Bank failure in the United States worries the central bank – Commentary by Thomas D Galloway

Comment Thomas DeGalloway

It’s 10:47 this morning — Thomas de Galloway

Job creation in the U.S. is higher than expected, but the job market is still cracked. With the European Central Bank (ECB) decision due this week, the market is expecting a 0.50% interest rate hike. And Chancellor of the Exchequer Jeremy Hunt presents the Budget for the United Kingdom.

Data released Friday showed the U.S. economy added 311,000 new jobs last month. The number (for the 11th time in a row) exceeded analysts’ expectations. In such cases, we often see the dollar strengthen in response. After all, economic growth has a rapid effect on inflation, and the US Federal Reserve tries to break all its might by adjusting interest rates. However, this time, ironically, we saw the dollar weaken (and thus the euro-dollar rise). Because the film looks a bit more nuanced than expected at first glance. The report showed that the rate of wage growth was lower than expected and that average hours worked fell. This last point may indicate weak demand, as employers often start cutting hours before laying off employees. Finally, the number of workers who lost their jobs also rose to the highest level since the start of the coronavirus pandemic.

A warning shot to the central bank
However, the release of the report was overshadowed by the sudden collapse of Silicon Valley Bank (SVB), the biggest bank failure since 2008. The event serves as a warning to the central bank and shows the destabilizing effects of its aggressive interest rate policy. So some analysts see a good case for a more cautious 0.25% at the end of next week. The inflation rate for January, which will be released on Tuesday (tomorrow), will also play a role in that decision. It is expected to show that ‘core inflation’ (which excludes volatile energy and food prices) increased by 0.40% for the third month in a row. If this number is higher, the chances of a 0.50% rate hike will increase, which will turn the Euro-Dollar negative.

The ECB’s future path remains unclear
In Europe, ECB members will meet this Wednesday for the second time this year to set interest rates. A 0.50% increase is likely to be chosen, a decision that Bank President Christine Lagarde has hinted at several times in previous speeches. However, the future path remains unclear. The latest inflation figures for the euro area were higher than expected, showing that the central bank is struggling to master inflation here (as in the US). Opinions are now divided on how to proceed. Last Wednesday Ignacio Visco (Governor of the Central Bank of Italy) implicitly criticized his Austrian counterpart Robert Holzmann. He had said earlier that week that the upcoming increase would be the first of four future steps of a similar capability.

Visco spoke against a return to ‘forward guidance’ (communication that informs the public about the direction of future policy), saying the ECB prefers a ‘meeting by meeting’ approach due to the current uncertain climate. In a recent poll by Bloomberg, most economists were expecting 3.75% in July. That means 0.25% is still three moves ahead of this week’s meeting. Some big banks (including Morgan Stanley and Barclays) expect it to rise to 4%.

The first budget after the disastrous mini budget
In the United Kingdom, he is gearing up for the first budget since September 2022’s disastrous mini-budget. But the cost of living crisis, public sector strikes and labor shortages remain a headache.

The pound rose on Friday after the government said GDP rose 0.3% in January (0.1% more than expected). It was the latest development in a series of positive data points, with surprisingly strong numbers for retail activity, manufacturing and consumer confidence. It could also mean that the Bank of England may have more leeway than expected when it comes to raising interest rates.

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