Tighter lending fuels risk of harder economic landing

Significance

Markets expect the US Federal Reserve (Fed) and ECB to raise rates by mid-year but are less certain about the trajectory thereafter. Tighter credit markets could pose a particular problem for US regional banks that have hefty exposure to commercial real estate, which is vulnerable given the rise in working from home since the pandemic.

Impacts

• Japan’s Topix Banks equities index is down 11.1% since March 9 on fears of some regional banks making big losses when interest rates rise.
• The OPEC+ oil cartel cutting output by more than 1 million barrels per day to shore up demand risks re-fuelling commodity price inflation.
• Illustrating the volatility, the policy-sensitive 2-year Treasury yield fell from 5% to 3.7% in March before stabilising close to 4%.