Bank quake lowers interest rate expectations

Until mid-March, the markets expected further large interest rate hikes by the US Federal Reserve, as overall inflation fell but core inflation rose or stagnated. With the bankruptcy of SVB and the takeover of Credit Suisse by UBS, interest rate expectations fell, which supported the stock markets in a very volatile month.


March was sometimes characterised by volatile stock market development: losses in the first half of the month contrasted with a recovery phase in the second. The German DAX index gained 1.72%, while the broad European Stoxx Europe 600 index lost -0.71%. The broad US index S&P 500 ended March up 1.00%. Hong Kong's Hang Seng Index remained stable with a gain of 0.60%. Overall, global equities, as measured by the MSCI World, rose moderately by 0.34% - all index data in euro terms.

As in the previous month, falling headline inflation contrasted with a further increase or stagnation in the core rate (excluding energy and food). In the euro area, headline inflation fell significantly and more strongly than expected from 8.5% to 6.9% year-on-year. This was mainly due to lower energy prices. However, the core rate rose from 5.6% to 5.7%. In the US, headline inflation also fell from 6.4% in January to 6.0% in February, but core inflation remained almost stable at 5.5% (previous month: 5.6%). Investors then expected key interest rates in the USA to continue to rise at the beginning of the reporting period and to reach an even higher level of up to 6.0% at the end of this rate hike cycle.

However, with the quake in the banking sector triggered by the bankruptcy of the US Silicon Valley Bank, the market's interest rate expectations changed significantly. Volatility on the stock markets then increased sharply. All the more so when soon afterwards the major Swiss bank Credit Suisse also got into difficulties and the Swiss government arranged an emergency takeover by its even larger competitor UBS. At the same time, speculation arose that the central banks might call off further interest rate hikes or at least suspend them.

The ECB, however, nevertheless raised its rate by 50 basis points to 3.5%, citing the much improved stability of banks since the 2008 financial crisis. The US Federal Reserve also raised its key interest rates, but only by 25 basis points to a range of 4.75% to 5.00% - at the beginning of March the markets had still assumed a move of 50. Towards the end of the month, the situation calmed down again and volatility levelled off. Technology stocks in particular benefited from the changing interest rate expectations.

Sentiment in the German economy improved for the fifth month in a row in March despite the turbulence in the international banking sector. The ifo business climate index rose to 93.3 points (previous month: 91.1). Above all, business expectations in manufacturing and in the service sector improved. However, this is not yet reflected in the purchasing managers' index of the German manufacturing sector. The index fell to 44.7 points (previous month: 46.3), following the trend in the USA and China.

The bond markets experienced a rally in view of the uncertainty surrounding the banking sector. High-quality bonds in particular were in demand, posting their best monthly performance since March 2020. Two-year US Treasury yields fell 79 basis points to 4.03%, and ten-year yields were 45 basis points lower than the previous month at 3.47%. Their German counterparts performed similarly, with the yield on two-year Bunds falling from 3.13% to 2.67% and ten-year paper falling from 2.65% to 2.29%. Gold was also in high demand. The price for the troy ounce climbed from 1,826.9 to 1,978.8 US dollars.



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