Shane O'Neill, Head of Interest Rate Trading
Another hectic month in financial markets, this month’s turmoil was started by the collapse of Silicon Valley Bank in the early part of March. Kickstarted by lax risk management (as we discussed here), SVB had insufficient capital to protect against a run on its deposits. This collapse sent shockwaves through all areas of financial markets and had investors worrying about a GFC mk. II. Equities tumbled and rate expectations got taken in. As more information came to light it started to look like SVB was a contained case – the powers that be stepped in to guarantee deposits and the Fed offered cheap funding against treasuries, with no haircuts. But no sooner had this crisis started to abate than Credit Suisse wobbled. As their share price tanked and CDS spreads ballooned, the Swiss authorities rushed through a deal (see here) to allow UBS to buy the struggling bank at a knock down price. These drastic (and maybe questionable) moves either side of the pond seem to have stopped the bleeding for now, allowing us to ask – should we refocus on the underlying economy?
In the aftermath of these banking fears, the peak rate in the US has fallen from 5.5% to 4.9%. And where we were pricing almost no cuts for this year, the market now expects 60bps of cuts and at some point was expecting more than 100bps. Expectations fell less this side of the pond but the moves were still significant – peak rates in the UK are now expected at 4.5% vs. near 5% and in the EU we’re looking at 3.4% vs. over 4% previously.
These sudden and significant moves made this month’s central bank meetings even more interesting and important. Up first we had the ECB – they went along with market expectations and delivered a 50bps hike. A move Schnabel had previously described as necessary under “virtually all scenarios”, the markets certainly tested this sentiment and they stuck to their guns. In the press conference and wording of the release, they were notably less committal than previously. Highlighting that, yes, inflation is still too high and looks like it will be for too long but that each decision is more data dependant than ever, given fragilities elsewhere.
The Fed were next and hiked by 25bps as was widely expected – and struck a similar tone to the ECB, warning of inflation but dialling back commitment to future hikes. That said, they didn’t adjust the dot plot, so as it stands the market is very dislocated from Fed expectations.
In the UK we had a surprise jump in inflation (10.4% vs 9.9% expected) – this all but confirmed the 25bps hike we saw the following day. There was no press conference with the release and so there was little new information to be gleamed from the BoE this time around.
We have no CB meetings in April so it will be interesting to watch the market work on its pricing with no “official” guidance. From here we feel the risks for hedgers is a refocus on the, still very present, issue of inflation and rates moving back to where they were pre-SVB. Managers in a position to take advantage of the disparity between Fed dots and market pricing may wish to act quickly. We’ve seen this opportunity come and go in the past, we could easily see it happen again.
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