Notes from the Desk: SVB Impact on Rate Markets
It’s been a wild Monday morning, with US and CAD 2y rates dropping 0.50%. Since Thursday we have seen the US 2y decline ~1% and the CAD 2y fall ~0.75%.
What’s Going On?
The fear of the SVB failure is that of contagion and instability in the financial system. In terms of rate markets, this has resulted in the following:
• The market has concluded that the Fed will not hike next week and is questioning whether they will be forced to cut.
• On the domestic side, the market has swung from expecting the Bank of Canada to hike later this year to now anticipating cuts.
• The probability of other central banks hiking has also dropped. Last week the odds the ECB would hike was set at 100%, today it is 50/50.
The Questions:
In the short-term, it makes sense for central bankers to be cautious around hikes while they assess the damage to the financial system. The medium to long-term will depend on the level of contagion.
• If the fallout extends further and deeper than US Regional Banks, then the door is open for central banks to reverse course and ease monetary conditions.
• If the problems are contained, their focus will shift back to inflation and a return to data dependency.
