CPI Reading Takes a Temporary Back Seat to Banking Crisis

(Bloomberg) -- The most important event on the economic calendar ahead of the Federal Reserve’s monetary policy meeting this month is no longer the latest reading on inflation. Tuesday’s consumer price index reading is being overshadowed by turmoil in the banking industry.

Silicon Valley Bank on Friday became the biggest US lender to fail in more than a decade just days after Silvergate Capital (NYSE:SI) Corp. announced it was shutting its bank. Then on Sunday, New York state financial regulators seized Signature Bank (NASDAQ:SBNY). The collapses led the Fed to launch a new emergency program to backstop banks. So now inflation is no longer top of mind for investors. 

“The usual statistics — even one as critical as CPI — take a back seat to a banking crisis,” said Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR).

The events are triggering traders to recalculate the magnitude and pace of the Fed’s interest-rate hiking path to tame inflation. Pacific Investment Management Co.’s Daniel Ivascyn said Monday the Fed could pause rate increases as soon as this month, while economists at Goldman Sachs Group Inc (NYSE:GS). said they no longer expect the central bank to deliver a rate hike at its March meeting. 

“Systematic issues like this, like a potential bank run or liquidity event, is going to supersede economic data in the near term,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management, adding that a few days before the turmoil broke out in the banking sector, Fed Chair Jerome Powell had hinted that the central bank could be raising rates by as much as 50 basis points at its next meeting.

Those comments now seem outdated. As a more aggressive Fed seems unlikely, yields on 10-year Treasuries fell 18 basis points Monday in New York to 3.52%, following a 20-basis-point drop on Friday. Meanwhile, the yield on the two-year at one point Monday fell nearly 60 basis points to 3.99%.

However, some market watchers say this is all temporary and attention will soon turn back to inflation.

Sylvia Jablonski, CEO and CIO at Defiance ETFs, said that even though recent events could be disinflationary in that they remove capital from the system, the problems of inflation and a hot jobs market remain.

“The Fed is likely to stay the course with further hikes. Perhaps there is a slowdown, or a pause sooner, but I do not think the Fed is done or that a hike is off the books, no matter how CPI comes in,” Jablonski said.

CPI “will come back to the forefront at some point soon enough, but maybe gets lost in it for the time being,” Joanne Bianco of BondBloxx Investment Management told Bloomberg’s ETF IQ show.