US Economy Has Investor Backing as Bank Risks Grow

Markets have been trading as if the end of the world is at hand – but what most participants see, behind the recent financial turmoil and contagion fears, is a still-strong US economy, the MLIV Pulse survey shows.

The collapse of three US banks and the scramble to rescue others, including Europe’s Credit Suisse Group AG and First Republic Bank, sent stocks and bond yields plunging. Bets on Federal Reserve monetary tightening got dialed back, swap contracts reflect expectations for rate cuts within months, and recession warnings are ramping up.

Yet the world foreseen in those trades is hard to square with the one outlined by 519 investors, retail and professional, who took part the MLIV survey between March 13-17. Most respondents believe that a hard landing will be averted, with about two thirds predicting that the economy is either heading toward a soft landing, accelerating or cruising.

The survey was conducted after Silicon Valley Bank collapsed, but before a weekend rescue of Credit Suisse, which wiped out holders of the bank’s riskiest bonds, raising concerns about a credit crunch.

Most lean toward a scenario in which the Fed ekes out some more rate hikes, even though history suggests that if recession risks do materialize, central banks can rapidly pivot to monetary easing.

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The survey findings suggest a mismatch between what investors see as the likely economic outcomes, and the direction that trades have taken — driven by market momentum and concern that banking troubles could snowball.