Swiss National Bank Support Steadies Market as ECB Faces Difficult Choice

The pendulum of market psychology is swinging dramatically. Amid the US banking crisis, Credit Suisse's long-running pressures percolated back to the top-of-mind, sending ripples through the capital markets and trigging a sharp slide in the euro. The SNB support is helping the markets calm today.

The odds of a 50 bp hike by the ECB today have been cut to about 50% compared with nearly 100% a week ago. The market has about a 66% chance of a 25 bp hike by the Fed next week discounted and about a 50% chance of a quarter-point move by the Bank of England priced into the overnight index swaps.

Asia Pacific equities continued the rout, while European stocks, including the bank index, have stabilized. US equity futures are narrowly mixed. Benchmark 10-year bond yields are jumping back. European rates are up 8-15 bp and the peripheral premiums are falling. The 10-year US Treasury yield is up almost four basis points to 3.50%. The US two-year yield is up a dozen basis points to poke back above 4%.

The US dollar is weaker against nearly all the G10 currencies, led by a rebounding Swiss franc (~0.6%). The notable exception is the New Zealand dollar, which was punished for a much weaker-than-expected Q4 GDP (-0.6%). Gold ran up a bit through $1937 yesterday and is consolidating today above $1900. May WTI is also stabilizing after falling to the lowest level since late 2021. Yesterday's low was a little below $66 and today's bounce has carried to back to almost $69. It finished last week slightly be $77.00.

Asia Pacific

As the Chinese economy finds better traction, it ought not be surprising that so do Japanese exports. Japanese exports increased on a year-over-year basis for the first time since last September. Imports slowed for the fourth consecutive month. The result is that Japan's trade deficit fell sharply. It was nearly JPY900 bln in February down from the record JPY3.5 trillion in January. Japan recorded a JPY711.5 bln deficit in February 2022. As we have noted, seasonal influences are powerful, and Japan's trade balance always (past 20 years) improves in February from January.

The seasonal pattern for March is not as strong, but the trade balance often improves then as well, before deteriorating in April and May. Imports rose 8.3% year-over-year (slowing from 17.5% in January), while export accelerated to 6.5% (from 3.5%). Of note, shipments to the US rose by nearly 15% and 18.6% to Europe. Exports to China fell by nearly 11%, the third consecutive decline. Separately, January's industrial output was revised to show a larger contraction (5.3% vs. -4.6%, month-over-month), and Japanese investors stepped up their purchases of foreign bonds last week after selling the week before. Through the first ten weeks of the year, Japanese investors have bought JPY6.26 trillion (~$47 bln) of foreign bonds. In the first ten weeks of 2022, they sold JPY1.82 trillion.

Australia filled nearly 75k full-time positions last month, more than the previous three months combined. It lost 10.3k part-time positions. The unemployment rate fell to 3.5% from 3.7%, while the participation rate was unchanged at 66.6%. The market focused on European and US financial problems, but the market shrugged it off and took Australian yields lower. The three-year yield fell 22 bp to 2.81% but the Australian dollar traded higher. In New Zealand, Q4 22 GDP was considerably weaker than expected, falling by 0.6% (instead of 0.2%), and Q3 was revised to 1.7% from 2.0%. It raises questions over whether the central bank can raise rates another 75 bp as it had previously signaled. 

The dollar is pinned in the lowest end of its range against the Japanese yen. Support has been found around JPY132.20. The upper end of this week's range is around JPY135.00. We suspect the greenback has scope to recover a bit, and a move above JPY133.50 would lift the tone. The Australian dollar is firm, though well within yesterday's range (~$0.6590-$0.6710). It reached about $0.6660 in early European turnover where it met a wall of sellers. Initial support now is seen near $0.6620. The greenback is slightly heavier against the Chinese yuan in quiet turnover. It rose slightly above CNY6.91 for the first time since Monday but is closer to CNY6.90 now. The PBOC set the dollar's reference rate at CNY6.9149. The median in Bloomberg's survey anticipated CNY6.9159.

Europe

Credit Suisse shares are rebounding today. The SNB will lend CHF50 bln to the bank, which has also offered to repurchase CHF3 bln in senior debt. The funds from the national bank are huge, a little more than 6% of GDP. The Stoxx bank index of EMU banks, which tumbled 8.4% yesterday, has stabilized and is trading about 1.3% higher in the European morning.

There were reverberations through the capital markets. Interest rates plunged. The euro fell the most in six months (~1.45%). The ECB is seen less likely to deliver the half-point hike that had seemed to be a done deal a weak ago. The swaps market sees about a 50% chance of a 50 bp move today. Before the financial tensions erupted, the market was nearly fully confident of a half-point move. The swaps market has also slashed the odds that the Bank of England delivers a quarter-point hike next week. Even at the end of last week, the probability was seen near 90%. It is a little above 50% now.

The euro posted a big outside down day, trading on both sides of Tuesday's range and closing well below Tuesday's low. It has stabilized today, ostensibly helped by the Swiss move. It has reached a high near $1.0635 after falling to around $1.0525 yesterday. A move above $1.0665 would lift the tone. However, intraday momentum indicators suggest it may initially first test support near $1.0580. Sterling has stalled after recovering a cent from yesterday's low around $1.2010. It was sold in early European turnover. There are about GBP500 mln in options at $1.2150 that roll off today. Ahead of yesterday's low, support is seen near $1.2050.

America

US retail sales fell for the third time in four months. Yet, in some ways, the American consumers, are providing to be resilient. Excluding auto sales (-1.8%) and gas station sales (-0.6%), retail sales were flat. The core measure (excludes auto, gas station, food services, and building materials) rose by 0.5%, after the January estimate was revised to 2.3% from 1.7%.

The median forecast in Bloomberg's survey was for a 0.3% decline. This may spur some economists to revise up their Q1 GDP estimate. Perhaps, the most troubling part of the retail sales report was the 2.2% decline in food service sales (restaurants and bars). It was the largest decline in more than a year. It does follow a 5.6% jump in January. Separately, producer prices were softer than expected. The headline year-over-year pace slowed to 4.6% and the core to 4.4% from revised January readings of 5.7% and 5.0%, respectively. 

European developments seem to shake fragile sentiment in the US and drove the US two-year yield to fresh six-month lows near 3.70%. Recall that last week, the yield poked above 5%. After Tuesday's CPI report and the weekend initiatives, the comments by Fed Governor Bowman, the market felt more comfortable with a 25 bp Fed hike next week.

At the close on Tuesday, the probability was seen near 80%. It was halved yesterday to 40% and is now near 66%. Moreover, the Fed funds futures strip is consistent with a rate cut in Q2. Consider the implied yield of the January 2024 Fed funds futures contract, which offers the cleanest read of the end of 2023. It is about 3.95% now and last week, the implied yield of the Jan 2024 Fed funds futures contract was approaching 5.60%. Today's data seems likely overshadowed by the ECB meeting and financial concerns. The data includes weekly jobless claims, which rose by more than expected, housing starts and permit, the Philadelphia Fed survey, and the NY Fed services survey.

The US dollar settled near CAD1.3770 yesterday and has spent little time above there so far today. A consolidative tone has emerged, and the greenback has traded down to almost CAD1.3720. The risk-off mood negated the positive impulse from the sharp decline in US short-term rates. Note that yesterday's high was just shy of CAD1.3815, where options for around $860 mln expire today. The greenback remains firm against the Mexican peso and is trading a little above MXN19.00. The high for the week was set on Monday at almost MXN19.18. Initial support is seen by MXN18.90, while a move above the week's high would target the MXN19.25-30 area.