Over the past year, we’ve seen the most aggressive tightening cycle from central banks in history – with the U.S. Federal Open Market Committee alone taking the Fed funds rate from zero to 4.5% in one year. As inflation remains elevated, even as recently as last week, central banks have continued to be hawkish, with several market watchers predicting they would keep hiking until they reached 6%.
But in most tightening cycles, it’s not up to the central banks to decide when they can pause. They usually hike until they break something – the debate this time around was what they would break. We found that out last week with the largest bank collapse in the U.S. since the Global Financial Crisis.
What happens next is very much up in the air. You can’t have a healthy market or economy without a strong banking system. The U.S. government stepped in to limit contagion in the regional banks over the weekend, but it will take time to restore confidence. The technology sector will take a massive step backwards as Silicon Valley Bank was one of the largest lenders to tech startups around the world. The big players are suddenly looking to be in a great situation with weaker competitors.
So with this turn of events, have we seen the last Fed rate hike this cycle? Every datapoint remains important, and we still need to see inflation subside. On Tuesday, we get an updated CPI reading. If it shows we’ve seen the peak in rates, it will be time to lengthen duration and lock in these higher yields. Coinciding with a peak in yields could be a peak in the US dollar, which would be good for the commodity sectors. These will be the key questions everyone will be asking for the next few days.
The Ides of March are upon us, and they have brought with them volatility.
— Greg Taylor is the Chief Investment Officer at Purpose Investments
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