Heading into last week’s ECB meeting there was speculation that the ECB’s flagged 50bps rate hike would not go ahead. Why? Well, it was the worries over potential contagion from European banks over the loss of confidence in Credit Suisse that was circulating strongly on Wednesday last week. However, Credit Suisse secured liquidity from the Swiss National Bank late Wednesday and intends to borrow up to $50 bln. FINMA also issued a statement in support of Credit Suisse saying that it ‘meets the higher capital and liquidity requirements applicable to systemically important banks’. So, this seemed to steady the ship for the ECB on Thursday.

The ECB told the markets that it would be hiking by 50bps and it did raise rates from 2.50% to 3.00%. However, it said after its 50bps hike that it feared not going ahead with that would have panicked investors. This was a good judgment call as risk rallied after the Thursday decision, but rate expectations have now dramatically fallen moving forward. Short Term Interest Rate Markets now only see one rate hike this year and a terminal rate of 3.22%.

Has this set the mood for the Fed?

The Federal Reserve meets on Wednesday, March 22, and since both the SVB crisis and the Credit Suisse wobble rate markets have rapidly re-priced interest rate expectations. (Incidentally, this fall in real yields is what has been benefitting precious metals.) The ECB made it clear that its priority is to still fight inflation, but it has now moved to a ‘meeting by meeting’ basis.

This has likely set the tone for the Fed. It will probably opt to hike by 25bps, to not spook markets, but then signal either a ‘meeting by meeting’ basis or a Fed pause. Ultimately this should be a positive week for US stocks as lower rates seem inevitable. 10 days ago many analysts were rightly speculating on whether the Fed will signal a terminal rate of 6%. STIR markets now see a terminal rate of around 5%.

The lower rate expectations, if the Fed confirms them, should be supportive for the S&P500. Major resistance sits at 4100 on the daily chart and that would act as a first target for buyers on a dovish Fed message.