Markets have started pricing in Fed rate cuts of 75 basis points by the year's end as SVB's collapse creates panic about other banks

• The CME FedWatch Tool shows that a more investors are expecting interest cuts later this year.
• After an expected hike of 25 basis points next week, odds point to 75 basis points of cuts.
• This follows Silicon Valley Bank's closure, which set off fears that more lenders will fail.

Silicon Valley Bank's demise has put pressure on the Federal Reserve to rethink its economic tightening, and markets are pricing in a sharp pivot to rate cuts this year. 

The CME FedWatch Tool, which looks at 30-day fed fund futures contracts to gauge what investors believe is the possible trajectory of rates, still shows expectations for more one increase next week.

In fact, it indicated on Monday a 72% probability for an increase of 25 basis points, bringing the benchmark rate to 4.75%-5.00%.

But after that, markets see a U-turn to the tune of 75 basis points of reductions by December from the March peak, or a net decline of 50 basis points from current levels.

That marks a major reversal just from last week, when Fed Chairman Jerome Powell's testimony on Capitol Hill suggested central bankers would re-accelerated increases and keep rates higher for longer.

Markets then pushed back projections for eventual rate cuts, with many forecasters putting the first one sometime in 2024. 

By May, the FedWatch tools shows odds of nearly 50% that rates will stay at 4.75%-5.00%, followed by a 38% chance they will rise again.

But by June, the sentiment shifts, with the probability of a quarter-point cut at 43%, topping the 41% odds rates will hold steady. 

And by July, the odds of a second quarter-point rate cut to 4.25%-4.50% are at 42%, just above the 41% likelihood of 4.50%-4.75%.

In September, expectations for a second quarter-point cut remain in the lead, at 41%, but markets also price in a 32% probability for a third quarter-point decline.

By November, the view for a rate of 4.00%-4.25% is still slightly ahead, at 35%. And in December it's 33%, with the chance of a fourth quarter-point drawdown at 27%.

The data follows recent commentary from Larry McDonald, the founder of "The Bear Traps Report," forecasting that the Fed will cut rates by 100 basis points this year in the wake of the SVB crisis.

Meanwhile, Goldman Sachs and economist Mohamed El-Erian said that the bank's Friday collapse will at least push the Fed to not pursue any more hikes.

SVB, which became the second-biggest US bank failure ever, announced a $1.8 billion loss last week on the sale of a bond portfolio meant to help cover increasing deposit withdrawals, triggering a run on the bank. 

On Monday, shares of other regional banks continued to sell off, as investors feared more collapses even as federal regulator announced new backstops for deposits.