Evening Brief – 04.17.23

The markets are continuing to shrug off the financial turmoil that brought such volatile conditions only a month ago. By the end of last week, the VIX index, a measure of volatility, closed at just 17.07, its lowest level since January 4, 2022, and on the same day the S&P 500 hit its record intraday high.

The MOVE index, which measures Treasury volatility, has returned to levels seen before the Silicon Valley Bank (SVB) turmoil. Additionally, Bloomberg’s index of US financial conditions has erased over 80% of the tightening seen in the previous month. These measures suggest the markets are currently less volatile and more stable. Despite fears of a financial crisis, the market has rebounded and is currently showing signs of resilience.

With growing signs that markets have stabilized, there have also been growing expectations that the Federal Reserve will deliver another rate hike at the next meeting on May 3. This was reinforced by a speech from Fed Governor Waller, who explicitly stated that “monetary policy needs to be tightened further.”

In addition, the University of Michigan’s survey of inflation expectations in April showed a one-year measure bouncing up to 4.6%, a full point higher than the previous month, and the biggest monthly jump in nearly two years. Finally, measures of core retail sales in March were a bit stronger than expected, with the measure excluding autos and gas stations only down by -0.3% versus expectations of -0.6%.

As a result, futures have priced in an 81% chance of a rate hike in May, the highest it has been since the SVB collapse. Looking further out, the rate expected by the December meeting has risen to 4.50%, up from a low of 3.75% in mid-March.