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As 2023 unfolds, “Thank God It’s Friday” is rapidly becoming “Oh No, It’s Friday”. Risk appetites are shrinking across the financial markets this morning as investors brace for a weekend that could follow its predecessors in bringing more scary news.

The dollar is pushing higher against all of its major non-Japanese counterparts, two-year Treasury yields appear headed back toward the lows reached earlier in the week, and futures suggest equity indices are setting up for a weaker open. North American crude futures are exchanging hands near $67 a barrel, below levels at which the Biden administration had committed to refilling the Strategic Petroleum Reserve.

A plunging share price coupled with a surge in credit default swaps at Deutsche Bank is rattling investors, renewing concerns about the global banking sector. Shares in Germany’s biggest bank lost another 10 percent today, bringing month-to-date losses close to 25 percent. Derivative contracts used to insure against default soared in price, hitting levels last seen in 2019. Like Credit Suisse, Deutsche has been in decline for years, yet is well-capitalized, with liquidity ratios that remain well above regulatory standards. Unlike Credit Suisse, Deutsche has around $1.4 trillion in assets, and has relatively-deep connections with other major banks.

Treasury Secretary Janet Yellen attempted to soften her message on bank deposits in a second day of Congressional testimony – but stopped short of offering to pursue a universal guarantee. In prepared remarks, Yellen added a sentence saying “We would be prepared to take additional actions if warranted” – helping offset a selloff in regional bank shares that deepened on Wednesday when she said “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits”. As suggested yesterday, this is shift in messaging is largely semantic – while the Treasury department and other regulators appear willing to rescue depositors at individual institutions, system-wide protections would require an act of Congress.

Retail sales grew by more than expected in the UK last month, helping further bolster rate expectations. Volumes climbed 1.2 percent in February, building on a 0.9-percent increase in the prior months, according to numbers from the Office for National Statistics – a pace that beat market forecasts and pointed to ongoing strength in underlying consumer demand. The data come after higher-than-anticipated inflation figures forced the Bank of England to hike rates and deliver an unexpectedly hawkish statement at yesterday’s meeting. The pound climbed in response, but faded as markets turned more cautious.

The US is expected to report a modest rise in durable goods for the month of February, with the aircraft orders category playing a less significant role.

Canada’s retail sales number for January should align with earlier estimates, coming in around the 0.7 percent handle – but traders will watch the preliminary estimate for February more closely, looking for signs of weakness in household consumption patterns. Canadian consumers have defied rising prices, soaring interest rates, falling home values, and deteriorating sentiment data for months, appearing to spend beyond their means even as the growth outlook darkens. We’re not sure if this is a form of retail therapy, or a more accurate representation of underlying strength in the economy.

St. Louis Fed President James Bullard will discuss the economy this morning. Bullard can be relied upon to suggest that rates should go higher, but is not a voting member of the Federal Open Market Committee this year.

Next week will bring the latest iteration of the Fed’s preferred inflation indicator – the core personal consumption expenditures index – which is expected to show prices rising 4.7 percent in the year to February. This might imply a deceleration from January’s overheated print, but will remain far too high for the central bank’s comfort. Australia, the euro area will also deliver inflation updates, China will drop its latest purchasing manager indices, and the Bank of Mexico could deliver its last rate hike for this cycle.

Have a good weekend, and good luck out there.

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