US banking sector issues are currently the main theme on the markets around the globe. While it looks like actions undertaken by Federal Reserve, US Treasury and FDIC are a solution to problems, moods on the markets remain sour. Regardless of what will happen of US banking sector, expectations for the next week's FOMC decision have already change significantly. Let's take a look what is price in for March 22 announcement.
Major US financial institutions change forecasts
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Open account Try demo Download mobile app Download mobile appAs recently as last Thursday majority saw 50 basis point rate hike at March meeting as done deal, following hawkish testimonies of Fed Chair Powell in US Congress. Now the market is not even fully pricing in a 25 basis point rate hike. Goldman Sachs said that it now expects Fed to hold rates unchanged next week. Fed is to some extent responsible for the situation as rate hikes led to sell-off of debt instruments held by banks and it could be a reason to pause the cycle. However, it should be said that the prime reason behind SVB collapse was poor interest rate risk management rather than increase in interest rates itself.
JPMorgan expects the Fed has already taken steps to stabilize the situation and therefore can press on with another rate hike. The bank still expects Fed to deliver a 25 bp rate hike next week.
Big changes in market expectations
Markets were almost fully pricing in a 50 basis point rate hike last week after Powell's hearing in Congress. Peak rate was seen above 5.50%. On the other hand, Goldman Sachs expects a pause in rate hikes. Moreover, expectations for the later part of the year and early-2024 also chance and now first rate hike is seen at the end of 2023 or at the beginning of the next year.
Market interest rate expectations were stable on previous Monday (March 6, 2023) and pointed to rate hikes until at least 5.75%. Source: Bloomberg
Today markets are pointing to one, or maybe two, rate hikes before pause of the cycle with rate hikes by the end of this year! Source: Bloomberg
Big moves in yields
A lot of action is happening of the bond yields. In theory, we should be observing bond price rally as investors flee to safety. This should lead to drop in yields, with short-term rates dropping more than long-term rates. This, again in theory, should be a positive news. However, negative 2-10 yield spreads during bear market bottoms heralded recessions in the past. Will it be the same this time?
Source: Bloomberg
What's next for yields?
10-year yields dropped to around 3.50%. Simultaneously, those levels marked low for yields back in December 2022 and January 2023. Should the Fed announce that rates will not increase in-line with previous projections, a pullback towards 3% could be on the cards. In such a scenario, TNOTE could climb towards the 120.00 area.
Source: xStation5
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