The level of uncertainty – particularly during a public blackout period for Fed officials – has seen wild swings in market interest rates each day for a fortnight and the most volatile month for Treasury bonds since the banking collapse of 15 years ago.
While many think bank turmoil in itself will ultimately hasten a credit crunch that does the Fed’s job for it, shocking news of a re-acceleration of UK inflation last month was a reminder to central banks that disinflation is not yet baked in.
While the British inflation surprise reflects some of the price stickiness already evident in February U.S. numbers released earlier in the month, and may potentially be overtaken by recent banking events, it hugely complicates the Bank of England’s policy decision on Thursday at least.
Without another landmine in the banking world over the past 24 hours, and following the first consecutive daily gains in the S&P500 in almost three weeks on Tuesday, money markets have now focussed squarely on the looming policy decisions.
Futures markets now see a 85% chance the Fed will lift rates by a quarter point later – but no further rate rise is fully priced for the cycle and at least one rate cut by yearend still remains in the futures strip.
Two year U.S. Treasury yields clung on to 4% – but have now recorded intraday swings of more than 25 basis points every trading day since March 10, with a peak-to-trough move on March 15 alone exceeding 70bp.
In truth, the Fed meeting may be far messier than that implies, with Fed chair Powell’s press briefing having to square pressing financial stability questions and recent emergency Fed lending against ongoing quantitative tightening and another rate rise. On top of that, the latest quarterly economic projections from Fed policymakers may reveal a big dispersion of views.
U.S. stock futures and euro bourses were flat first thing, with banking news focussed on Treasury Secretary Janet Yellen’s latest assurances overnight and further moves to shore up First Republic Bank – which is still in the crosshairs.
Beyond the Fed, the dire UK inflation reading seems to have solidified expectations of another BoE rate rise on Thursday and a further move later in the year. The prospects of a hike this week were seen as only 50-50 just 24 hours ago.
If nothing else, it underlines in red ink just how all central banks are totally dependent now on incoming data evidence on what’s happening in the real economy.
On that score, Thursday’s news of the first annual drop in U.S. house prices in 11 years won’t go unnoticed in Washington either.
With the U.S. dollar lower across the board ahead of the Fed meeting, sterling hit its highest level since early February.
Elsewhere, the prospect of central banks hesitating in further credit tightening seems to have excited the frothier parts of the financial markets, with Bitcoin back above $28,000 this week for the first time since June and even ‘meme stocks’ like GameStop surging 40% before the bell after the videogame retailer reported a surprise profit.
In tech, Alphabet Google on Tuesday began the public release of its chatbot Bard, seeking users and feedback to gain ground on Microsoft Corp in a fast-moving race on artificial intelligence technology.
