Daily Market Outlook, March 23, 2023

Powell Giveth, Yellen Taketh… Bailey Up Next

Asian equities took their lead from Wall Street's souring in risk sentiment, as all US benchmarks closed in the red, nursing 1%+ losses on the session as markets sought to make sense of duelling narratives, on the one hand FOMC Chair Powell pretty much stuck to the script raising rates by the expected 25bps while reducing near term expectations for further imminent raises, Powell pushed back against the market pricing rate cuts, stating that this wasn't a baseline expectation for 2023 and that the Committee was prepared to do more on rates if needed. The fly in the ointment and the catalyst for the sharp reversal in gains seen during Powell’s press conference came from Treasury Secretary Yellen's testimony, as she stated that the Treasury is not considering insuring all uninsured bank deposits, flip flopping on initial posturing that a backstop for all deposits was in the offing, this led to investors dumping risk exposure into the close of trading.

Today’s European session will be dominated by the UK’s Bank of England (BoE) the next major central bank to deliver a policy update later today. Investors had been cautiously optimistic that given the global backdrop of the banking turmoil having a direct impact in the UK with HSBC taking over SBV UK’s operations that this would lead to a pause from the BoE. However, this optimism has been thwarted given yesterday's UK CPI printing an upside surprise, ticking up to 10.4% in February from 10.1% in January, market watchers were eyeing the potential for a print sub 10%. After its last meeting in February the BoE hadd stressed that further rate move would be heavily data dependent, hence, markets have rapidly repriced the potential for another move north in rates today for a further hike, it appears that another raise today won't occur without dissent from doves on the committee with committee member Cunliffe believed to be shifting his stance towards a more dovish tilt, heading into today’s meeting markets are pricing over 80% probability of a 25bp hike pushing the headline rate to 4.25%.

FX Options For 10am New York Cut

USD/JPY: 131.50 ($1.5b), 130.50 ($980.5m), 70.00 ($856m)
EUR/USD: 1.0580 (EU927.1m), 1.0800 (EU874.4m), 0.9935 (EU754.9m)
AUD/USD: 0.7500 (AUD333.3m), 0.7100 (AUD325.4m), 0.7300 (AUD301.4m)
USD/CNY: 6.7500 ($1.27b), 6.9500 ($575.5m), 6.4700 ($440m)
USD/CAD: 1.5175 ($360m), 1.3850 ($312.6m)
EUR/GBP: 0.8900 (EUl.Oób), 0.8705 (EU350m)
USD/BRL: 4.7500 ($690m), 4.8000 ($400m)
Benchmark 1-month expiry G10 FX implied volatilities are edging closer to levels seen ahead of the March banking crisis. USD/JPY implied volatility has proved a reliable FX fear gauge over recent weeks and took an ominous pre Fed hit on Wednesday. One-month was sold at 12.5 – the low end of its 11.8-15.5 March crisis range, which helps to reinforce the recovering risk appetite as bank worries fade. (RTRS)

Overnight News of Note

Asian Shares Subdued After Fed Hints At Rate Pause
Dollar Slips As Fed Outlook Shifts
Treasury Sec Yellen: Not Considering ‘Blanket’ Bank Deposit Insurance
US Futures Little Changed As Investors Weigh Fed Outlook
Gold Gains As Fed Hints At Pause In Rate Hikes
Citigroup CEO Jane Fraser: There Are 'Isolated Problems' In Banking Industry
FDIC Delays Bid Deadline For Silicon Valley Private Bank - Bloomberg News
China’s Australia Ambassador Says Threat of War Not ‘Realistic’
BofA Lowers Peak US Interest Rate Forecast To 5-5.25% From 5.25-5.5%
Brazil Central Bank Leaves Interest Rate Unchanged At 13.75%
RBNZ Chief Economist Conway: Incredibly Determined To Get Inflation And Inflation Expectations Back To Target
Coinbase Gets SEC Notice Signalling Intent To Sue Over Crypto Offerings
Oil Drops After Three-Day Rise As Investors Assess Fed’s Message