Australian Bond Exchange

ABE Weekly – Silicon Valley Bank Collapses

Australian Bond Exchange Weekly Newsletter

Friday 17 March 2023

ABE Weekly 17 March 2023 PDF Version

Key points:

  • Silicon Valley Bank (SVB) in the United States collapsed (US)
  • Cash rates remain at 3.6 per cent (Aus)
  • The Consumer Price Index (CPI) increased 1.9 per cent this quarter and the monthly CPI slowed down to 7.4 per cent for the year to January (Aus)
  • The Fed cash rate sits at 4.58 per cent (US)
  • US consumer prices increased in February as home rents continue to go up (US)
  • The current European Central Bank (ECB) cash rate is 3 per cent (EU)
  • Inflation in the Euro area is down from 8.6 percent in January 2023 to 8.5 per cent in February 2023 (EU)
  • The bank rate is currently 4 per cent (UK)
  • Consumer Prices Index, including owner occupiers’ housing costs (CPIH), rose by 8.8 per cent in the 12 months to January 2023 (UK).

In terms of current world events, Silicon Valley Bank (SVB) in the United States collapsed.

Although this event happened in the United States, you must learn how to defend your investment portfolio from unexpected events.

Our Senior Investment Advisors at the Australian Bond Exchange (ABE), Benjamin Collings and Benjamin Davison,

discuss this topic and how our clients at ABE are not exposed to risks from this or other banks in the United States.

Watch the online discussion HERE.  

Australia

In Australia, cash rates remain at 3.6 per cent, the following RBA Official Cash Rate announcement will be on 4 April 2023. Due to the recent failure of the SVB “Sentiment on interest rate movements has shifted in Australia” (ABC News, 2023), and money markets assume that the RBA will pause interest hikes. However, some banks like ANZ continue with their expectation of increasing cash rates ahead. The Consumer Price Index (CPI) rose 1.9 per cent this quarter and the monthly CPI slowed down to 7.4 per cent for the year to January. Mortgage payers are already under pressure with current interest rates; the real impact of Australia’s high-interest rates and high inflation is translating into companies closing and families changing their way of life to a more austere one.  

United States (US)

As noted before, the SVB collapse was the news of the week. The feeling in the financial markets is that the US Federal Reserve (Fed) might pause its continuous interest rate hikes to ease pressure on US banks. Currently, the Fed cash rate sits at 4.58 per cent. In terms of inflation, US consumer prices increased in February as home rents continue to go up. In our opinion, the US is the most important economy now and one that has implemented many reforms after the Global Financial Crisis (GFC) so that a situation like the GFC would not happen again; we are yet to see if two banks failing in the US is a random event due to higher interest rates or if will be part of a domino effect.  

European Union (EU)

The current European Central Bank (ECB) cash rate is 3 per cent9 and inflation in the Euro area is down from 8.6 percent in January 2023 to 8.5 per cent in February 2023. The supply shocks generated by COVID-19 made inflation reach 10.6 per cent in October, but now supply is going the other way. In other words, supply bottlenecks are easing, and gas prices have been declining, allowing supply to increase, so prices are expected to decrease. There might not be the need for another interest rate hike from the ECB. However, if another rate increase was to be implemented by the ECB, according to the Official Monetary and Financial Institutions Forum (OMFIF), EU area fundamentals may be strong enough to support the change. Suppose cash rates in the EU slow down. In that case, Australia’s cash rates might also slowdown, which would be suitable for Australia‘s population, now feeling the impact of the high-interest rates translated into higher mortgage payments and less money to spend in their pockets.  

United Kingdom (UK)

The bank rate is currently 4 per cent. In terms of cost of living, the Consumer Prices Index, including owner occupiers’ housing costs (CPIH), rose by 8.8 per cent in the 12 months to January 2023, down from 9.2 per cent in December 2022. The UK has recently avoided a recession, so increasing interest rates now would not be sensible. It would slow the economy as it is starting to pick up the pace.  

What does this mean for you? 

This means the market’s volatility has just increased. So, investing in defensive assets is more important than ever to protect your capital. This would be it if people needed a wake-up call to invest in corporate bonds.  

 

Contact us if you have any questions or would like any assistance.

Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. You should obtain the relevant appropriate document for any product mentioned and consider its contents before making any decision.  

Copyright © 2023 Australian Bond Exchange Pty. Ltd. (“ABE”). (ABN 73 605 038 935, AFSL 484453) 

​​References

ABC News. (2023, March 14). Could interest rates in Australia fall after the collapse of two US banks? Australia. Retrieved 03 15, 2023, from https://www.abc.net.au/news/2023-03-14/outlook-for-interest-rates-changes-dramatically/102094454 

​Australian Bureau of Statistics. (2023., January 25). Consumer Price Index, Australia. NSW, Australia. Retrieved 03 15, 2023, from https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release 

​Bank of England. (n.d.). Interest Rates and Bank Rate. Retrieved 03 15, 2023, from https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate 

​Board of Governors of the Federal Reserve System. (2023, March 14). Selected Interest Rates. Retrieved March 15, 2023, from https://www.federalreserve.gov/releases/h15/ 

​European Central Bank (ECB). (2023, February 08). Key ECB Interest Rates. Retrieved 03 15, 2023, from https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html 

​Forbes Advisor. (2023, March 01). Australian Inflation Rate: CPI Falls to 7.4%. Retrieved March 15, 2023, from https://www.forbes.com/advisor/au/personal-finance/australias-inflation-rate-rises/ 

​Office for National Statistics. (n.d.). Inflation and price indices. Retrieved 03 15, 2023, from https://www.ons.gov.uk/economy/inflationandpriceindices#:~:text=Consumer%20price%20inflation%2C%20UK%3A%20January%202023&text=The%20Consumer%20Prices%20Index%20including,from%209.2%25%20in%20December%202022. 

​Official Monetary and Financial Institutions Forum (OMFIF). (2023, March 13). No need for the ECB to raise rates to 4%. Retrieved 03 15, 2023, from https://www.omfif.org/2023/03/no-need-for-ecb-to-raise-rates-to-4/ 

​Reserve Bank of Australia. (n.d.). Cash Rate Target. Retrieved from https://www.rba.gov.au/statistics/cash-rate/ 

​Reuters. (2023, March 15). Little relief for US consumers as sticky rents keep inflation elevated. 

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