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Bank Turmoil Casts Doubt on Fed Raising Rates Next Week; Data Hints at Cooling U.S. Economy
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Good day. Market turmoil spurred by the failures of Silicon Valley Bank and Signature Bank prompted investors in interest-rate futures markets on Wednesday to give a nearly 50% chance to Federal Reserve officials declining to raise interest rates at their meeting next week. On Tuesday, investors saw a 30% chance of that. The upswing came as February economic figures showed a decline in retail sales and easing price pressures, potential signs of a cooling economy after a strong start to the year. Such data might now take a backseat in Fed deliberations over rates, some analysts said. “At this point I would imagine the [Fed’s] decision next week will mainly be a function of how much turmoil remains in the banking sector and financial markets,” said Stephen Stanley, chief U.S. Economist at Santander U.S. Capital Markets.
Now on to today’s news and analysis.
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Bank Failures, Market Turmoil Fuel Bets on Pause in Fed Rate Rises
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The Federal Reserve has raised rates at eight straight policy meetings and indicated more increases are ahead, but some investors have raised doubts about its next move.
PHOTO: ERIC LEE FOR THE WALL STREET JOURNAL
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More investors anticipate that the Federal Reserve’s rate increase cycle could be over due to broader financial turmoil from the failure of two U.S. regional banks in the past week.
Investors in interest-rate futures markets on Wednesday saw a nearly 50% chance that the Fed won’t increase rates at their March 21-22 meeting, up from 30% on Tuesday, according to data compiled by CME Group. That would leave the federal-funds rate between 4.5% and 4.75%.
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Suddenly a Half-Point ECB Rate Increase Isn’t Guaranteed
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Market expectations for a half-point rate hike by the European Central Bank are changing. Now, the implied rate hike for Thursday’s meeting is 35 basis points—basically meaning it’s a 50-50 decision as to whether the ECB will lift rates by a half point, which the central bank had all but promised heading into it. Investors are hoping the ECB won’t be as stubborn as it has been in the past. “In the past, the ECB has shown itself to be dogmatic in the face of changing news. This caused problems in mid-2008 when it raised rates as the banking situation was deteriorating in the U.S.,” said David Dowsett, global head of investments at GAM Investments. (MarketWatch)
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Credit Suisse Stock Decline Tests Strength of European Banks
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Credit Suisse’s meltdown Wednesday prompted European Central Bank officials to call banks it supervises to ask about their exposure to the Swiss lender, according to people familiar with the matter.
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Glynn’s Take: RBA Rate Pause in April Looks Likely
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This month’s sudden return of fear and loathing to the global banking sector could soon see the Reserve Bank of Australia toss out its aggressive inflation-fighting narrative and look instead to signal coming cuts in interest rates to support failing confidence. Read more.
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Economy Shows Signs of Cooling as Bank Troubles Spread
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A drop in retail sales and easing price pressures in February offered preliminary signs of a cooling economy as the spread of financial turmoil on Wall Street called into question whether the Federal Reserve would continue raising interest rates.
Those market developments overshadowed the latest economic readings, including a Commerce Department report that showed spending fell at stores, online and in restaurants by a seasonally adjusted 0.4% in February, following a 3.2% jump in January.
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U.S. Producer Prices Dropped in February
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The producer-price index declined 0.1% in February from the prior month, compared with a downwardly revised 0.3% increase in January, a possible sign of a recent easing in inflationary pressures.
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Life Is So Expensive, People Are Nostalgic for 2021
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People used to talk wistfully about $3 movie tickets in the 1980s. Now they are nostalgic for prices of a few years ago. But the affordability we recall may never have existed, and faulty memories only deepen angst over prices.
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Why Gas Bills Are Going Crazy—With No End in Sight
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Last year was the most volatile on record for natural gas, boosting the cost to heat homes, generate electricity and manufacture economic building blocks such as steel, and analysts expect such instability to become the norm.
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More Students Are Shunning College and Opting for Apprenticeships
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The gap between the number of students going to college and those selecting apprenticeships is closing as more students say they fear enrolling in college will leave them in debt and holding a degree that hasn’t prepared them for a good job.
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Key Developments Around the World
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U.K. Economy Expected to Avoid Recession, Government Says
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The U.K. government, seeing an improved economic outlook, said it would offer new tax breaks for business investment, boost military spending and give financial support to encourage older Britons and new parents to return to work.
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G-7 Opposes Lowering Russian Crude Price Cap From $60 a Barrel
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The Group of Seven advanced democracies want to keep the price cap on Russian crude at $60 a barrel, according to people familiar with the matter, thwarting hopes in some European capitals of tightening sanctions this month.
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Indonesia’s Central Bank Maintains Benchmark Rate as Expected
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Bank Indonesia held its seven-day reverse repo rate steady at 5.75% on Thursday, in line with expectations, as the central bank continues to expect Indonesia’s economic growth outlook to remain bright this year.
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China’s Housing Prices Show Signs of Stabilizing
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A more than yearlong decline in Chinese new home prices appears to be abating, offering more signs of a recovery as Beijing seeks to shore up confidence and arrest a protracted slump in the sector.
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South Korea’s President Yoon Arrives in Japan for Rare Summit Talks
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Japan said it would lift export curbs on South Korea, as the two countries started the first formal summit between their leaders since 2011 and moved to repair ties long strained by historical disputes.
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Big Japanese Companies Plan Largest Wage Increase in Years
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Major Japanese companies promised to raise wages at the fastest pace in years to help workers cope with inflation, an unusual situation in a country where wages and prices have generally been flat for three decades.
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Russia Blocked From Collecting $4.5 Billion in Ukraine Bond Dispute
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The U.K.’s highest court sided with Ukraine in a dispute with Russia over more than $4.5 billion in debt, allowing Kyiv to make the case that it doesn’t need to repay bonds it has said were foisted upon it nearly a decade ago.
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Financial Regulation Roundup
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SEC to Consider New Cybersecurity Rules for Financial Firms
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Brokers and asset managers would have to notify their customers of data breaches as part of a raft of cybersecurity and resiliency rules the Securities and Exchange Commission proposed on Wednesday.
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Guo Wengui Charged in Alleged $1 Billion Fraud Conspiracy
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Chinese businessman Guo Wengui was arrested Wednesday, accused of orchestrating a $1 billion fraud and charged with 11 counts of fraud and money laundering, according to an indictment unsealed in New York federal court.
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8:30 a.m.: U.S. housing starts for February; U.S. import and export price indexes for February; U.S. weekly jobless claims
9:15 a.m.: European Central Bank rate decision
9:45 a.m.: European Central Bank rate decision press conference
11:15 a.m.: ECB Podcast with ECB’s Lagarde presenting latest monetary policy decisions
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5:30 a.m.: Bank of England/Ipsos Inflation Attitudes Survey
6 a.m.: European Union consumer-price index for February
9:15 a.m.: U.S. industrial production for February
10 a.m.: The Conference Board Leading Economic Index for the U.S. for February; University of Michigan preliminary consumer survey for March
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Federal Reserve’s Preferred Inflation Gauge Expected to Moderate
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Economists at Barclays estimate that core Personal Consumption Expenditures Price Index inflation will slow to a 0.33% month-over-month increase in February from 0.6% in January. Underlying their forecast, the economists say, is an expected easing in core goods inflation as a one-off increase in prescription drug prices that boosted January core goods PCE fades. They also are looking for some easing in core services inflation, noting that Wednesday’s release of producer-price index data on transportation and healthcare, which together account for 21% of the core PCE basket, point to somewhat lower inflation in the categories last month. The PCE price index is the Federal Reserve’s preferred inflation gauge and will be released in two weeks.
—Patrick Sheridan
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Don’t Count Out the Consumer Yet
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With fears that Silicon Valley Bank and Signature Bank fallout will stifle businesses’ access to credit, there is reason to worry about what lies ahead for U.S. consumers, but for now they are doing fine, Justin Lahart writes.
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Bank Crisis Adds a Fresh Crack in Property’s Foundations
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The relationship between banking and real estate may be about to take a toxic turn. The collapse of Silicon Valley Bank and Signature Bank will likely ripple through the mortgage market to commercial landlords, Carol Ryan writes.
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China Begins to Reflate, but Jobs Lag
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January and February data released Wednesday—and other tidbits over the past week—make it clear China’s economy is steadily climbing out of the deep hole policy makers dug at the end of 2022, Nathaniel Taplin writes.
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FedNow, the Federal Reserve’s long-anticipated instant-payments service, will make its debut in July, the central bank said Wednesday. Through FedNow, businesses and consumers will be able to send and receive payments instantly, with immediate access to their funds. (MarketWatch)
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U.S. business inventories contracted slightly in January, posting their first drop since April 2021, in a further sign firms are scaling back restocking as demand weakens. Inventories decreased 0.1% in January, swinging from a 0.3% gain in December, according to Commerce Department data. (Dow Jones Newswires)
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Home sellers in the U.S. gave concessions to buyers in 45.5% of home sales recorded by Redfin agents during the three months ending Feb. 28, the highest share for any three-month period since June 2020 and up from 31.1% a year earlier, the company said. (DJN)
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Japan posted a trade deficit for a 19th straight month in February after the yen’s weakness and higher energy prices boosted the value of imports, Ministry of Finance data showed. Japan reported a Y897.7 billion trade deficit in February, compared with a Y3.5 trillion deficit in January. Exports rose 6.5% in February from a year earlier, while imports rose 8.3% from a year earlier. (DJN)
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Australia's job market surged back to life in February as the economy added more than 60,000 jobs over the month, pushing the unemployment rate sharply lower while also arguing against a pause in interest rate increases in April. After two months of falling employment there were 64,600 new jobs created in February, lowering the unemployment rate to 3.5% from 3.7% in January, its lowest level in nearly half a century, the Australian Bureau of Statistics said. (DJN)
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India's trade deficit in goods narrowed slightly in February on year, with both imports and exports falling sharply, providing increasing evidence of weakening domestic and global demand. The trade deficit, or the difference between exports and imports of goods, came in at $17.43 billion in February compared with a $18.75 billion deficit the same month a year earlier, government data showed. (DJN)
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Singapore's non-oil domestic exports likely fell 15.95% in February from the same period a year earlier, according to the median estimate of eight economists surveyed by The Wall Street Journal. In January, non-oil domestic exports declined 25.0% on year. (DJN)
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Nigeria's inflation rate rose to 21.91% in February from 21.82% a month earlier, the country's National Bureau of Statistics said. The inflation rate fell to 21.34% in December--its first decline in 11 months-- but accelerated again in January and February. (DJN)
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This newsletter is compiled by James Christie in San Francisco.
Send us your tips, suggestions and feedback. Write to:
James Christie, Jon Hilsenrath, Nell Henderson, Nick Timiraos, Paul Hannon, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Perry Cleveland-Peck, Nihad Ahmed, Michael Maloney, Paul Kiernan, James Glynn
Follow us on Twitter:
@WSJCentralBanks, @NHendersonWSJ, @NickTimiraos, @PaulHannon29, @kimmackrael, @TomFairless, @megumifujikawa, @pkwsj, @JamesGlynnWSJ, @cleveland_peck
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