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Against the turbulent backdrop of the failure of numerous US banks and a crash in global banking shares, investors snatched up cash at the highest weekly pace since April 2020 in the week ending March 15, according to Bank of America (BofA) Global Research.While cryptocurrencies defied broader risk assets last week, everyone <a href="https://www.blockhead.co/2023/03/19/blockhead-business-newsletter-all-eyes-on-the-fed-but-bitcoin-barrels-past-banking-troubles/" rel="noopener noreferrer nofollow">is watching the Federal Reserve</a> after the <a href="https://www.blockhead.co/2023/03/20/a-wild-week-in-finance-what-happened-and-where-do-we-go-from-here/" rel="noopener noreferrer nofollow">wildest week in financial markets</a> since 2008.Many are afraid that the global economy is on the verge of another calamity due to unrest in the financial industry.Another turbulent week for banks signals the end of an era for the global economy, which may be difficult for those who were not around during the 2008 financial crisis to comprehend.The central bank meetings in the week ahead have become a much closer call.&#34;By some accounts, central banks are now walking an almost impossible tightrope. They were behind the curve in fighting inflation and now need to restore their credibility,&#34; said Ethan Harris, head of global economics at BofA Global Research.&#34;Hence, &#39;flip-flopping&#39; on the pace of rate hikes is verboten, pausing and then hiking is even worse, and worst of all is easing policy to address financial market volatility,&#34; he added.The <a href="https://business.bofa.com/en-us/content/market-strategies-insights/global-economy-outlook-and-forecast.html" rel="noopener noreferrer nofollow">Fed is under extreme pressure</a> from all sides as the next FOMC meeting approaches.Even though Jerome Powell is a very &#34;hawkish&#34; person, most people think the Fed will raise interest rates by 25 basis points.Recent events at Silicon Valley Bank, Signature Bank, and Credit Suisse have made central banks concerned, pushing lending standards to tighten even before those incidents.&#34;Here we make three points: (1) central banks have particularly strong tools when the challenges originate in the banking sector, (2) central banks can walk and chew gum - there is nothing wrong with using lender of last resort tools to address banking concerns and rate hikes to deal with an overheating economy, and (3) there is also nothing wrong – or unusual – about lowering rates in the short term to stabilize markets and then resuming rate hikes later to finish the job of corralling inflation,&#34; said Harris.<h2 id="header-0">Could the Fed Be Lagging?</h2>Last month, the Fed slowed to a quarter-point clip, and Federal Reserve chair <a href="https://www.blockhead.co/2023/03/08/the-tug-of-war-continues-hawkish-fed-vs-recession/" rel="noopener noreferrer nofollow">Jerome Powell&#39;s hawkish warning</a> at a congressional hearing added fuel to the fire of concerns about whether or not the Fed was premature in taking that action.The Fed has messed up after being too cautious when initially hiking interest rates a year ago and then doing so very aggressively, which brought the banking industry to its knees.The Fed described the trend of increasing inflation as &#34;transitory&#34; in 2021. Yet, authorities are adamant that this recovery is unusual and that policy should reflect this.&#34;The credibility cost of waiting too long: With a good bit of 20/20 hindsight, central banks have faced heavy criticism for hiking too late and letting the inflation genie out of the bottle. However, it is worth remembering that some of the inflation surges reflected forces that virtually no one anticipated,&#34; said BofA&#39;s Harris.&#34;Now, central banks allegedly have a major credibility problem that ties their hands. Restoring credibility requires a laser focus on fighting inflation, with a well-choreographed steady diet of rate hikes. Anything else will undermine their credibility crusade,&#34; Harris added.<h2 id="header-1">Change in Expectations</h2>The markets are now wagering that the <a href="https://www.blockhead.co/2023/03/15/traders-bet-on-fed-to-focus-on-financial-stability/" rel="noopener noreferrer nofollow">US Federal Reserve will prioritise financial stability</a> over short-term inflation. The change in outlook is being driven more by the US financial crisis caused by the demise of three banks than by elevated inflation.The probability that the Fed would raise interest rates by a modest amount at its meeting on Wednesday increased.Powell has repeatedly said that the Fed needs to be flexible when making policy decisions because there is a lot of uncertainty, but the markets have termed reversals of central bank policy as flip-flops.&#34;We disagree. With such a fluid backdrop in markets and the economy, central banks can&#39;t afford to box themselves in. They need to be flexible in changing their course as conditions change. That means &#39;flip-flopping&#39; is a virtue, not a vice. It shows that the central bank is willing to reassess on the fly,&#34; said Harris.&#34;Perhaps the ultimate flip-flop would be for central banks to pivot from fighting inflation to restoring stability in capital markets. They (central banks) can &#39;walk and chew gum,&#39; using targeted tools to stabilize the financial world and (carefully) hiking rates to lean against inflation,&#34; he added.<h2 id="header-2">Investors Pile Into Cash, But &#34;No Equity Capitulation&#34;</h2>Cash funds witnessed a &#34;massive&#34; influx of $112.7 billion in the most recent week, according to EPFR data cited by <a href="https://business.bofa.com/en-us/content/market-strategies-insights.html" rel="noopener noreferrer nofollow">BofA Global Research</a>.There are transactions from the days following the failure of Silicon Valley Bank to March 15, Wednesday last week.Since then, the markets have been very unstable, but investors&#39; worries have gone down a lot thanks to a series of plans to save failing banks.Credit Suisse has been bailed out by the Swiss National Bank with a US$54 billion loan since the flow data cutoff on Wednesday, while First Republic Bank in the United States has been bailed out by a consortium of large US banks for US$30 billion.BofA forecasts that cash inflows for the first quarter of 2023 will be the greatest they&#39;ve been since the second quarter of 2020.A &#34;tiny&#34; US$26 million was withdrawn from equity funds last week, while US$2.3 billion was moved out of bonds and US$600 million was moved into gold.Even though the market was unstable, BofA said that stock flows were stable from week to week and that there had been &#34;no equity capitulation.&#34;That somewhat explains the <a href="https://www.blockhead.co/2023/03/19/blockhead-business-newsletter-all-eyes-on-the-fed-but-bitcoin-barrels-past-banking-troubles/" rel="noopener noreferrer nofollow">surge in cryptocurrencies</a> last week.But in a study that came out on Friday, BofA said that banks taking out emergency loans could lead to stricter lending rules, less credit for small businesses, and more joblessness.Since May 2022, the most money that has been put into Treasury bonds in one week was US$9.8 billion, which BofA says shows a &#34;flight to quality&#34; in fixed income. The US$3.1 billion outflow from emerging market debt was the largest since November.With &#34;weaker credit flows and less breadth in equities,&#34; BofA&#39;s bull and bear indicator, which measures market sentiment, fell sharply to 3.5 from 4.2 the week before. This is the lowest it has been since January.Read more: <a href="https://www.blockhead.co/2023/03/20/a-wild-week-in-finance-what-happened-and-where-do-we-go-from-here/" rel="noopener noreferrer nofollow">A Wild Week in Finance: What Happened, And Where Do We Go From Here?</a>The world of Web3 can be quite a whirlwind. Whether it’s crypto news in Singapore, South East Asia or even across the globe, we understand how busy the industry is keeping you, so we kindly send out three newsletters each week:<ul><li><a href="https://blockhead.co/tag/blockbeat?ref&#61;blockhead" rel="noopener noreferrer nofollow">BlockBeat</a> for a wrap-up of the week’s digital assets news</li><li><a href="https://blockhead.co/tag/blockhead-brief?ref&#61;blockhead" rel="noopener noreferrer nofollow">Blockhead Brief</a> for weekend happenings as well as what to look forward to in the week ahead</li><li><a href="https://www.blockhead.co/tag/business-bulletin/" rel="noopener noreferrer nofollow">Business Bulletin</a> for macroeconomic updates and industry developments.</li></ul>To avoid FOMO and access member-only features, click <a href="https://www.blockhead.co/#/portal/" rel="noopener noreferrer nofollow">here</a> to subscribe for FREE.

Cash is King, But "Central Banks Can Walk & Chew Gum": BofA

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Autres articles publiés le 21 mars 2023

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