Lower Rates Tie Out Volatile Week Ahead of March FOMC

Yields fall in another volatile session while bank stocks drive equities lower. The 2-year rate declined ~32bps today in the 7th straight day of 20bp+ moves and capping a week of swings between 3.71% and 4.53%, the widest weekly range since September 2008. The MOVE index, a measure of implied treasury volatility, ended the week at ~180 points, up from ~140 last Friday. Yields swung back and forth this week as markets re-calibrated their Fed hike expectations, digesting recent bank failures and yesterday’s 50bp ECB hike. In equities, regional bank stocks were down 15% on the week, driving major equity indices down today despite increases in large tech stock prices. The KRE was down 6.04% today, and the S&P and NASDAQ were down 1.10% and 0.74%, respectively.

ECB policymakers send hawkish signals following 50bp hike. Today, ECB governors from Estonia, Lithuania and Slovakia presented a hawkish outlook for the bank, saying that the economy needs more tightening after recent market volatility subsides. Slovak National Bank chief Kazimir said, “the future development of inflation over the entire horizon of our forecast period speaks clearly in favor of the need to continue.” Traders are pricing in 50% odds of a 25bp hike in May, and a 3.35% deposit rate peak by October. U.S. markets are closely eyeing the developments overseas for clues about upcoming Fed hikes, and futures markets currently see a ~60% chance of a 25bp Fed hike next week.   

Week ahead. Next week will be highlighted by the Fed’s FOMC meeting. Among the various data releases will be home sales, durable goods orders and S&P PMI.