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Quick Takes:

  • First Quarter Has Volatile End. Risk assets went on a roller coaster ride for the final month of the quarter with the collapse of multiple banks across the globe.
  • Fed Shakes Off Banking Woes, Increased Rates. The Fed implemented increased interest rates by 25bps during the FOMC’s March meeting despite the concerns in the financial services sector. While commentary seemed to leave room for further hikes, market participants began pricing in interest rate cuts as early as later this year. With market interest rates retreating, there was a flurry of real estate activity.
  • Greenback Stumbles. With market interest rates tumbling during the month of March, the dollar was dragged down with them. This led to International markets posting respectable results for the month, despite concerns of contagion from the global banking sector.
  • Labor Markets and Inflation. While inflation metrics came largely in-line with market expectations, the FOMC expressed concerns with how persistently strong the labor market has remained throughout their tightening cycle. The FOMC also expects tighter lending standards from creditors. Expect this to have a similar impact as a hike in interest rates.

Asset Class Performance

Markets were volatile for the month of March with concerns of fallout from several banks collapsing around the globe. While governments stepped in to stabilize the financial services sector, there was a general flight to safety leading to interest rates falling, bonds performing well, and growth styled equities also posting a strong month of performance.

Markets & Macroeconomics

The month of March gave market participants a flashback to the Great Financial Crisis as several banks collapsed, both domestically and abroad. To alleviate a risk of contagion spreading across the global financial system, governments across the globe stepped in to stabilize the sector, with the FDIC guaranteeing all deposits, even those above the $250,000 maximum, and the Swiss government brokering a sale of Credit Suisse to rival UBS. As market participants were still digesting the risks to the financial sector and the government intervention, the FOMC voted to increase interest rates by 25bps during their March meeting. Regardless of the turmoil in the banking sector, the Fed remained concrete in their fight against inflation with commentary hinting at the possibility of more rate hikes in the future but will be heavily dependent on macroeconomic data readings as well as the continued development within the banking sector. Despite these comments, the bond market diverged from FOMC members’ dot plot, an estimate of where the FOMC see future interest rates, and began to price in rate cuts, not hikes, starting later this year. This divergence illustrates that the market seems to be pricing in more risk than the FOMC is currently seeing and ultimately appears that a majority of market participants are anticipating a recession in the near future. As a result, market participants believe the Fed will be forced to abandon the fight against inflation and begin to stimulate the economy back towards expansion. Because of this viewpoint, interest rates plummeted throughout the month of March.

Bottom Line: Despite the stress in the financial services sector throughout the month of March, the FOMC increased interest rates during their March meeting. While guidance left the door open for more rate hikes in the future, market participants began to price in rate cuts as early as later this year. This means that market participants are anticipating a recession very soon and thus the FOMC will be forced to pivot in their fight against inflation to stimulate the economy to a sufficient level of output to reduce the effects of a contraction in economic production.

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