A pre-FOMC limbo found investors biding time. It didn’t feel like a “crisis” day. Indeed, depending on who and what “stress” metric you consult, there is no crisis.

Credit Suisse postmortems filled the void during what felt, to me anyway, like an uncharacteristically quiet session. Traders were waiting on Jerome Powell to accidentally disclose how worried the Fed is (or isn’t) about the US banking system, and Americans were waiting to be elated (or furious, depending on your political views) about Donald Trump’s prospective indictment.

US rates continued to gyrate wildly. At this point, 10bps or 15bps on two-year yields counts as a “calm” day. Note that recent events and the associated rates rollercoaster drove front-end one-year implied vol to a record high — so, above GFC levels. The only thing more erratic than rates are shares of First Republic, which at one point rose more than 50% Tuesday, after falling 47% Monday and 72% last week.

Outside of financials, stocks seem largely unconcerned+ with the specter of a regional bank apocalypse. As one MD put it on September 29, 2008, “Out in the boondocks, people don’t realize what this means. When they can’t get a loan at the bank, then they’ll figure it out.” It’s funny: I doubt that quote would make it into market coverage in 2023. Something about it just seems not “woke” enough, if you will.

Anyway, optically stocks are holding up remarkably well under the circumstances. Big-cap US tech is on track for a 6% monthly gain, for example. During the middle of a bank crisis. The Nasdaq 100 outperformed the S&P 500 for a dozen straight sessions through last Friday, among the longest such streaks on record. Given that, it’s not surprising that breadth is an issue.

“Performance breadth measures are breaking down broadly,” Morgan Stanley’s Mike Wilson remarked. “These are signs of unhealthy market internals, in our view.”

Speaking of “unhealthy market internals” (not the kind Wilson means) just about the only thing that’s flashing red (or, orange actually) on Goldman’s market stress heat map is bond market liquidity which, you could argue, is among the most important of all internal functions.

“The spike in rates volatility led to a deterioration in the liquidity of US bond cash and future markets and likely contributed to the widening in MBS spreads too,” the bank said. The red arrow below shows that drop in market depth, and the red box gives you some context for the “sea of orange” you’d expect if this were a “real” crisis.

Although funding market stress is still “contained” (as Goldman put it), the Fed’s preemptive efforts to ensure it stays that way could be construed as foreboding. That’s certainly how I framed the announcement of more frequent dollar swap operations. But apparently there isn’t much demand. So, maybe I was overzealous.

In any case, if it was a semblance of calm on FOMC eve (and sometimes, when I go back and scan the day’s headlines, I discover that what felt calm to me wasn’t actually a serene session for anybody else), I’d expect things to get lively again soon enough.

Or maybe not. Who knows. Maybe Powell can thread the needle. Maybe the banks will stabilize. And maybe dollar-funding stress, to the extent it existed in the first place, is indeed contained. All I know is that $153 billion in discount window usage and $300 billion in FHLB issuance (to fund advances to banks) make for a pretty odd couple with the word “calm,” or any synonym thereof.

And on that note, I’ll leave you with a few loose quotes I collected Tuesday ahead of the Fed.

Writing in the Financial Times, Gillian Tett notes the treatment of AT1 bonds in the Credit Suisse affair could contribute to an “insidious sense of investor doubt” about the neutrality of laws underpinning capital markets, with suspicions the Swiss authorities ensured the powerful Saudis got their money first. Likewise, SVB was not just a start-up bank but a national security issue, says the Pentagon, and Signature Bank was about dollar-rival crypto. The expansion of Fed swap lines excluded EM, again. Yes, the average Fed governor, like the average market analyst, may not even be able to spell geopolitics, let alone say it, but that doesn’t mean there isn’t a parallel reality to purely market perceptions of events. Which brings us back to the view that it’s if not when we get a Fed Put. Let’s try to frame this in broader political-economy: COVID-era inflation was never going to be “transitory.” That’s what happens if you finally use fiscal and monetary policy, having failed with only monetary, supply chains buckle and entrenched oligopolies raise prices because they can. Oh, and war. Nominal wage inflation was always likely to rise. COVID saw excess deaths, long illnesses, early retirement, lifestyle changes and labor hoarding in aging societies where fewer younger workers must produce the same volume of goods and services, while immigration came to a halt. Workers needed pay rises to try to catch up to inflation, and firms can afford to let them to some degree because profits are so high. Governments have to for political reasons. Interest rates were always likely to have to be “higher for longer.” What else were central banks supposed to do? Argue for higher taxation and anti-trust action? Raising rates in a financialized economy breaks things. Yet some things getting broken aren’t useful to the Pentagon, and others are more useful broken. — Rabobank

It’s early enough in the regional banking turmoil that the Fed could be excused for staying the course on Wednesday via a quarter-point increase in an effort to not alarm the market. This certainly falls into the category of when leaders say there is no problem, that is when one should truly begin to worry. Alas, the worrying is well underway during the current episode as evidenced by the massive repricing that has already occurred in the front-end of the bond market. — Ian Lyngen and Ben Jeffery, BMO

This is how it always plays out in our experience and why the last part of the bear can be vicious and highly correlated — i.e., prices fall sharply via an equity risk premium spike that is very hard to prevent or defend in one’s portfolio. Understanding this dynamic, active investors have fled to higher ground to avoid the flood. More specifically, they have come back into the mega-cap tech stocks that have served them well over the past decade. We caution against the view that mega-cap tech is immune to these growth concerns. — Mike Wilson, Morgan Stanley

Equity risk premia remain low considering higher recession risk and growing market stress. They declined most of last year, helped by a resilient US economy and more growth optimism earlier in the year. While risk premia have increased somewhat, so have risks — after recent market and macro shifts there is higher risk of both rates and growth shocks. — Christian Mueller-Glissmann, Goldman

We are not looking for a Fed pivot at this point given sticky services inflation, and expect the Fed to hike by 25bps in each of the March and May meetings. This risk of markets getting disappointed by the Fed is one reason we remain cautious on risk assets such as equities and credit. — JPMorgan

The Fed cutting rates to the tune of 100bps over six months is typically only seen in a recession, meaning the rates market is assuming a much higher probability of a hard landing than it did even two weeks ago. Recall that in a recession, earnings usually fall 30-35%, which is not remotely close to what markets and consensus are pricing in currently. Equity valuations remain seemingly unfazed. Even before the events of last week, equity risk premiums were historically low, given the late cycle, slowing growth environment. What is most surprising to us is that they have remained unchanged despite the current banking crisis and the move lower in rates, leaving multiples completely disconnected from fundamentals and economic reality. — Venu Krishna, Barclays