Strange time we are currently having in the financial markets: Fed Chair was ultra hawkish one day, and then more conservative the next, bank failures in the US and strong US employment data. Trying to make sense of the current data and event washing machine is challenging, so let’s take a dive into what happened the past week and what could happen this week.

It all started last week with Fed Chair Jerome Powell stating the Fed will keep its foot on the accelerator and hike rates past the expected Fed threshold of 5%. The market took this as ultra hawkish, and we saw the US dollar flex its muscle and EM currencies under pressure. The rand tested the R18.7000 level at one stage last week with the hawkish rhetoric.

Fast-forward 24 hours later, and the tone of the message delivered by Powell was a bit different. Gone was the certainty and the hawkishness of the previous day, and it was replaced by a more cautious tone of waiting on what the data tells the Fed, and they will act accordingly. Something was amiss, but it was unclear what.

US Treasury Yields plunge after Silicon Valley Bank

What was amiss was the cracks in certain regional banks in the US, as there was a run-on liquidity at these banks, specifically Silicon Valley Bank (SVB). Whether SVB is the canary in the cage that signals the start of a financial crisis is still to be seen, but we have seen the market move out of the US dollar and back into Gold which is also a safe haven currency. The old adage states that the Fed raises interest rates until something breaks. Now that something has broken, it remains to be seen what the Fed’s strategy will be. As we can see from the chart above, US 2-year yields fell 110 basis points from Thursday to Monday, the largest decline since the early 1980s.

Apart from the news of Sillicon Valley Bank, we also had non-farm payroll numbers out, which, in light of the SVB story, moved away from the front pages. The US non-farm printed at 311,000 jobs in February versus the expected 225,000. While the headline number exceeded expectations, when digging down into the data, we see that hourly earnings were lower and that unemployment started to pick up. Taking this into account with the SVB story, it seems that the Fed has started to impact the US economy materially.

US Financial Conditions falls off a cliff

After nearly a year of tightening due to rising interest rates, the following graph demonstrates that financial conditions in the US have begun to loosen. The latest fallout in SVB has just reversed all of that and more and begs the question of how robust the US economy is in reality.

CPI sticky on the way down

This brings us to this week, when the CPI is released today. The market anticipates a reading of 6.0%. It is important to understand the impact of the CPI number. With the first cracks starting to show in the US economy, a hotter-than-expected inflation print could force the hand of the Fed to hike at its next meeting next week, but a reading around the 6% mark could give the Fed a bit of breathing room to pause at this meeting and see how the events unfold until its next meeting. At the moment, it is all up in the air what the Fed will do at the FOMC meeting on 22 March.

Other important data and events out this week are the US retail figures as well as the Eurozone interest rate decision. With the events unfolding in the US and the contagion effect likely to spread to the Eurozone, it will be interesting to see whether the ECB will keep its word and hike by 50 basis points.

What would the above mean for the rand? The rand strengthened by 50 cents after the high of earlier last week. Should the Fed keep rates unchanged, we could see the rand on the front foot and break below the R18.00 level against the US dollar, but there are two-way risks abound. We must remember that the rand has a significant risk premium associated with it, and we need local factors to improve before a significant rally is observed.