MNI ASIA OPEN: Former FDIC Head: Bank Contagion Unlikely

EXECUTIVE SUMMARY

• MNI INTERVIEW: Ex-FDIC Chair Downplays Bank Contagion Risk
• MNI INTERVIEW: Fed Could Cut Rates Before Summer-Ex-NY Fed Econ
• MNI INTERVIEW: Fed Will Cut But Move Slowly: Ex-IMF US Chief
• MNI: Fed Rates Policy Can Focus on Lowering Inflation -Bullard
• MNI: Fed's Bullard Raises Peak Rate Projection To 5.6%

Tsy 2s10s Curve Climb Off Deeper Inversion

US

FED: Bill Isaac, former head of the Federal Deposit Insurance Corporation, told MNI the failures of regional lenders like Silicon Valley Bank and Signature Bank are unlikely to lead to bigger problems for the U.S. financial system because authorities acted with alacrity to stem concerns.

• "There's not much more to be concerned about as long as people are not seeing a potential for a lot more failures and right now I don't see a lot more," he said in an interview.
• "I'm confident in the sense that we have large government organizations like the FDIC and the Fed and others that have the capacity to control almost anything in terms of having adverse effects in the financial system. They have a lot of authority to take steps, whatever steps are needed to keep things calm and under control." For more see MNI Policy main wire at 1318ET.

FED: The Federal Reserve could have to reverse course and start cutting interest rates and halting asset runoffs sometime in the next few months if the recent banking crisis devolves into a widespread credit crunch, former New York Fed staffer Gianluca Benigno told MNI.

• “They might need to cut rates,” he said in an interview. “I’m not sure that we need to wait until the summer, it might be earlier."
• Benigno said the Fed’s quantitative tightening plans, coupled with what he sees as a misguided reverse repo facility, is exacerbating the banking sector’s troubles.
• “It works by draining reserves from the banking sector, and there is in my opinion an issue with the overnight RP facility because it’s actually creating the incentive to make things worse,” said Benigno, also a former BOE staffer and ex-consultant to the IMF. For more see MNI Policy main wire at 1016ET.

FED: The Fed will be cutting interest rates in the second half of 2023 as policymakers slowly adjust to an economy driven to recession by a credit squeeze and the lagged effect of past rate hikes, Desmond Lachman, former head of the IMF division tracking the U.S. economy, told MNI.

• “The Fed will be slow to make the turn” to rate cuts including a pause next meeting, said Lachman, former IMF western hemisphere department chief and deputy policy development branch director, now at the American Enterprise Institute.
• “Markets are right in saying the Fed is going to be in cutting mode pretty soon, because you will see the economy in a real recession, you’ll see real problems in the banking system,” he said. “Markets might have their timing a bit wrong, or thinking that he’s going to cut very fast.” For more see MNI Policy main wire at 0720ET.

FED: U.S. monetary policy can continue to focus on bringing inflation down as the Fed's macroprudential tools are well positioned to contain the financial turmoil after several bank closures and government interventions, Federal Reserve Bank of St. Louis President James Bullard said Friday.

• Economic data have been stronger than expected in the first quarter, and inflation remains too high. The macroprudential response has been "swift and appropriate, and regulators stand ready to take additional action if necessary," he said in remarks prepared for Greater St. Louis Inc.
• “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,” Bullard said.
• The FOMC raised rates by a quarter point on Wednesday to a 4.75% to 5% target range but signaled it's approaching the peak of the hiking cycle faster than earlier expected amid a likely credit crunch amid bank turmoil. For more see MNI Policy main wire at 0941ET.

FED: U.S. interest rates will need to rise to a 5.5%-5.75% range and stay there until next year to bring down inflation assuming turmoil from the collapse of several banks dissipates, Federal Reserve Bank of St. Louis President James Bullard said Friday.

• His forecast is a quarter-point higher than in December "in reaction to the stronger economic news and under the assumption that the financial stress abates in the weeks and months ahead," he told reporters after giving a talk in St. Louis.
• The Fed's swiftly launched emergency lending facility for banks "goes to the heart of the matter" and allows the Fed's interest rate policy to be carried out separately, Bullard said.
• "I would put 80% probability on the case where financial stress abates. If it doesn't abate, that's a completely different world where financial stress gets more intense, and I would be willing to react to that. But you would have to get into that scenario before I would know exactly how to play that," he said. For more see MNI Policy main wire at 1136ET.

US TSYS: Bank-Tied Safe Haven Rate Bid Recedes in Late Trade

• Decent gains held by Treasury futures after the bell were well off first half highs, 30Y futures trading in a narrow range since late morning were trading 132-12 +19 after the bell.
• Treasury futures opened broadly higher after another retreat in European banks overnight (Deutsche Bank -12%, Commerzbank -9%), global rates rallied amid persistent worries over bank funding and surge in Foreign and International Monetary Authority repo facility take up to $60B from zero the week prior.
• Treasury 2Y yields fell to the lowest levels since September 2022: 3.5594% just two days after marking a one week high of 4.2480% early Wednesday, while yield curves bull steepened to the least inverted levels since October (2s10s taps -26.706).
• In line with the overnight bank sell-off and safe haven bid projected rate CUTS gained momentum. Fed funds implied hike for May'23 receded to around 6bp, followed by projected rate cuts through year end in early trade: Jun'23 cumulative -15.6bp to 4.631%, Jul'23 -49.3bp to 4.295% while Dec'23 cumulative neared -100.0.
• Safe haven short end support moderated through the second half as stocks recovered (SPX eminis +15 in late trade), however: Sep'23 SOFR futures traded around 95.80 late (+0.040) vs. 96.11 early session high, while Dec'23 cumulative receded to -87.7 at 3.926%.

OVERNIGHT DATA

• US FEB DURABLES ORDERS -1.0% VS JAN -5.0% REV (-4.5% PRIOR)
  
• US FEB DURABLES EX-TRANS ORDERS +0.0% VS JAN 0.4% REV (+0.8% PRIOR)

• US S&P GLOBAL MARCH SERVICES PMI AT 53.8 VS 50.6 LAST MONTH
• US S&P GLOBAL MARCH COMPOSITE PMI AT 53.3 VS 50.1 PRIOR
• US S&P GLOBAL MARCH MANUFACTURING PMI AT 49.3 VS 47.3 PRIOR

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 43.07 points (0.13%) at 32158.31
• S&P E-Mini Future up 8.75 points (0.22%) at 3987.75
• Nasdaq down 15 points (-0.1%) at 11775.63
• US 10-Yr yield is down 5.4 bps at 3.3725%
• US Jun 10-Yr futures are up 5.5/32 at 116-5
• EURUSD down 0.0071 (-0.66%) at 1.0761
• USDJPY down 0.14 (-0.11%) at 130.71
• Gold is down $14.78 (-0.74%) at $1978.58

• EuroStoxx 50 down 76.52 points (-1.82%) at 4130.62
• FTSE 100 down 94.15 points (-1.26%) at 7405.45
• German DAX down 253.16 points (-1.66%) at 14957.23
• French CAC 40 down 124.15 points (-1.74%) at 7015.1

US TREASURY FUTURES CLOSE

• 3M10Y -4.196, -131.017 (L: -136.904 / H: -125.082)
• 2Y10Y +1.43, -39.84 (L: -45.557 / H: -26.706)
• 2Y30Y +0.759, -13.481 (L: -18.483 / H: 5.688)
• 5Y30Y -2.321, 23.192 (L: 22.168 / H: 37.382)
• Current futures levels:
• Jun 2-Yr futures up 2.125/32 at 103-29.125 (L: 103-22.625 / H: 104-11.25)
• Jun 5-Yr futures up 1.5/32 at 110-16.25 (L: 110-07 / H: 111-09.75)
• Jun 10-Yr futures up 5.5/32 at 116-05 (L: 115-21.5 / H: 117-01.5)
• Jun 30-Yr futures up 19/32 at 132-12 (L: 131-06 / H: 133-09)
• Jun Ultra futures up 1-02/32 at 142-23 (L: 140-26 / H: 143-22)

US 10YR FUTURE TECHS: Trades Through A Key Resistance Zone

• RES 4: 118-07 High Aug 23 (cont)
• RES 3: 117-29+ High Aug 26 2022 (cont)
• RES 2: 117-14+ High Aug 29 / 30 2022 (cont)
• RES 1: 117-01+ Intraday high
• PRICE: 116-07 @ 1330ET Mar 24
• SUP 1: 115-21+/01 Low Mar 24 / Low Mar 23
• SUP 2: 113-26 Low Mar 22
• SUP 3: 113-15 50-day EMA
• SUP 4: 113-08+ Low Mar 15

Treasury futures touched a low of 113-26 on Wednesday. The contract has recovered from that low and the bounce accelerated Friday. Price has traded through the key resistance zone between; 116-24, Monday’s high and 116-28+, the Jan 19 high. The breach strengthens bullish conditions and opens 117-14+ next, the Aug 29 / 30 2022 high (cont). Activity is likely to remain volatile, key support has been defined at 113-26, the Mar 22 low.

EURODOLLAR FUTURES CLOSE

• Jun 23 -0.010 at 94.940
• Sep 23 +0.030 at 95.530
• Dec 23 +0.035 at 95.880
• Mar 24 +0.035 at 96.275
• Red Pack (Jun 24-Mar 25) +0.015 to +0.030
• Green Pack (Jun 25-Mar 26) +0.005 to +0.010
• Blue Pack (Jun 26-Mar 27) +0.010 to +0.020
• Gold Pack (Jun 27-Mar 28) +0.020 to +0.050

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N +0.00172 to 4.90886% (+0.24800/wk)
• 1M -0.01472 to 4.83057% (+0.00457/wk)
• 3M -0.03228 to 5.10143% (+0.10300/wk)*/**
• 6M -0.15542 to 4.98729% (-0.06500/wk)
• 12M -0.29800 to 4.80886% (-0.22528/wk)
• * Record Low 0.11413% on 9/12/21; ** New 16Y high: 5.15371% on 3/9/23

• Daily Effective Fed Funds Rate: 4.83% volume: $92B
• Daily Overnight Bank Funding Rate: 4.82% volume: $276B

• Secured Overnight Financing Rate (SOFR): 4.80%, $1.355T
• Broad General Collateral Rate (BGCR): 4.77%, $526B
• Tri-Party General Collateral Rate (TGCR): 4.77%, $510B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage recedes to $2,218.458B w/ 100 counterparties vs. the prior session''s $2,.233.956B. Compares to Friday, Dec 30 record/year-end high of $2,553.716B (prior record high was $2,425.910B on Friday, September 30.

PIPELINE

• 03/24 No new issuance Friday, $22.4B total for week
• $13.65B Priced Thursday
• 03/23 $6.5B *United Health $1.25B +5Y +88, $1.5B 10Y +118, $2B 30Y +143, $1.75B 40Y +158
• 03/23 $2B *Medtronic $1B 5Y +87.5, $1B 10Y +115
• 03/23 $1.5B *Nutrien $750M 5Y +150, $750M 30Y +215
• 03/23 $1.2B *Prologis $750M 10Y +140, $450M 30Y +160
• 03/23 $900M *Public Service E&G $500M 10Y +122, $400M 30Y +142
• 03/23 $800M *Marriott Int 6Y +170
• 03/23 $750M *AIG (American International Group) 10Y +210

EGBs-GILTS CASH CLOSE: Bull Steepening Again On Bank Fears

European curves bull steepened strongly for the 2nd consecutive session Friday, as central bank hike expectations pulled back yet again.

• The session's fixed income price action was driven by a banking share price rout, with stalwart Deutsche Bank down over 10% at one point amid fears around the financial sector outlook and going into the weekend.
• 10Y BTP spreads widened as much as 7bp as Bunds rallied sharply and stocks weakened.
• However, the drop in core yields pulled back from extremes in the afternoon as equities stabilised.
• ECB peak rate expectations dipped as much as 25bp before closing 9bp lower; BoE rate pricing closed 7bp lower, but had fallen as much as 30bp intraday.
• Stronger-than-expected Eurozone / weaker-than-expected UK PMIs didn't move the needle much, with market participants much more focused on bank risks.
• For the session, 2Y German yields dropped 13.5bp with 10Y off 6.9bp; the UK short-end rally was less pronounced, with 2Y yields down 8.1bp and the belly outperforming (5Y down 8.4bp), vs 10Y Gilt down 7.9bp.
• Banking-related headlines will be watched for over the weekend, with the highlights of Monday's schedule including German IFO data and multiple ECB speakers (including Schnabel) and BOE's Bailey making an appearance.

FOREX: Euro Weakness Persists Amid European Banking Sector Concerns

• Pressure on banking stocks was present again early Friday, weighing on the likes of the Euro and prompting an early surge for the US dollar and the Japanese Yen. Names such as Deutsche Bank were knocked by worries that regulators and central banks have not yet contained the current crisis, placing particular pressure on EURJPY which fell as much as 1.9% during European trade.
• PMI data from across the Eurozone saw mixed results, with composite indices beating expectations thanks to a healthier services sector, although disappointing manufacturing reads added to the bearish sentiment for the single currency.
• Despite a recovery for risk sentiment during US hours, the Euro is showing losses of around 0.7% against both the dollar and then yen as we approach the close.
• The slightly more optimistic backdrop approaching the week’s close weighed on the Yen with USDJPY set to close around 130.70 despite an early slide to 129.64 on Friday. The turnaround across higher Beta FX was also noticeable in LatAm where USDMXN fell from early highs of 18.80 to around 18.45 approaching the close.
• Overall, the USD index (+0.58%) has stabilised after a consistent grind lower both before and in the immediate aftermath of the Fed decision this week. Despite dipping briefly below 102 on Thursday, the DXY looks set to close the week on a surer footing and back above the 103 mark. The broad greenback strength on Friday was enough to depress the likes of AUD (-0.55%) and NZD (-0.80%).
• European clocks adjust for daylight saving this weekend and German IFO data will kick off the docket on Monday. Australian and Eurozone CPI prints highlight next week’s calendar.

Monday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
26/03/2023	1400/1600			EU	ECB Schnabel in Discussion at Chicago Booth Conference
27/03/2023	0800/1000	***		DE	IFO Business Climate Index
27/03/2023	0800/1000	**		EU	M3
27/03/2023	0845/0945			UK	BOE Treasury Select Committee Hearing on Silicon Valley Bank
27/03/2023	1000/1100	**		UK	CBI Distributive Trades
27/03/2023	1340/1540			EU	ECB Elderson Speech at Foreign Bankers' Association
27/03/2023	1430/1030	**		US	Dallas Fed manufacturing survey
27/03/2023	1500/1700			EU	ECB Schnabel in Conversation at Columbia University
27/03/2023	1530/1130	*		US	US Treasury Auction Result for 26 Week Bill
27/03/2023	1530/1130	*		US	US Treasury Auction Result for 13 Week Bill
27/03/2023	1700/1800			UK	BOE Bailey Speech at LSE
27/03/2023	1700/1300	*		US	US Treasury Auction Result for 2 Year Note
27/03/2023	2100/1700			US	Fed Governor Philip Jefferson