Fed may not pause rate hike cycle despite SVB crisis: Nomura

The US Federal Reserve (US Fed) may not pause its rate hike cycle despite the developments with US-based Silicon Valley Bank (SVB) and Signature Bank, said analysts at Nomura in a recent note, who believe the inflation in the US still remains above the comfort zone.

The immediate focus of the markets over the next few days, they said, will shift to the US Core CPI data due March 14 and then on the Federal Open Market Committee (FOMC) next week.

“It looks like we are back to where we were before SVB issues surfaced – but with a slightly greater possibility of a pause from the Fed in coming months (due to tightening of financial conditions) — but with still the same risks of a US slowdown/recession ahead. However, if the Fed indeed pauses in March – although not the base case of our US economics team – it is likely that the odds of a US ‘soft landing’ scenario might increase,” wrote Chetan Seth, Ankit Yadav and Anshuman Agarwal of Nomura in a recent note.

US inflation, Nomura said, is still elevated and the Fed will look to bring it down going ahead. "There remains the specter of a slowdown in US growth / non-farm payrolls (NFPs) over the course of coming months. At 17.2x forward price-earnings (P/E) for S&P vs a post-2014 average of 17.8x and pandemic low of 13.6x, we think risk reward for S&P doesn’t appear attractive at these levels," Nomura said.

Despite consistent rate hikes in the US, the year-to-date (YTD) returns are positive for both S&P 500 (around +1%) and NASDAQ (around +7%). On a one-year basis, they are down only by 7% and 11% respectively, despite nearly 450 basis point (bps) hike in the US Fed rate since March 2022, data show.

Market recovery

From a short-term perspective, analysts expect the stock markets to recover from their recent lows, but remain choppy and chart their course over the next few weeks in the backdrop of macro-economic data from the US.

Those at Nomura, for instance, do not think there will be any material fundamental impact on Asian stocks from US banking sector issues, there is always the risk of some ‘skeletons emerging from the closet’.

“We think the bar for the Fed to raise rates by 50 bps (instead of 25 bps) in March has become higher in light of the recent banking sector liquidity issues. We think that we need to see a large inflation upside surprise to justify a 50 bps hike from the Fed,” Seth, Yadav and Agarwal of Nomura said.

The US consumer price index rose by 6.4 per cent in January compared with a year earlier. Most economists had expected a slower pace of 6.2 per cent from the 6.5 per cent recorded in December 2022.

Meanwhile, comments by the Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg that the depositors will be able to access their money from Monday and that the resolution of SVB will be done in a manner that protects them.

The development, said G Chokkalingam, managing director for research at Equinomics Research & Advisory, has to some extent calmed market's nerves and the damage was contained on Monday. The current crisis in SVB, he believes, is unlikely to escalate. The Fed, fearing further fallout of more banks, could tone down further aggressive rate hikes.

“Post Lehman crisis, the US Fed rate fell near zero. SVB’s assets are about one-third of Lehman’s assets. There will be a break in the aggressive approach of the US Fed and we will not be surprised if the US market recovers this week,” he said.