(Updates Barclays view, money market expectations)

(Reuters) – Most Wall Street banks expect the U.S. Federal Reserve to hike the benchmark interest rate by 25 basis points at the end of its two-day meeting on Wednesday, while money markets are leaning toward a pause as worries about a global banking crisis mount.

In a quick reversal of expectations, money markets are pricing in a near 60% chance of a pause following 450 basis points of hike since last March. That followed fears of stress on the banking system from the collapse of two mid-sized U.S. lenders this month.

On Sunday, a Swiss-backed takeover of Credit Suisse by peer UBS helped calmed some fears of a contagion, but uncertainties remain over the ramifications of the deal.

A majority of economists in a Reuters poll published last week had also forecast a 25 bps hike.

Following are rate expectations from major Wall Street banks:

Bank Expectation post SVB Expectation before SVB

crisis and U.S. Feb CPI crisis

March hike Terminal March Terminal rate

(in bps) rate hike

(in

bps)

Goldman No hike 5.25% – 5.5% 25 5.5% – 5.75%

JPM 25 5% – 5.25% 25 5% – 5.25%

Citi 25 5.5% – 5.75% 50 5.5% – 5.75%

BofA 25 5.25% – 5.5% 25 5.25% – 5.5%

Morgan 25 5.125% 25 5.125%

Stanley

Barclays 25 5% – 5.25% 50 5.5% – 5.75%

NatWest No hike N/A 50 N/A

Nomura 25 bp cut N/A 50 N/A

(Editing by Anil D’Silva, Sam Holmes, Vinay Dwivedi and Sriraj Kalluvila)

By Michael S. Derby

WASHINGTON (Reuters) – Historic Federal Reserve lending to banks in the wake of Silicon Valley Bank’s collapse punched a huge hole in its effort to shrink the size of its balance sheet, though economists don’t view that turnaround as a shift back toward a stimulative use of its asset stockpile.

Instead, the rapid expansion of the Fed’s holdings of cash and bonds has emerged as a key tool to help contain financial stability issues, speaking to the core mission of why the central bank was founded just over a century ago.

The usage of these lending facilities, including the Fed’s long-shunned discount window for bank lending, gave the central bank room, should it choose it, to press forward with rate rises and avoid past cycles of being forced to stand aside or cut rates when markets suffer notable turbulence.

While the Fed may have underestimated how rate rises and its bank oversight would affect the financial system, “in one way they were remarkably prescient — the Fed has been trying to institutionalize reforms to the discount window designed to improve financial stability in the aftermath of the early-COVID financial crisis,” wrote Joseph Politano, of Apricitas Economics, in a newsletter Saturday. The “unprecedented use of the discount window partially reflects the desired results of those reforms.”

Evercore ISI analysts pointed to the seeming contradiction of an expanded balance sheet driven by financial stability concerns happening as monetary policy tightens, and noted there is “rarely a perfect separation between financial stability and monetary policy goals. Messy real world policymaking needs to embrace this.”

BIG NUMBERS

Fed numbers showed the speed of the shift to a new balance sheet reality. Last Thursday, Fed data showed a massive surge in lending to banks, driven notably by $153 billion in what’s called discount window credit, up from $5 billion the week before and blazing through a record set in the fall of 2008, when the financial crisis pushed banks to take $112 billion.

That borrowing, which also saw other large-size Fed credit extensions, pushed the size of the Fed’s overall balance sheet up to $8.7 trillion on Wednesday, versus $8.4 trillion the week before. Fed holdings peaked at just shy of $9 trillion last summer.

On the face of it, the emergency borrowing unraveled months of progress in which the Fed allowed some of the Treasury and mortgage securities it owns to expire each month. This effort, known in markets as quantitative tightening, or QT, complemented the Fed’s aggressive rate rises aimed at bringing down inflation.

That puts the central bank in a seemingly awkward position. While the banking sector’s woes have generated considerable uncertainty into the outcome of the rate-setting Federal Open Market Committee meeting which concludes Wednesday, the Fed nevertheless appears on track for another quarter point rate rise.

The details of Fed holdings matters greatly in terms of understanding Fed balance sheet dynamics, analysts say.

Benson Durham, head of global policy at Piper Sandler, said the key is the composition and not the size of Fed holdings. Emergency borrowing has driven up the overall level of Fed holdings, but the Fed continues to shed bonds and cut the level of reserves in the banking system, which is how the QT process has worked all along, he said.

Even with a jump in the balance sheet the Fed is “still credit tightening” and when it comes to the increase in the overall size, “it’s hard for me to imagine that this is remotely inflationary,” Durham said.

Tim Duy, chief U.S. economist with SGH Global Advisors, agreed and said the Fed emergency lending is “not funding that’s going into banks that they can make loans with per se,” a key factor blunting any form of new stimulus.

There’s even a case for how some of the underlying factors driving banks to borrow Fed cash point to the tighter financial conditions the central bank has sought to control inflation, and which could hamper growth.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, said “a tightening of bank lending conditions could lead to a broader tightening of financial conditions that would meaningfully dent growth prospects and heighten recession probabilities.”

LESS ROOM TO RUN?

One factor limiting economists’ interpretation of the balance sheet surge is the fluidity of the factors now driving it.

“At this early stage in the process, it is unclear how much of the Fed’s emergency lending will turn out to be sticky,” analysts at Wrightson ICAP said in a note over the weekend.

But even with that caveat, the firm saw some potential implications for how the Fed proceeds with its balance sheet drawdown, depending on banks’ reserve positions. Even if, as expected, the FOMC decides at the meeting to keep the drawdown at its current pace of $100 billion per month, it may allow the drawdown to end earlier than previously expected.

There’s little doubt banks’ demand for reserves has risen amid more fragile conditions, the note said. “If some of the recent surge in emergency lending runs off in the weeks ahead, it may very well be the case that this episode has nudged the banking system closer to the point of effective reserve scarcity rather than farther away.”

(Reporting by Michael S. Derby; Editing by Dan Burns and Andrea Ricci)

By Tom Wilson

LONDON (Reuters) – At the turn of the year, bitcoin was in the grip of a bleak midwinter, down and out after a 2022 defined by tumbling crypto prices, bankruptcies and corporate scandals.

Less than three months later, bitcoin’s got its mojo back. With gains of more than 70% so far this year, it has outpaced other major assets, and was on Wednesday trading near its highest in nine months.

The original and biggest cryptocurrency has been here before, its 15-year history peppered with dramatic price increases and equally vertiginous drops. Fuelling the gains: interest rates.

Markets expect that central bank hikes to the cost of credit are nearing their peak, and such a scenario is set to buoy risk-on assets such as bitcoin, six investors and analysts from crypto and traditional finance told Reuters.

“The macro narrative is the number one,” said Noelle Acheson, an economist who has tracked the crypto sector for seven years. “Bitcoin is not just a risk asset, it is arguably the most sensitive to monetary liquidity out of all of the risk assets.”

Other factors are at play, too, from turmoil in the banking sector to enduring hopes – still unfulfilled – that bitcoin can achieve wide usage as a form of payment.

Bitcoin closed its best week in four years on Sunday, and has gained 45% in just 12 days.

As the collapse of U.S. lenders Silicon Valley Bank and Signature Bank helped to triggered the takeover on Sunday of 167-year-old Credit Suisse by rival UBS, claims that bitcoin is an asset immune to risks in traditional finance have gained traction.

“It’s rather narrow-minded to say that bitcoin is going to succeed because a bank failed,” said Usman Ahmad, CEO of Zodia Markets, the crypto exchange of the venture arm of Standard Chartered and Hong Kong crypto firm BC Technology Group.

“But confidence is almost a critical factor – confidence in the banking system has been damaged.”

Driving bitcoin’s gains have been its core user base of retail investors, analysts said. Institutional investors such as pension funds, until now wary of the unstable and mostly unregulated bitcoin, are likely to remain sceptical of a long-lasting renaissance for the cryptocurrency, the interviews showed.

“Bitcoin’s recent bull run looks to be mainly supported by individual investors – ranging from retail to whales – as we have seen evidence of institutions exiting during this rally,” said Zhong Yang Chan, head of research at crypto data firm CoinGecko.

Indeed, bitcoin investment products, favoured by larger investors, saw outflows of $113 million last week, according to digital asset manager CoinShares, which ascribed the moves to a scramble for liquidity during chaos in the banking sector.

DEJA VU?

In the past, too, dramatic price swings for bitcoin have been closely tied to shifts in monetary policy globally.

As stimulus measures flooded the global financial system during the COVID-19 pandemic, stay-at-home investors fuelled a six-fold rally for bitcoin between September 2020 and April 2021.

Those moves, allied with emerging interest in crypto from larger investors and companies, led crypto backers to vow that its chances of a bruising crash historically seen after bitcoin rallies were lower.

Yet as signs of runaway inflation late in 2021 forced central banks and governments to curb stimulus packages, bitcoin slumped by more than half from its record high of $69,000 in just 75 days as rates began to rise.

In 2022, bitcoin plummeted over 65% as higher rates triggered the fall of a major crypto token, precipitating the closure of major hedge funds and crypto lenders. It was further bruised by regulatory headaches and the dramatic fall of the FTX exchange.

The disastrous year was another reminder of bitcoin’s vulnerability to external shocks, despite backers’ claims it is a safe haven asset in times of political and economic stress.

To be sure, some investors say developments to bitcoin’s intrinsic characteristics are now capable of supporting its price. Richard Galvin of crypto fund Digital Asset Capital Management, for instance, cited software upgrades that have enabled a new breed of non-fungible tokens on bitcoin.

Still, for investors in traditional assets, doubts remain.

“I don’t know if old-school currency people are reassessing it,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets. “We are still struggling with bitcoin on the definition of a currency.”

(Reporting by Tom Wilson, Editing by Louise Heavens)

BERLIN (Reuters) -Germany’s economic council on Wednesday warned that inflation could remain high for longer or even pick up again if financial market worries prevent central banks from raising interest rates.

“The recent increase in financial market risks has made it more difficult for central banks to fight inflation,” the five “wise ones” who advise Berlin on economic policy said in their biannual report.

“If the monetary policy response is too weak due to these trade-offs, inflation could remain high for longer than expected or even pick up again,” they added.

Commenting on recent turmoil in the banking sector at a press conference on Wednesday, council member Monika Schnitzer said banks had to be monitored with frequent stress tests. She added that regulators should examine whether government bonds held by banks should be backed by equity capital.

Turmoil in the banking sector culminated in the Swiss regulator-backed takeover of Credit Suisse by rival UBS at the weekend. That followed the collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to a surge in interest rates.

Council member Ulrike Malmendier said that, unlike during the 2008 financial crisis, financial stability was not in danger, but banks “should be taken by the hand more” in the face of rapidly changing conditions.

In its report, the council revised its prediction that the German economy would face a mild recession this year, saying on Wednesday that gross domestic product (GDP) would grow by 0.2% in 2023 and 1.3% in 2024. This is in line with the government’s forecast.

Inflation will come in at 6.6% in 2023 and 3.0% in 2024, the council predicted.

(Reporting by Rene Wagner, Writing by Friederike Heine, Editing by Miranda Murray and Christina Fincher)

BARCELONA (Reuters) -German carmaker Volkswagen plans to produce 3 million small electric vehicles at its two plants in Spain between 2025 and 2030, Wayne Griffiths, the chairman of VW’s Spanish unit SEAT, said on Wednesday.

The German car maker is pushing the electrification of its production and plans to build a battery plant in Spain.

Griffiths said SEAT aims to assemble 500,000 electric cars a year in the medium-term at SEAT’s plant in Martorell, outside Barcelona.

Not cutting jobs at the plant is SEAT’s priority, he added.

The executive said in a news conference the carmaker is working hard to bring a second platform for electric vehicle production to Martorell, which would increase competitiveness.

Volkswagen has already said it would start producing two electric vehicles at the Martorell plant in 2025 and at VW’s Navarra assembly line around the same time – one small car for SEAT’s associated upmarket brand Cupra and another car for the VW brand.

Griffiths told Reuters last month that Volkswagen would submit a new request to Spain for European Union funds as it weighs up whether to manufacture additional new electric vehicles there beyond the ones planned for 2025.

(Reporting by Joan Faus and Inti Landauro; editing by Emma Pinedo and Jason Neely, Kirsten Donovan)

By Iain Withers and Nell Mackenzie

LONDON (Reuters) -The banking turmoil sparked by the collapse of Silicon Valley Bank is not yet over, and a significant number of banks will fail within two years, the CEO of hedge fund Man Group told a Bloomberg conference in London on Wednesday.

Asked whether the crisis in the sector was over, Man Group’s Luke Ellis told delegates he did not think so.

Market chaos forced the emergency rescue of Credit Suisse by Swiss rival UBS over the weekend in a move that has brought some calm to markets.

“I think we will have significantly more banks that don’t exist in 12-24 months,” Ellis said, adding that he thought smaller and regional banks in the United States and challenger banks in Britain could be at risk.

Ellis said the growth in social media had accelerated how quickly concerns about banks circulate. “Things happen at a much faster speed. Whether that’s a crisis or it’s good news,” he said.

He added that he was not personally an investor in U.S. regional banks.

Many hedge funds have made money from the banking sector volatility in recent days by betting against banks.

A spokesperson for the Bank of England, which supervises the health and stability of Britain’s financial system, said “the UK banking system is well capitalised and funded, and remains safe and sound”.

Central banks globally have responded to the turmoil with coordinated measures to ensure the flow of cash between banks around the world.

“I think policymakers have done enough to ringfence these really unique issues,” Seema Shah, chief global strategist at Principal Asset Management, told delegates in a separate debate at the event.

Alexander Chartres, investment director at asset manager Ruffer LLP, said that he expects there to be a recession in the United States and that he would therefore invest across different asset classes.

(Reporting by Iain Withers and Nell MackenzieAdditional reporting by Lawrence WhiteEditing by Louise Heavens and David Goodman)

By Ananya Mariam Rajesh

(Reuters) -Nike raised its full-year revenue outlook on Tuesday after reporting quarterly results that beat estimates, but warned of margin pressures as it continues to get rid of excess inventory through heavy discounts.

The company saw strong demand for its sneakers, including classic styles such as Jordan Retro and newer franchise launches such as LeBron 20, that helped grow its market share.

Nike said its apparel inventory fell in the third quarter and expects to end fiscal 2023 with “healthy” inventory levels.

Rival Adidas is still struggling from its split with the artist formerly known as Kanye West and the German company is expected to post its first annual loss in three decades this year.

Nike’s shares fell 2% in extended trading on Tuesday after the company said it expects 2023 gross margin to decline about 250 basis points, at the low end of its previous forecast range.

The company’s margins remain pressured by a strong U.S. dollar, higher freight costs and Nike’s efforts to offer steeper discounts in an attempt to get rid of excess inventory, Chief Financial Officer Matthew Friend said.

Nike is in a much better position with inventories than it was in the past six months, Jessica Ramirez, senior analyst at Jane Hali and Associates said.

Sales in Greater China fell about 8% even as the country eased pandemic-related restrictions, which is expected to benefit the company in the near term.

Nike’s recovery in China looks a lot more better than Adidas which has been “falling apart” in the country, Morningstar analyst David Swartz said.

Nike now expects reported revenue for the full year to increase in the high-single-digit range, compared with its previous forecast of growth in the mid single digits.

In the fourth quarter, the company expects flat to low-single-digit revenue growth, compared with estimates of a 2.42% rise, according to IBES data from Refinitiv.

Nike posted revenue of $12.39 billion in the third quarter beating estimates of $11.47 billion and reported a profit of 79 cents per share above estimates of 55 cents.

(Reporting by Ananya Mariam Rajesh in Bengaluru; Editing by Shounak Dasgupta)

By David Milliken and William Schomberg

LONDON (Reuters) – British inflation unexpectedly rose to 10.4% in February, pushed up by higher food and drink prices in pubs and restaurants, according to official data which is likely to prompt the Bank of England to raise interest rates on Thursday.

Economists polled by Reuters had forecast that the annual consumer price inflation rate would drop to 9.9% in February from January’s 10.1% and move further away from October’s 41-year high of 11.1%.

The figures – including increases in underlying inflation measures that the BoE closely monitors – are likely to bolster the concerns of those BoE policymakers who worry that inflation will be slow to fall, even after 10 straight rate hikes.

Investors had been split on whether the central bank would pause that run after the recent upheaval in the global banking sector. But financial markets on Wednesday fully priced in a quarter-point increase to 4.25%.

“While the decision has at times over the last week looked to be on a knife edge, this inflation outturn would appear to swing it in favour of a 25-basis-point hike,” said Liz Martins, senior economist at HSBC.

Sterling rose against the dollar and the euro after the data was published and two-year British government bond yields, which are sensitive to speculation about interest rates, jumped.

The increase in inflation contrasted with a fall in the U.S. CPI rate to 6.0% in the 12 months to February. Euro zone inflation also eased last month to 8.5% but underlying price growth continued to accelerate.

The ONS said that an end to January drinks promotions in pubs and restaurants was the biggest factor behind last month’s rise, but shortages of salad items also played a role.

Overall inflation for food and non-alcoholic drinks rose to 18.0%, the highest since 1977, reflecting cold weather in southern Europe and north Africa, as well as reduced production from greenhouses in northern Europe that face high energy bills.

Higher alcoholic drink prices added 0.17 percentage points to February’s inflation rate while the increased cost of food and non-alcoholic beverages added 0.15 percentage points. Lower petrol prices helped offset some of these increases.

GRAPHIC – Unexpected jump in UK inflation: https://www.reuters.com/graphics/BRITAIN-ECONOMY/INFLATION/lgpdkjjlovo/chart.png

UNDERLYING INFLATION UP TOO

Annual inflation in the services sector, which most policymakers view as a good measure of underlying price pressures in the economy, rose to 6.6% from 6.0% in January.

Basic wages – a big driver of services prices – rose by an annual 6.5% in the three months to January, and a survey of employers on Wednesday showed they expected to raise pay by an average of 5% this year, around double pre-pandemic rates.

Core CPI – which excludes energy, food, alcohol and tobacco and is also watched closed by the BoE – rose to 6.2% from 5.8% in January, versus a forecast decline to 5.7%.

“These inflation figures smell a little like the recent U.S. experience, where it appeared that core inflation was easing rapidly a few months ago only for it to accelerate again as economic activity proved resilient,” said Paul Dales, chief UK economist at Capital Economics.

However, other analysts said the increase in inflation appeared to be caused by one-off factors.

Last month, the BoE forecast headline inflation would drop below 4% by the end of 2023 and be beneath its 2% target from mid-2024 onwards, with energy prices no longer rising steeply.

The government’s Office for Budget Responsibility forecast last week that inflation would fall below 3% by the end of 2023.

Some BoE policymakers have said they had tightened enough and the full impact of past rate rises had yet to be felt.

Finance minister Jeremy Hunt said the data showed the expected decline in inflation could not be taken for granted.

“Falling inflation isn’t inevitable, so we need to stick to our plan to halve it this year,” he said.

On Tuesday, he told lawmakers that inflation above 10% was “dangerously high”.

There were some signs of decreasing price pressures ahead.

Prices paid by factories increased by 12.7% over the 12 months to February, still a big rise by historical standards but their weakest increase since September 2021. Prices charged by manufacturers rose at their weakest pace in a year, up by 12.1%.

(Editing by Bernadette Baum)

By Bhargav Acharya

JOHANNESBURG (Reuters) -South Africa’s inflation rose slightly more than expected in February, a further indication that rolling power cuts nationwide may be fuelling price pressures, data showed on Wednesday.

South Africa’s headline consumer inflation rose to 7.0% year-on-year in February from 6.9% in January, Statistics South Africa said.

On a month-on-month basis, consumer inflation was at 0.7% in February compared to -0.1% in the previous month.

Analysts polled by Reuters had predicted the year-on-year figure to come in at 6.9% and month on month at 0.6%.

South Africa has been dealing with rotational power cuts on a daily basis, hampering businesses and economic growth in Africa’s most industrialised economy.

“The rise… may be a sign that the intensification of loadshedding (power cuts) in recent months is fuelling price pressures,” Capital Economics said in a research note.

The South African Reserve Bank targets inflation of between 3% and 6%.

The central bank’s Monetary Policy Committee (MPC) raised rates by a smaller than forecast 25 basis points in January as it lowered its economic growth forecasts over the crippling power cuts.

The bank, which has raised interest rates at its last eight monetary policy meetings to tame inflation, said inflation is expected to sustainably fall to the midpoint of its target range by the fourth quarter of 2024.

“So long as renewed fears about the global banking system do not flare up, the Reserve Bank will almost certainly press ahead with a final 25 basis points interest rate hike at next week’s MPC meeting,” the note added.

Market focus will be on the U.S. Federal Reserve’s policy meeting, which will end later in the day, with investors awaiting clarity on the path the U.S. central bank could take in the wake of a global banking turmoil.

Core inflation, which excludes prices of food, non-alcoholic beverages, fuel and energy, was at 5.2% year on year in February, from 4.9% the previous month.

On a month-on-month basis core inflation was at 0.8% in February, compared to 0.2% in January.

(Additional reporting by Rachel Savage; Editing by James Macharia Chege and Bernadette Baum)