report highlights that UK production has effectively flatlined just under pre-pandemic levels for the past year.

Although Germany’s Final Feb. CPI was unrevised (at a high headline of 8.7%y/y), there was a more notable undershoot in Norway’s Feb. CPI (Headline 6.3%y/y and core 5.9%y/y, est. 6.8%y/y and 6.3%y/y).

However, market attention remains on asset price reactions to the SVB fallout and today’s NFP.

Consensus for US Feb. NFP has been edging down this week (now 225k) and will be even more acutely awaited along with the other employment profiles in US and Canada (also releasing Feb. employment data).
Next week’s US Feb CPI will also be a major market focus.

WE GET

· AU: CBA Spending, Westpac MI Cons. Conf & NAB Biz Surveys (14^th), Consumer Infl. Exp. & Employment Force (16^th), RBA Asst. Gov. Kent (20^th), RBA Mins. & Westpac Leading Index (21^st)

· NZ: REINZ Hse. Px. (tbc), PSI & Food Px. (13^th), Migration (14^th), 4Q C/Acc. (15^th), 4Q GDP (16^th), Trade (21^st), Westpac 1Q Cons. Conf. (22^nd)

· EZ: EZ Ind. Prod. (15^th), ECB Policy & Staff Projections (16^th), EZ Final CPI & 4Q Lab. Costs (17^th), Ge PPI & EZ Trade (20^th), ZEW Surveys & EZ Construction (21^st)

· UK: Employment (14^th), UK Budget (15^th), BoE/Ipsos Infl. Exp. (17^th), Rightmove Hse. Px. (20^th), Public Finances (21^st), CPI/RPI/PPI & CBI Trends (22^nd)

· US: NFP/Empl. (10^th), NFIB & CPI (14^th), Empire/NY Fed, Retail Sales, PPI, Biz Inventories & NAHB (15^th), Claims, Imp./Exp. Px., Housing Starts/Permits & Philly Fed. (16^th), Ind. Prod., Leading Index & U. Mich. Cons. Sentiment with inflation expectations (17^th), Existing Home Sales (21^st), FOMC (22^nd).

WESTPAC PUBLICATIONS

AU & NZ Economics Weekly : RBA Gov. wants to pause in April; we are not yet convinced.
Westpac AU & NZ Economics

· Bill Evans underscores Westpac’s call for hikes in both April and May whilst acknowledging volatile data and global market conditions being determinates of whether RBA may pause.

· Cliff Notes point to growing divergences. Household spending, inflation and labour data key for RBA’s coming decisions. Fed Chair Powell noted concerns and potential for more hikes, but is not on a pre-set path. BoC remains on pause and China seems set to outperform.

· Usual data reviews and previews accompany updated views and forecasts.

Westpac Market Outlook March 2023 : Latest thinking on AU, markets and global economy.
Westpac AU & NZ Economics

· Global concerns have returned to inflation taking longer to subside and economies are faring better than expected fuelling potential for further tightening being maintained for longer.

· AU’s soft end to 2022 highlights household sector strains with further slowing likely through 2023. RBA has opened potential for a pause, but Westpac still see hikes in April and May.

· Further updates cover Commodities, FX, NZ, China and Global prospects.

ADDITIONAL PUBLICATIONS
NZ Weekly Economic Insight Video : Even less bang for your buck.
Satish Ranchhod

· The impact of tighter financials conditions are now being felt by households and businesses and high rises in inflation mean higher spending is merely keeping volume of goods static.

· Much of the pain for the economy lies ahead. Mortgages refixing and businesses struggling from rising costs and margin compression will erode demand and activity in the year ahead.

NZ Agricultural Insight Video : Mixed Bag.

Nathan Penny

· Rebounding Chinese demand is lifting meat prices with both lamb and beef rising against usual seasonal easing. However, the expected lift for the dairy sector is yet to become clear.

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