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According to our Global Liquidity Report (GLR) the liquidity crunch is about 2 months away from reaching a tipping point, based on historical measures. We already had the first signal, which was anticipated from the first 2023 GLR issued in January. The banks are facing liquidity issues, but they have not yet pushed the envelope to pressure overnight lending rates.
However, our observations suggest this is imminent, although not immediate.
On the rate-hiking side, the FOMC-hope that tighter lending standards would prevail on the heels of the recent bank failures seem to have been dashed. The notion was that tighter regulations may prevail, but the cause of these failures is now considered to be mismanagement, and not related to lending standards that might prevent other banks from lending as they are.
The FOMC is therefore unlikely to get help from tighter lending standards.
The added amount of lending scrutinization that was initially expected is now expected to be far less, which means that the FOMC is likely to be right back on their rate-hiking regime, shouldering the load themselves, while still being unsatisfied with current levels of inflation.
The target of the FOMC has been employment, with the understanding that employment is a direct catalyst to the continued presence of inflation, and the Jobs data comes Friday. Market expectations are for a strong jobs number again, albeit with lower hourly earnings growth.
Still, the FOMC has made it clear that some pain needs to be felt in the Jobs market to get inflation down to their targeted level, and as of the last detail that suggested a substantial reduction in the number of jobs (4 mil) and/or a surge in the number of job seekers, to create balance.
Given this, the probability of another rate hike is much higher than it was shortly after the last FOMC meeting, and that probability will be strongly influenced by the Jobs Data coming Friday.
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