Recession Is Much Closer Than Anyone Predicted | Daily Market Analysis

Key events:

• Eurozone - ECB President Lagarde Speaks  

We could not but notice that the financial world has gone wild lately. Markets are behaving as if the end of the world is already here. U.S. banks, European and Japanese banks lost $459 billion of their value this month so far, and most experts and investors think a recession is out of the question. The OECD is calling on the Fed to raise the federal funds rate to 5.5% and the ECB to raise the deposit rate to 3.75%, noting that this is not 2008, no need to fear a banking crisis. However, the more you tell a person not to be afraid, the greater the fear. Yes, 15 years have passed, but then there was not such high inflation.

The turmoil around three U.S. credit institutions at once and the bailout of the barely afloat First Republic (NYSE: FRC) by the big banks indicates serious cracks in the system.

Credit Suisse (SIX: CSGN) was bought by UBS (NYSE: UBS) for $3 billion, with the Swiss government compensating the new owner for $9 billion in possible losses and SNB providing $100 billion in liquidity. Europe is taking drastic measures, which are immediately reflected in the EUR/USD growth.

The OECD is calling a 50bp increase in the ECB deposit rate in March absolutely the right decision. Taking into account the fact that the average hourly wage in the Euro area is increasing by 5.7% and overtaking its American counterpart, the verdict is logical. We should note, however, that the ECB's determination has brought the topic of a 25bp federal funds rate hike back to the market at the March 21-22 meeting, although derivatives had previously indicated the end of the Fed's monetary tightening cycle.

The market's belief in the Fed's dovish reversal as early as 2023 and that a recession is much closer than might have been thought contrasts with the views of economists and global investors. 49% of Financial Times analysts foresee that the federal funds rate will reach the 5.5% mark, significantly higher than the 18% in the December survey. Another 16% of respondents believe the cost of borrowing will grow to 6% or higher.

A majority of the 519 global investors surveyed by MLIV Pulse are sure the U.S. economy will be able to avoid a recession despite the banking crisis. Two-thirds of respondents expect it to either make a soft landing, take off, or maintain its current cruising speed. At the same time, the Fed will b reluctant to raise borrowing costs several more times to bring inflation closer to the target.

Thus, despite the scale of the banking crisis, most experts and investors keep their heads cold, believing that it will soon be over. Monetary policy will once again return to the focus of the markets. At the same time, the intention of the ECB to raise the deposit rate at a faster pace than that of the Fed will be beneficial for EUR/USD. The desire of the head of the Bank of Austria Robert Holtzamann to bring it up to 4% is one thing!

If so, it makes sense to keep buying the main currency pair towards 1.0755 and 1.0825.