Forward Curve for US Federal Funds Rate and the European Central Bank
Source: Alpine Macro
Over the past month, the mood in investment markets has soured as it shifted from enthusiasm that inflationary pressures were abating and interest rates were near their peak, to a concern that rates were going higher than previously thought and were going to stay higher for longer.
This is clearly observed in the chart above which shows market expectations for the path of official cash rates over the course of this year and next. The blue curve maps out the market’s expectations for rates and is drawn from early February, whereas the red line shows the higher rate expectations in early March. This is true for the two largest markets, namely the US and the Eurozone.
Yet over the past week or two, the failure of the Silicon Valley Bank as well as a couple of smaller US regional banks is likely to give the Federal Reserve pause: it will be desperate to avoid a Lehman-style systemic collapse as occurred at the start of the GFC, and therefore may rein back its determination to hike “until the pips squeak”, and rather pause and calculate what damage has been sustained by the US economy, especially in the systemically important tech and start-up sectors.
We would not be surprised if the fears of the banking collapses fade in time and the so-called “terminal rate” in the US rises to around 5.5-5.75%, and in the Eurozone to 4.25%. At present, the terminal rate for Australia still looks like being at 4.1%, implying two further rate rises of 25bps each.
Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770. The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.
