Post-March FOMC, Powell cited "tight" (regarding policy/banks) 23 times vs 8 in Feb = Fed reaction function changing. 5 reasons Technology/FAANG and Bitcoin holding up, despite credit/rates turmoil. Array ( [cookie] => 54d50c-7c1b42-e2b07f-98726a-40e2d8 [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 1 [max_usage_crypto] => 1 [lock] => 1 [message] => [error] => [active_member] => 1 [subscriber] => 0 [role] => fsi_macro [visitor_id] => 592583 [reason] => [method] => ) 1
Two weeks ago, the collapse of Silicon Valley Bank (SVB Financial) triggered the current financial crisis and these aftershocks continue. The severity of the shock is far more evident in the credit/rates markets than it is in equities.
- S&P 500 is up +2.3% since 3/10 (close) led by Technology/FAANG and even Bitcoin (to an extent)
- The aftershocks continue. Regional banks are large players in commercial real estate (>2X larger than large banks) and credit markets are beginning to price in heightened risks in CMBS and other markets.
- In credit/rates, there remains significant carnage as the panic around deposits triggered an explosion of rates volatility and collapse of liquidity that amounted to a "black swan" event in credit. There are obvious signs such as the collapse of Credit Suisse ($CS $UBS) and the continued distress in some regional banks including First Republic ($FRC), PacWest ($PACW) both down >60% since then.
- In speaking with our credit-focused clients, trading in credit remains highly choppy and volatile, evidenced by the continued high levels of volatility measures like the ICE MOVE Index, which at 151 is well above 100 seen around "normal" times. A 150 is roughly equivalent to a 30-level for VIX. So this gives one an idea of how risk positions would be limited given the volatility. And in the meantime, the higher cost of funding for all financial institutions (everything impacted), means liquidity in credit/rates are impacted. So one cannot say credit/rates are giving a "risk-on" signal.
- We view the Fed's decision of +25bp as overall dovish as Powell, in the press conference, made clear the Fed is now closely monitoring the knock-on effects from the current banking crisis. Powell use the word "tight" in regards to policy/lending 23 times compared to 8 times in Feb. And labor market tightness garnered a mere 2 references.
- To us, this means the Fed is focused on the impact of the banking crisis and its associated ripple effects on the economy via credit contraction and lower consumer confidence. In fact, the Fed even noted this crisis is equivalent to a tightening of monetary policy. As we noted earlier this week, we think the Fed trajectory has now forked lower. We think at most there might be one more hike before YE, but even that could be doubtful as we think inflation similarly legs lower.
- To track the status of this crisis, we have previously 4 things to watch closely:
(i) MOVE Index (bond volatility) below 150 (151 now)
(ii) First Republic ($FRC) comes to a resolution
(iii) Regional bank deposits stabilize (Tables 9 and 10 of Fed's H8)
(iv) VIX Index falls below 20
extra credit: bank funding stabilizes at Fed (H4)
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