• Fed Vice Chair for Supervision Barr testifies before the Senate Banking Committee; Fed officials continue to view the banking crisis as a regulatory failure; survey readings for March will continue rolling out; BOC Deputy Governor Gravelle speaks; Brazil central bank minutes will be released
  
• Reports suggest ECB Executive Board member Schnabel pushed for the last policy statement to include explicit language regarding further rate hikes; France reported firm March business confidence; BOE Governor Bailey sounded a bit dovish; Hungary is expected to keep the base rate steady at 13.0%
  
• Australia reported February retail sales data; reports suggest Australian banks are considering providing relief to homeowners that are struggling with mortgage payments; the RBA may be approaching the end of its tightening cycle

The dollar remain under modest pressure. DXY is down for the second straight day and trading near 102.632. A break below 102.466 would set up a test of last week’s low near 101.915. We believe that markets are overestimating the Fed’s capacity to ease and so the dollar should eventually recover when expectations are repriced. The euro is trading higher near $1.0825 while sterling is trading higher near $1.2310. The yen is the best performer today, with USD/JPY is trading back below 131. With the BOJ seen on hold for the foreseeable future and banking sector tensions easing, we believe USD/JPY remains a buy at current depressed levels. Bottom line: we expect the dollar rally to resume after this current bout of market turmoil fades and markets are one again able to focus on the fundamentals.

AMERICAS

Fed Vice Chair for Supervision Barr testifies before the Senate Banking Committee today. His prepared remarks here were released yesterday and Barr focused on a post-mortem of the SVB failure, calling it a “textbook case of mismanagement” while stressing a renewed focus by the Fed on regulation. Barr also stressed that “Our banking system is sound and resilient, with strong capital and liquidity.” However, he acknowledged that “the events of the last few weeks raise questions about evolving risks and what more can and should be done so that isolated banking problems do not undermine confidence in healthy banks and threaten the stability of the banking system as a whole.” Obviously, the Q&A today will be closely watched. FDIC Chair Gruenberg also testifies today and his prepared remarks are here. Barr then testifies before the House Finance Services Committee tomorrow.

Fed officials continue to view the banking crisis as a regulatory failure. If this turns out to be so, the impact on monetary policy is likely to end up being not too significant. The next FOMC meeting is May 2-3 and WIRP suggests around 55% odds of 25 bp hike then. After that, it’s all about the cuts. Nearly two cuts by year-end are priced in. While down from 4-5 cuts priced in during the height of the banking crisis earlier this month, even two cuts seems very unlikely. In that regard, Powell said after the March 22 decision that Fed officials “just don’t see” any rate cuts this year.

Key survey readings for March will continue rolling out. Richmond Fed manufacturing and Dallas Fed services surveys will be reported today, with the Richmond reading expected at -10 vs. -16 in February. Yesterday, the Dallas manufacturing survey came in at -15.7 vs. -10.0 expected and -13.5 in February. Chicago PMI Friday will be key and is expected at 43.0 vs. 43.6 in February. Last week, preliminary March S&P Global PMIs came in much stronger than expected, with the composite rising to 53.3 vs. 51.1 in February. This was the highest since last May.

Other minor data will be reported. February wholesale and retail inventories, advance goods trade (-$90.0 bln expected), January FHFA and S&P CoreLogic house prices, and March Conference Board consumer confidence (101.0 expected) will all be reported.

Bank of Canada Deputy Governor Gravelle speaks today. The bank next meets April 12 and WIRP suggests nearly 15% odds of a rate cut then. Mirroring Fed expectations, a total of two cuts by year-end are priced in and this too seems very unlikely. Of note, Deputy Prime Minister and Finance Minister Freeland will unveil her budget today.

Brazil central bank minutes will be released. At last week’s meeting, the bank kept rates steady at 13.75% and maintained a hawkish bias.  We note that inflation continues to ease but government interference in monetary policy could make the central bank dig in its heels. Markets are pricing in the start of an easing cycle at the June 21 meeting but we should get more insight at the next meeting May 3. The bank’s quarterly inflation report will be released Thursday and will contain updated macro forecasts.

EUROPE/MIDDLE EAST/AFRICA

Reports suggest ECB Executive Board member Schnabel pushed for the last policy statement to include explicit language regarding further rate hikes. She was ultimately overruled as President Lagarde took a more balanced view and underscored a meeting by meeting approach to policy. Since the March 16 decision, Lagarde has said that “We would have indicated that subsequent hikes would be needed, but in the face of the uncertainty that we had, it would not and it was not the right policy indication to give.” The next policy meeting is May 4 and WIRP suggests nearly 90% odds of a 25 bp hike then. After that, another 25 bp hike is nearly priced in for Q3 that would see the deposit rate peak near 3.5%. There are some odds of rate cut by year-end, which seems very unlikely.

France reported firm March business confidence. Headline came in at 103 vs. a revised 104 (was 103) in February, while manufacturing confidence came in at 104 vs. a revised 105 (was 104) in February. Consumer confidence will be reported tomorrow and is expected at 81 vs. 82 in February. Quite frankly, we are surprised confidence has held up so well in light of the rising tensions as protests mount against Macron’s recent decision to ram through a higher retirement age by decree. What started as peaceful strikes has degenerated into at times violent protests. Unions are holding another day of nationwide strikes today.

Bank of England Governor Bailey sounded a bit dovish. Specifically, he said the underlying state of the U.K. economy suggests that “interest rates will not necessarily have to return fully to, and remain around, the higher levels they once had.” Of note, the bank rate peaked at 5.75% in 2007 before the Great Financial Crisis hit. Bailey added that any interest rate decisions won’t be impacted by the banking crisis and noted “We have a strong macro-prudential policy regime in this country. With the Financial Policy Committee on the case of securing financial stability, the Monetary Policy Committee can focus on its own important job of returning inflation to target.” This is the view of most major central bank and we concur. Bailey testifies before Parliament on SVB today. The next policy meeting is May 11 and WIRP suggests around 80% odds of a 25 bp hike, with odds of another hike topping out near 60% in Q3.

National Bank of Hungary is expected to keep the base rate steady at 13.0%. The 1-day deposit rate has become the de facto policy rate since it was introduced back in October at 18.0%. At the last meeting February 28, the bank said it would keep policy tight for a “prolonged period.” Deputy Governor Virag said “We’ll certainly need to maintain the 18% interest rate level until a trend-like improvement in risk assessment.” The market is pricing in the start of an easing cycle over the next three months, which seems very unlikely. Inflation may have peaked but remains well above the 2-4% target range. Ahead of the decision, Hungary reports Q4 current account data.

ASIA

Australia reported February retail salesdata. Sales came in as expected at 0.2% vs. a revised 1.8% (was 1.9%) in January. However, the y/y rate cooled to 6.4% from 7.5% in January and was the lowest since December 2021. Recent data have been mixed, with unemployment dropping to 3.5% in February while the March composite PMI falling to 48.1 vs. 50.6 in February. February CPI data will be reported tomorrow. Headline is expected at 7.2% y/y vs. 7.4% in January. If so, it would be the second straight month of deceleration but would remain well above the 2-3% target range.

Reports suggest Australian banks are considering providing relief to homeowners that are struggling with mortgage payments as rates continue to rise. Head of the Australian Banking Association Bligh acknowledged that many borrowers are “starting to feel the pinch” from rising borrowing costs. The relief measures reportedly being discussed include shifting to an interest-only loan for a brief period, refinancing at lower interest rates, lengthening the loan tenure, and deferring some repayments. Bligh added that “Banks are not anticipating the sort of scale that would require some form of capital relief from regulators, but they will be using all of those tools in their toolbox and doing everything they can.”

The good news is that the RBA may be approaching the end of its tightening cycle. After the RBA hiked 25 bp to 3.60% at its last meeting March 7, Governor Lowe said the bank will be guided by incoming data on employment, inflation, retail sales, as well as various business surveys in deciding on whether to hike rates or pause at the April 4 meeting. He noted that “If collectively they suggest the right thing is to pause then we’ll do that, but if they suggest that we need to keep going we’ll do that. So we’ve got a completely open mind about what happens at the next board meeting.” WIRP suggests steady rates next month. In light of the mixed data recently, this is much more likely than the rate cut that was being priced in during the height of the banking sector crisis this month. However, a rate cut is still priced in before year-end and we believe that remains very unlikely.