Macro Economy Weekly | Bitmidas
2023–03–21
Bank Liquidity Crisis May Reverse Monetary Policy
Credit Suisse, the second largest bank in Switzerland, is in crisis. The 2022 financial report shows that Credit Suisse has a net loss of 7.3 billion Swiss francs for the whole year, and a large amount of deposits and net assets outflowed in the fourth quarter. It may continue a significant adverse impact on performance and financial conditions. The major shareholder, the National Bank of Saudi Arabia, rejected the aid, which triggered panic in Europe. Crude oil fell sharply, and the market worried about an outbreak of the financial crisis, betting that the European Central Bank would slow down or suspend interest rate hikes.
The Swiss credit crisis has now been alleviated, and the Swiss National Bank confirmed that it will provide liquidity to Credit Suisse with sufficient collateral. Credit Suisse raised up to 50 billion Swiss francs from the SNB and planned to buy back up to 500 million Euros of Eurobonds maturing in 2023 and 2024 and up to $2.5 billion dollar-denominated bonds.
After the Credit Suisse crisis eased, the European Central Bank did not slow down rate hikes as expected by the market. In order to curb high inflation, the European Central Bank raised interest rates by 50bp to 3.5%.
In the United States, after SVB fell into a liquidity crisis and went bankrupt, Signature Bank also broke down, and followed by crisis of First Republic Bank. Depositing $30 billion to ease liquidity prevented the current First Republic’s liquidity crisis. However, this did not ease the market’s concerns. Numerous deposit banks and their deposits that are not subject to FDIC insurance.
In order to prevent other U.S. banks from liquidity crisis, the Federal Reserve launched the BTFP tool to provide banks with liquidity guarantees, loans of 11.9 billion U.S. dollars. In addition, as of March 15, banks borrowed 152.85 billion U.S. dollars through the discount window, a record high. Banks borrowed a total of $164.75 billion from the Fed’s two guarantee facilities.
CPI Falls, Service Inflation Remains High
The annual rate of U.S. CPI without seasonal adjustment in February recorded 6%, which was significantly lower than the previous value of 6.4%. The CPI annual rate recorded 5.5%, lower than the previous value of 5.6%, showing an overall downtrend, but service inflation is still at a five-month high. After the release of the CPI data, Biden said that he will continue to work hard to keep inflation low.
The U.S. PPI recorded an annual rate of 4.6% in February, significantly lower than the previous value of 5.7%, and the expectation was 5.4%. It is reflected that the cost of production goods is being greatly reduced, and the transmission of prices into the terminal market will continue to decrease.
Federal Reserve Balance Sheet
In order to provide market liquidity and reduce the collateral crisis caused by US Banks, the Fed’s balance sheet jumped from US$8,342.283 billion on March 8, 2023 to US$8,639.3 billion on March 15, 2023, an increase of nearly US$300 billion , the highest level since November last year.
Recession Indicator — U.S. Debt Inversion
After the Fed’s balance sheet increased, the yield of U.S. bonds fell sharply, and the 2/10 inversion converged. As of the time of this report, the inversion depth was 60.14bp. The market believes that liquidity will be released as the Fed re-expands its balance sheet, and the probability of financial crisis outbreak is reduced, and the time of recession is delayed.
Market Performance
The U.S. dollar index fell sharply under the US Banks’ crisis. Upon the Credit Suisse crisis, funds poured into the U.S. dollar as a safe-haven and Dollar rebounded as a result. At present, the U.S. dollar index is at a turning point when the Fed is about to decide its subsequent monetary policy.
Under the US and European banking crisis, a large amount of safe-haven funds poured into gold, and gold rebounded sharply.
U.S. stocks fell sharply after the SVB downfall, and rebounded sharply after 11 banks injected $30 billion in deposits to First Republic and the Federal Reserve’s balance sheet increased by $300 billion, but it has not recovered all the losses yet.
The SVB crisis was transmitted into the crypto market, because Circle had risk exposure to SVB, USDC de-pegged, and BTC fell sharply. After the FDIC, the US Treasury Department, and the Federal Reserve provide liquidity aid, BTC recovered its lost ground. When Fed begins to ease its balance sheet of US$300 billion, BTC surged under the expectation of an enhanced liquidity, reaching a new high since 2022.
Summary
Many banks in the United States wend down due to the liquidity crisis, and Credit Suisse in Europe has also caused global market shocks due to huge losses and liquidity problems. The market is worried about the spread of the financial crisis in the European and American banking industries. Crude oil, a sensitive good, plunged, pointing to a future economic recession.
With so many measure to aid banks, ie the Swiss National Bank providing liquidity to Credit Suisse, the Federal Reserve, the U.S. Treasury Department, and the FDIC provided support and liquidity for U.S. banks, a liquidity crisis was snuffed out. The rescue was relatively successful, preventing it from transforming into a financial crisis in 2009.
However, the European Central Bank is still aggressively raising interest rates, and the Federal Reserve has not reached the terminal interest rate as planned by the dot plot. Theoretically, there is still room for interest rate hikes. As long as interest rates are on hikes, the profitability of American and European banks will generally continue to decline. Liquidity is still a hidden risk, which may force the central banks of the United States and Europe to shift. Up to date, the Federal Reserve has released nearly 500 billion US dollars of liquidity in the process of bailing out the market. The Federal Reserve’s BTFP tool may increase by as much as US$200 million. As long as the (risky) banks’ deposits in the United States are still flowing out, the Fed will have to continue to buy bonds and expand its balance sheet to release liquidity. The current situation has essentially changed by the end of QT, the market has ushered in a reversal, which has a more direct push-up effect on cryptos.
Completion of this report: 2023–0317–18:10 (UTC+8)
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