| A Fed official warns rates will have to rise above 5% and stay there for some time, the top-secret prep behind the Credit Suisse takeover and why the biggest short in banking can be found in Canada. — David Goodman Federal Reserve Bank of Cleveland President Loretta Mester said the bank should move its benchmark rate above 5% this year and hold it at restrictive levels for some time to quell inflation, with the exact level depending on how quickly price pressures ease. To put inflation on a steady path down to 2%, monetary policy needs to move "somewhat further into restrictive territory this year, with the Fed funds rate moving above 5% and the real Fed funds rate staying in positive territory for some time," Mester said at an event in New York on Tuesday. The comments show a long-hoped for pivot in monetary policy may not be a given. That was reinforced on Wednesday as New Zealand's central bank unexpectedly raised rates by 50 basis points, maintaining its pace of tightening to tame inflation even as the economy heads toward recession. Switzerland's banking regulator said today it considered putting Credit Suisse Group into bankruptcy before deciding on the takeover by UBS. But, as this extraordnary story shows, the groundwork for one of the biggest bank deals ever had been laid for years. When Colm Kelleher became chairman last April, he inherited feasibility studies by predecessor Axel Weber dating back to at least 2020 on what a takeover would look like. And early this year, after clients pulled tens of billions of dollars from the bank, Kelleher called on a small group of top advisers from his alma mater Morgan Stanley to ramp up contingency planning, according to people with direct knowledge of the matter. The biggest short in the banking industry anywhere in the world isn't in Switzerland or Silicon Valley, but rather, in the relatively tame financial center of Canada. In recent weeks, short sellers have upped their bearish bets against Toronto-Dominion Bank, and now have roughly $3.7 billion on the line vis-à-vis Canada's second-largest lender, according to an analysis by S3 Partners. That's the most among financial institutions globally and puts TD ahead of the likes of France's BNP Paribas and Bank of America. Global stocks and US index futures dropped as hawkish messages from New Zealand and Australian central banks signaled a prolonged fight against price pressuers and revived concerns about a deeper economic slowdown. Gold extended a 13-month high. The two-year Treasury yield rose for the first time in four days and the dollar fluctuated. How will recent turmoil in the financial sector affect corporate earnings and outlooks? What will be the impact on bank profitability? Will tech earnings be strong enough to support the recent rally? What will be the biggest positive and negative drivers this season? And what luxury brand do you think represents the most investment value these days? Share your views in our MLIV Pulse survey. The US publishes mortgage applications data early this morning, before ADP issues its report that likely will show private employers added a more modest number of jobs in March. There are no Fed speakers on the slate today, with James Bullard's remarks tomorrow the only comments due before Easter break. Here's what caught our eye over the past 24 hours: This week we got a stark reminder that in many ways the old geopolitics of oil aren't disappearing anytime soon. Despite the massive amount of US oil production, and despite the ongoing shift to new sources of energy, OPEC still matters. And, actually, it still matters a lot. In a note to clients this week, Goldman Sachs strategists argued that that OPEC enjoys an unusually high degree of pricing power right now for three reasons: "First, the formation of OPEC+ has boosted the producer group's effective market share. Second, the low price elasticity of non-OPEC oil supply, including for US shale (related to financial discipline and bottlenecks), and limited spare capacity are restraining competitors' ability to offset OPEC production cuts. Third, global oil demand is now inelastic given the lack of substitutes in an energy constrained world."
That being said, policymakers around the world are thinking more and more about non-oil commodity security, particularly as things like EVs get more prominent. In a new proposal at Employ America, Arnab Dutta and Alex Turnbull argue for the creation of an SPR-like storage vehicle for the lithium supply chain. Specifically they call for a strategic reserve of Spodumene, a lithium precursor, which can then be refined into useful forms of lithium as needed. They write: "Lithium" is not a singular product, but a whole class of chemical compounds that include the base element–many of which are used for different functions and purposes. For example, lithium carbonate (Li2CO3) is used for lithium iron phosphate batteries, while lithium hydroxide is used for nickel-manganese-cobalt ("NMC") chemistries. Spodumene, a lithium precursor, is the most analogous to crude, and can be processed into numerous chemical compounds necessary for the energy transition. Spodumene has several advantages for storage over other lithium compounds: (1) it can be more easily and affordably stored; (2) its relative simplicity in grades (compared to other lithium compounds) makes it easier to trade in higher volumes; and (3) it has a short production cycle.
They go onto argue that sufficiently robust storage facility could be built for less than $250 million. And that if paired with active financial management, could play a role in stabilizing an otherwise unstable market that's prone to booms and busts. All that being said, this gets back to something I wrote about earlier this week with respect to the SPR itself. In theory it makes sense for the government to be active about being a buyer and seller of last resort for various commodities to smooth cycles. But it's only going to work if there's a serious commitment to do so, to buy when prices are low and so forth. Without that commitment there's no credibility to producers, and without that credibility then the existence of a physical facility only gets you so far. It's one thing to build physical structures for warehousing a buffer stock. It's another thing to actually use them. Anyway, the whole piece on the case for a Spodumene facility to stabilize the lithium supply is worth reading, just to think about other non-oil commodities for which these conversations will grow more prominent. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart. | 
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