Giles Coghlan LLB, Lth, MA
Financial Source
The latest SVB news has greatly changed interest rate expectations for the Federal Reserve meeting on Wednesday. Short Term Interest Rate markets have reacted very strongly to the news pricing back into rates markets a year-end rate cut. Look at the Financial Source Interest Rate Probability Tracker to see the change:
Similarly, the STIR markets’ chance of a 25bps rate hike is now at 72% with only a 28% chance of a 50 bps rate hike. So, expectations have rapidly fallen heading into the Fed’s meeting in terms of what the Fed’s rate decision will be too.
Tighter monetary conditions
In one sense, the SVB collapse is evidence that the Fed’s tighter monetary conditions are starting to have a deeper impact on the US economy. The Fed’s work is working. Also, last Friday’s jobs print, showed unemployment rising to 3.6% up from 3.4% prior and above the highest expectations from economists. The headline was still strong at 311K, but with average hourly earnings missing expectations too, there is enough here to see signs of a potential start in faltering US jobs. So, this means that the Fed’s projections are likely to be more dovish now than investors were expecting just a week ago.
What to expect
This is tricky now as it will depend on how worried investors are and the further implications of the SVB fallout. However, assuming that the SVB crisis is averted, it is interesting to note that Goldman Sachs says it no longer expects the Fed to hike rates at all in the March meeting. This would be a dovish result, especially if the Fed signaled a lower terminal rate too. Remember, that it is only a week ago since the notion of a 6% Fed terminal rate was being mooted.
The best opportunity
The best opportunity would come from a dovish Fed. That would be a 25 bps hike or a no rate hike, but with a lower terminal rate being signaled too. If the Fed’s dot plot shows a terminal rate the same as December’s (e.g. 5.10% median) then it would be reasonable for traders to expect gold and silver to rally.
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