Last Week Review

Global stocks ended the week flat, with a 1.0% increase in the U.S. while developed markets outside the U.S. fell 3.0% and emerging markets declined 0.4%. Investors reacted to developments related to Silicon Valley Bank’s failure and worries over what may occur at other banks. Interest rates gyrated throughout the week, ending with the two-year Treasury yield falling 0.75% and the 10-year yield declining 0.27%. The average high yield credit spread rose 0.60% and the investment-grade spread increased 0.20%.

Investors Worry Over Contagion

Last week started with fears over contagion risks from the Silicon Valley Bank failure. U.S. regulators responded with actions to provide liquidity to banks and reassured customers about the safety of their deposits. The actions failed to fully calm investor fears of a systemic fallout, though we have not seen signs of widespread failure.

U.S. Inflation Persists

U.S. inflation for February rose 6% year-over-year, based on the Consumer Price Index. It was in line with expectations. But core inflation, which excludes food and energy prices, unexpectedly ticked up 0.5% from January, driven by services. We believe investors took some comfort that leading indicators of shelter prices suggest future cooling.

ECB Hikes Rate 0.50%, Ready to Address Financial Stability

The European Central Bank pressed ahead with a 0.50% rate hike, as it had previously signaled. We think the central bank attempted to assuage concerns about financial stability in the wake of the banking crisis by not providing forward guidance for future rate hikes. President Christine Lagarde said that future decisions will depend on the direction of the economy. She noted that the bank doesn’t assume a tradeoff between price stability and financial stability, and she believes it has the tools to address both as needed. We think these comments highlight the difficult position for global central banks. We believe they see inflation as too high and persistent, but they can’t ignore how their monetary policy decisions may impact financial stability.

This Week Preview

Federal Reserve Rate Decision on Wednesday, Bank of England on Thursday

All eyes will be on the Fed’s rate decision on Wednesday. Investors have assigned about a 60% chance that the Fed hikes 0.25%, based on futures trading. The banking turmoil has drastically pushed down expectations for central bank tightening over the past week or so. Prior to Silicon Valley Bank’s failure, the expected peak federal funds rate rose as high as 5.7%, based on futures trading, with expectations of a 0.50% rate for this week’s meeting and no rate cuts for the remainder of the year. Now, the expected peak rate sits around 4.8%, with about three rate cuts expected this year. Further, the Bank of England is scheduled to announce its rate decision on Thursday, and investor are divided over whether the bank will increase its policy rate.

Global Flash Purchasing Managers’ Index Releases This Week

The U.S. flash services Purchasing Managers’ Index is expected to remain expansionary, though manufacturing is expected to remain in contraction. The same reports are also scheduled for Europe and Japan.

^{Source: Bloomberg for data, news developments and schedule of economic releases. Data as of March 19, 2023.}

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