The Battle Against Inflation Continues
Last week was a dramatic continuation of the previous one.
Banks Remain Under Pressure
On Sunday night, the Swiss government announced that Credit Suisse had failed and would be taken over by UBS, wiping out bondholders in a controversial way. Credit Suisse had been a systemic bank – one of the 30 largest banks in the world – i.e. a much bigger deal than Silvergate, SVB and Signature.
First Republic stayed under pressure in the US, with the stock price unable to recover despite support from the US mega-banks (JPMorgan, BofA, Citibank, and so on) and pronouncement of further help by the Treasury and the Fed.
Fed Raises Rates Again
In less than three weeks, market expectations have gone from a fight against inflation – because the economy continued to run too hot – to a banking crisis leading to tightening financial and credit conditions leading to a potential recession.
Indeed, interest rate expectations have gone short-term rates at 5.6% to 3.6%. This is unheard of!
At its regular meeting on Wednesday, the Fed nonetheless hiked the reference rate by 25 basis points (bp) to a 4.75% - 5.00% target. The Swiss National Bank did likewise, hiking by 50bp to 1.5%. Both central banks justified the moves as part of the ongoing fight against inflation. But in the Fed’s case, they made it very clear that the situation was now fluid.
Measures Taken to Stabilise the Economy
While equity markets wobbled at the start of the week, they stabilised and rallied after the Fed meeting: on average, 0.75% gain in the US and 1.5% gain in Europe (and the same in Switzerland).
One quick way to make sense of this is that the Fed (plus the Treasury) put us back in play. More than US$ 300 billion have been injected back into the system. There are talks of potential blanket guarantee of all deposits in the US.
Markets see these facts as ensuring that the economy will not be allowed to falter. Therefore, equity valuations should be protected. While that may not be true, it is the mantra among participants.
