The recent bank collapses spooked markets, investors, and governments.
Many expected central banks to sacrifice their determination to defeat inflation and turn their attention to underpinning financial stability. This of course was proved wrong at recent central bank meetings where rates were again raised proving that price stability is the number one priority over financial stability. Investors still seem to underestimate the central banks resolve to defeat inflation, whatever the cost.
The fact is, although banks failed and two more needed rescuing (bought by other banks), this was never the beginning of a collapse of the banking system as each was independent of the others, with two focused very much on crypto and tech. If anything, it was poor management and the weakening of regulations under Trumps presidency that allowed some of this to happen.
Yields dropped as investors sought an exit from banks and there was a little irony in the fact Bitcoin became the digital gold and rallied. Stocks understandably dropped, especially the banking sector, and the USD was down then up as traders attempted to decipher what it all meant. U.S interest futures rallied on the expectation the Fed would cut rates in September and December offering some great opportunities.
Although rates are nearing their peak, I expect they mayl remain there at least until the end of 2023 as central banks are still far away from their 2% inflation target. It is possible central banks will overshoot with their rate hikes as they are not allowing sufficient time for the economy to react and for it to feed into the data, after all, the effect is lagging by several months.
Even when inflation does reach 2%, we should not expect rates to drop quickly, as some economists do, as they will want to see them hold there for three to six months. Not only that, but very low rates are reserved for a crisis, and although the recent banking chaos was close, it will take more for central banks to begin to cut rates and its possible that at the next crisis, yes there will be one, they will be more reluctant to drop rates so quickly or so low. Cheap money may not return this decade!
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