After a brutal week, markets are in hangover mode, laying on the sofa, drinking as much liquidity as they can, and remaining ready to puke at any time. Risk appetites are reviving and major equity indices are poised to extend gains after Credit Suisse said it would stabilize its balance sheet with 50 billion francs borrowed from the Swiss National Bank, and a group of big US banks agreed to inject $30 billion into First Republic Bank. Treasury yields are seeing bifurcated moves, with the two year rising as the ten-year falls, and the dollar is weakening. Oil and other commodities are inching higher.

We can only assume investors will soon order delivery from McDonald’s. 

The euro is slightly stronger after the European Central Bank lifted rates by half a percentage point, prioritizing its fight against inflation over highly idiosyncratic financial stability concerns at Credit Suisse. President Lagarde hinted at a more cautious approach in months to come, saying “It’s not business as usual. It is not possible at this point in time, to determine what the path will be going forward,” but Governing Council member Gediminas Simkus later said “I still believe this wasn’t the last interest rate increase”.

The Canadian dollar remains on the defensive, but with the Bank of Canada poised to become marginally less lonely on the global stage, rate differentials could narrow in the exchange rate’s favour. We still think Canada’s domestic vulnerabilities will remain a significant headwind and could lead to to longer-term currency currency underperformance, but rate expectations could have further to fall in other major jurisdictions over coming weeks.

Today’s data agenda looks relatively quiet. US industrial production is expected to weaken slightly in February relative to the prior month. The University of Michigan’s consumer sentiment survey for early March is likely to hold near the 67 mark hit in late February, with the last week’s financial volatility falling outside the survey period. The Conference Board’s leading economic index is likely to soften, perhaps as much as 0.5 percent from January.

Barring renewed turmoil in the regional banking sector, we think the Fed will opt to lift its benchmark rate by a quarter point on Wednesday, choosing to fight inflation through broad-based monetary tightening, even as it supports regional lenders using more targeted liquidity measures. Markets are coming around to this view as well, with odds on a hike now holding near 80 percent, up from less than 50 percent on Wednesday.

This approach carries risks. The differences between the collapse of Silicon Valley Bank and the Lehman Brothers implosion are bigger than the similarities, but the episode has nonetheless increased the odds on a hard economic landing. Labour markets remain strong, but financial conditions have tightened sharply, and – if the level of news coverage is any indication – confidence among businesses and consumers has likely taken a serious hit.

Markets will remain nervous and vulnerable to sudden panics. As the effects of history’s most aggressive and concerted global monetary tightening campaign continue to reverberate across the real economy, investors will be stuck playing a financial version of whack-a-mole, worrying about where the next issue might pop up. We’re concerned weakness in US commercial property and private equity markets, along with the Canadian household sector, but this part of the cycle is typically deeply unpredictable, and shocks could come from a variety of directions. Volatility expectations are likely to remain elevated.