Pause, Pivot, Hike
This evening’s US interest rate announcement remains the key event risk for this week.
Markets are currently pricing the likelihood of a 25 basis point interest rate hike at 87% (versus 97% for most of yesterday). The Fed’s job has become increasingly difficult over the last few months. Core inflation remains persistently high, with the bank’s preferred gauge, the PCE deflator, stating that prices rose 0.3% in April. However, further tightening to credit conditions could lead to further bank failures and significantly harm business and consumers. Former Treasury Secretary Larry Summers put the odds of US recession next year at 70%. The 10th of March brought with it the news of the Silicon Valley Bank’s liquidity issues and subsequent collapse, highlighting the stress caused by the current interest rate environment. On the same day, markets forecast US benchmark rates 1.5% lower by the 26/07/2023 FOMC Meeting (see chart below).
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