It was clear from the get-go that Monday would be mayhem for the markets – and as it turned out, it proved a lot more than that, with two-year Treasury yields collapsing the most in decades.
At stake was not just the integrity of the financial system, but also the availability of liquidity.
Bloomberg cross-asset strategist, Ven Ram, notes that as of the start of the European morning, the markets appear a lot calmer, with Treasury yields having barely moved, the dollar attempting to claw some way back and stock futures a lot less jittery.
Shortly, we get the readout on inflation for February, with the median estimates for on-month and on-year numbers forecast to show a deceleration.
There are two ways this could play out from the Fed’s perspective.
The tumult in the markets continues, centered on concerns about the soundness of other regional US banks, liquidity ebbs – as it always does when the markets need it the most!
In such a scenario, what happens with the February inflation prints becomes a sideshow.
In other words, even a surprise, higher-than-forecast print won’t bother the Fed much.
After all, inflation is a pre-existing problem – and the Fed has time to battle this
If the market jitters calm down, the inflation numbers – together with last week’s payroll data and upcoming retail-sales data – will take regain their predominance.
Even so, the chance of the Fed raising rates by 50 basis points is pretty much zilch.
Calming the markets about the prospect of a systemic crisis towers head and shoulders over inflation fighting from the Fed’s perspective.
After all, when a patient suffering a chronic condition meets with an accident, you treat the patient for life-threatening injuries first.
The long-stay illness isn’t the priority of the hour, as every good doctor knows.
Additionally, as Bloomberg’s Sebastian Boyd notes, today’s CPI print is going to land in a different world than the one Jerome Powell described to Congress a week ago.
Just look at the massive repricing in the Treasuries curve since last Tuesday.
A chart like this is so unusual, you should print it out to show to your grandkids.
Even if CPI comes in hot, it’s hard to imagine the curve bouncing back, even if that might have been the Fed’s intention with its stunning announcement over the weekend.
That’s not to say yields won’t rise.
After Monday’s extreme price action, the most normal thing would be to see rates claw their way back.
Short-dated eurodollar yields, which were down 80bps at one point on Monday, are up as much as 33 bps on the day.
We may crawl our way back to pricing a terminal rate close to 5%, but confidence has been shaken.
If the Fed’s plan was to tighten until something broke, we seem to have made it.
Last week is another country, they do things differently there.