Please see the below article from Brooks Macdonald providing the latest Investment Bulletin. Received this morning 14/03/2023
What has happened
Yesterday saw further wild moves in the bond market with some of the price changes in the US 2-year Treasury rivalling those of 2008. European equity markets caught up with the late US losses on Friday and banks continued to underperform despite measures by the Federal Reserve to rebuild confidence in the regional banking sector.
SVB impact
The market remains deeply concerned that there will be contagion from SVB into other banks and the wider financial system. President Biden said yesterday that he would do whatever it takes to ensure the banking system is secure, raising the possibility of additional regulation to avoid similar collapses in the future. In terms of the quantum of liquidity needed, the US Federal Home Loan Banks raised $88.7bn yesterday to provide funding to private regional banks, including SVB. Other US regional banks under pressure yesterday include First Republic and Western Alliance Bancorp, with both banks experiencing halts to the trading of their shares. The banking giants in the index, such as JPMorgan, outperformed with investors suspecting contagion is limited to the smaller banks.
Bond market impact
The moves within the bond market were far more dramatic than within the equity market yesterday. Market pricing for the US terminal rate plummeted to below 4.8%, this contrasts to just last week where we saw a peak of almost 5.7%. This reflects the new market belief that the Fed, having now ‘broken’ something, may step back from their interest rate hikes. Last week a 50bp interest rate hike was seen as the most likely outcome for next week’s meeting, now markets are weighting up the odds of 25bps or no hike at all. Should the Fed hike by 25bps, the market has concluded that that will likely be the final hike of this cycle. Huge moves within the Treasury market that prior to 2022 has been relatively calm for a decade.
What does Brooks Macdonald think
While bond pricing has moved, investors ultimately have no idea how the Fed will interpret the SVB news and whether voting members will be willing to pause interest rate hikes when CPI remains well above the target range. This of course brings us to today’s CPI release which remains crucially important to the Fed’s room for manoeuvre. How the core CPI number (expected 0.4% month-on-month) and hourly earnings (expected 0.2% month-on-month) unfolds will provide another hurdle for a market still struggling to price the risk of SVB.
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Alex Clare
14/03/2023