The European Central Bank lifted its key lending rate by 50 basis points Thursday, defying market forecasts that the region's simmering banking crisis, triggered in part by the failure of Silicon Valley Bank and accelerated by solvency issues at Credit Suisse, would prompt a pause in its inflation fight.
In a nod to the crisis, which was placated in part by a $54 billion lifeline from the Swiss National Bank to Credit Suisse earlier Thursday, the ECB said it was "monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area."
The central bank also dropped previous references to where it sees future rate hikes, indicating decisions will now be more data-dependent.
Nonetheless, given that "inflation is projected to remain too high for too long", the ECB lifted its benchmark refinancing rate by 50 basis points (0.5 percentage point), to 3.5%, while adding similar increases to its margin lending and deposit rates.
"The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission," the ECB said in a prepared statement.
The move now puts next week's Federal Reserve policy meeting in stark focus, with traders now speculating as to whether Chairman Jerome Powell will take his foot off the gas in terms of near-term rates hikes while the banking sector concerns work themselves through, or carries on with his "higher-for-longer' messaging amid the country's stubbornly-high inflation rates.
Powell was offered little assistance in his inflation fight Thursday as well, as weekly jobless claims fell by 20,000, a much larger-than-expected decline that took the overall tally to just 192,000. February housing starts were also hot, rising 9.8% to an annualized rate of 1.45 million.
The CME Group's FedWatch is now indicating a 21% chance that Chairman Jerome Powell will hold rates at between 4.5% and 4.75% next week in Washington, with the bulk of wagers suggesting rates will ultimately peak at below 5% later in the spring.
The CBOE Group's VIX index, a key volatility benchmark, slipped 7% in the early trading session to 24.28 points suggesting traders see daily swings on the S&P 500 of around 60 points, or 1.5%, over the near term.
Benchmark 2-year Treasury note yields were marked 9 basis points higher from last night's levels at 4.095% in New York trading, with 10-year paper pegged at 3.455%. The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.21% lower at 104.395.
"The implications for the Fed's meeting next week suggests that the Fed will raise rates 25 basis points based on futures probability, but will make it clear that the stability of the banking system remains strong," said Quincy Krosby, chief global strategist for LPL Financial in Charlottesville, Virginia.
"However, should there be further deterioration within the regional banks, or another blowup, the Fed may consider a pause," she added. "At this stage, both the ECB and Fed are trying to find a viable balance between price stability and financial stability."
On Wall Street, the S&P 500 was marked 36 points lower in the opening hour of trading, flirting with negative territory for the year, while the Dow Jones Industrial Average booked a 120 point advance. The tech-focused Nasdaq was up 170 points.
Treasury Secretary Janet Yellen, in prepared remarks to the Senate Finance Committee Thursday, added her voice to the chorus of officials assuring investors the that U.S. banking system is safe and stable.
"I can reassure the members of the committee that our banking system is sound, and that Americans can feel confident that their deposits will be there when they need them," Yellen said. "This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe."
Credit Suisse Group (CSGKF) shares were marked 3% higher after it secured the 50 billion Swiss franc lifeline from the Swiss National Bank, marking the first direct rescue of a major global lender since the global financial crisis.
Credit Suisse, which hit a record low Wednesday received access to a so-called covered loan facility, which is similar in structure to the Federal Reserve's new bank lending backstop, and further access to a short-term liquidity fund.
The cash support followed a statement from the Swiss National Bank last night that said Credit Suisse was in-line with the "capital and liquidity requirements imposed on systemically important banks" and thus eligible for central bank assistance. The move followed word from its biggest shareholder, the Saudi National Bank, said it would not provide further capital if asked,
Still, while the stress surrounding Credit Suisse, which spilled-over into the European banking sector yesterday, will likely be soothed in the near-term, some analysts suggest authorities in Zurich are likely to orchestrate a full takeover of the bank, or force its breakup, over the coming months.
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