Fabrice Coffrini/Agence France-Presse/Getty ImagesContagion fears triggered by the collapse of Silicon Valley Bank and Signature Bank, then exacerbated by trouble at Switzerland’s Credit Suisse, is giving way to fresh expectations for at least 100 basis points, or a full percentage point, of interest rate cuts by the Federal Reserve before the end of the year. Traders are pricing in a 67.3% chance that the fed funds rate target will drop to between 3.5% and 3.75%, or even lower, by December, according to the CME FedWatch Tool. That would be down from a current target of 4.5% and 4.75%, implying at least 100 basis points of rate cuts by the Fed’s final meeting of 2023. It marks a sharp turnabout from a week ago, when traders saw a decent chance of rates heading toward 6% this year and staying there.Behind the repricing of expectations is concern that contagion fears might not be contained to just a few banks, after the top shareholder of Credit Suisse CS told Bloomberg that it wouldn’t raise its stake in the Swiss bank. Just last week, Fed Chairman Jerome Powell pointed to the possible need to reaccelerate the pace of rate hikes, though he said policy makers hadn’t yet made a decision about their next meeting on March 22. Traders now see a 47.6% chance of a pause next week, and 52.4% likelihood of a quarter-point move.“Credit Suisse is in focus at the moment as the bank’s shares dropped to a fresh all-time low (declining more than 20%) and jitters reverberate throughout the European banking sector,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “Renewed investor concern regarding precisely how contained the lender stress will ultimately be will continue to drive the performance of risk assets, and Treasuries have benefited from the resumption of flight-to-quality flows,” which triggered a plunge in yields on Wednesday.Treasury yields were down in New York morning trading, with the policy-sensitive 2-year rate BX:TMUBMUSD02Y falling 41 basis points to 3.796% and the 1-year rate BX:TMUBMUSD01Y down 43 basis points at 4.109%. Meanwhile, U.S. stocks DJIASPXCOMP opened sharply lower Wednesday morning as Credit Suisse’s woes amplified fears about banks.“Just when financial markets appeared to be calming down after the SVB [Silicon Valley Bank] saga, the sell-off in European bank shares has resumed this morning due to concerns about the viability of Credit Suisse. At this stage, a huge amount is unclear, but a few points are worth making,” said Andrew Kenningham of Capital Economics. “The problems in Credit Suisse once more raise the question whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” Kenningham wrote in a note. “This is the third ‘one-off’ problem in a few months, following the UK’s gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume there will be no other problems coming down the road.”
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