Markets Fight Back Bank Fears – Did the Fed Blink? (Wall Street Cheat Sheet)

Last week the stock market saw a strong start and finished the week. There was mid-level volatility as investors considered the Fed’s latest policy change and ongoing concerns about the banking sector.

The Swiss National Bank mediated a $3.2B “takeunder” between UBS and Credit Suisse (CS). This announcement was made to the trading community over the weekend. The Federal Reserve assured the public that the U.S. bank system’s capital and liquidity positions are strong and that the U.S. financial sector is resilient. However, it also announced coordinated central bank actions with the Bank of Canada and the Bank of England to increase U.S. dollar liquidity.

According to Bloomberg reports, the Treasury Department is looking into ways to guarantee bank deposits without Congress’ approval. In prepared remarks to the American Bankers Association, Treasury Secretary Yellen stated that the government was ready to step in again “if smaller banks suffer deposit runs that present the risk of contagion.”

Investors waited anxiously for Wednesday’s FOMC decision, which caused sharp declines at the index level. However, many bank stocks that were recently in trouble reacted positively and moved higher during the first half.

By Friday’s close, the market had eliminated some of the concerns driving the downside movements this week. Despite sharp falls in Europe’s main indices following the announcement that Deutsche Bank’s (DB) default insurance cost jumped to a 4-year high, the session ended higher.

The Federal Open Market Committee (FOMC) unanimously voted to increase the Fed funds rate target range by 25 basis points to 4.75-5.00%. In the updated Summary of Economic Projections, the Fed’s median terminal rate projection remained at 5.10%. Stock prices rose initially in response to the news but then declined as Fed Chair Powell began his press conference.

Powell, Fed Chair, accelerated the sell-off. He admitted that Fed participants don’t expect rate cuts this year. He also admitted that recent banking events were unfavorable for the possibility of an economic soft landing.

In his comments, Powell was neither hawkish nor dovish in general. He did not seem overly optimistic about the future, and this contributed to the lack of confidence among investors that led to the selling during his presentation.

According to the fixed-income markets, the Federal Reserve may have retreated, as longer-term securities saw a smaller rate decrease than the 2-year Treasury rates. The significant rate shift for the 2-Year Treasury suggests that the market perceives the Fed as likely to back down and halt rate hikes. Read more here.

Other central banks followed their lead later in the week. The Bank of England raised interest rates by 25 basis points, indicating that more increases were possible. Central banks made similar moves in the Philippines, Norway, Hong Kong, and Switzerland.

Last Week’s Economic Reports

Housing Market Still Strong

Although the economy showed some encouraging signs in February, sales of existing homes increased 14.5% to an annual seasonally adjusted rate of 4.48M. However, it was still lower by 22.4% compared to February 2022. After twelve months of declines, this is the most significant monthly percentage rise since July 2020. The median sale price increased to $363,000, which is a 0.2% increase year-over-year. The total housing inventory was unchanged at 980K, up 15.3% year-over-year. Unsold inventory was reported at a 2.6-month run rate. This is a decrease in inventory of 10% from January but an increase from the 1.7 months recorded from February 2022.

Manufacturers Slow Down

New orders for manufactured durable products fell 1.0% to $268.4B in February. This is the lowest reading since April 2020. It follows a downwardly revised 5.0% decrease in January and a 5.1% increase in December. The total durable goods orders rose by 2.0% year-over-year. However, the main reason for the decline in the headline number was the 2.8% drop in transportation equipment orders. This has decreased $2.6B to $89.4B in three of the last four months.

CALENDAR & MOVERS

  • Wednesday: Pending Home Sales (MoM) (February)
  • Friday: Core PCE Price Index (MoM) (February)
  • Fed Talk
  • Continued Bank Collapse Fallout

The time difference between Europe and the United States will return to normal this weekend as daylight saving time is implemented across the continent. The preliminary March inflation figures for Germany and the latest estimate of Q4 GDP in the United States (both on Thursday), followed by March inflation in the Eurozone and so-called PCE inflation in the United States (both on Friday) are the week’s major events.

Two additional speeches have the potential to make an impact. Speeches by US Treasury Secretary Janet Yellen on Thursday night and European Central Bank Head Christine Lagarde on Friday.

Earnings

Monday, March 27 – CCL, PVH
Tuesday, March 28 – LULU, MKC, WBA, MU, PLAY
Wednesday, March 29 – RH, CTAS, PAYX, EVOP
Thursday, March 30 – EVGO, BB, RUM, DCT

Dividend Spotlight

TJX Companies (TJX) is expected to increase its quarterly dividend.

BONDS

Despite financial sector pressure, central banks kept up their anti-inflationary efforts as expected. Key interest rates in the United States and the United Kingdom both increased by 25 basis points, to 5% and 4.25%, respectively.

The United States side maintained its stance on where rates would go in the future. Investors, however, are still betting on a rate cut from the Fed this summer, so the central bank will have to quickly shift its stance. From the Latin American debt explosion of 1982 to the stock market crash of 1987 to the collapse of LTCM in 1998 to the bursting of the internet bubble in 2000 to the subprime mortgage crisis of 2007 and the BKLN crisis of 2018, every episode of monetary tightening has resulted in a crisis.

A systemic crisis may have begun with the bankruptcy of SIVB, but that is only a (small) step away. Meanwhile, the yield on US 10-year debt is ferociously testing support at 3.35%, with 2.73% in sight, while on the German side, we will be monitoring the 2% threshold to confirm the drop to 1.50%.

COMMODITIES

OIL & ENERGY

After a precipitous decline last week, when Brent crude oil prices fell by nearly 12%, prices have risen this week. Banks on both sides of the Atlantic remain in trouble, and traders continue to feel the effects. Thus, the resumption of selling flows in oil at the week’s end can be attributed to the continued volatility in risky assets.

Russia is anticipated to maintain its production cuts of roughly 500,000 barrels per day through the end of June. Despite expectations for a drawdown of 1.7 million barrels, oil stocks in the United States increased by 1.1 million barrels last week. A barrel of North European Brent crude oil is currently around $73, while a barrel of US WTI crude oil is around $68. At about EUR 42/MWh, the Rotterdam TTF for natural gas in Europe is merely holding its own.

PRECIOUS METALS & GOLD

The price of gold hit $2,000 per ounce. The resurgence of risk aversion and the subsequent decline in bond yields has whetted investors’ appetites for the antiquated relic. Industrial metal prices rose this week, except nickel, which fell to $2,850, despite the gloomy market sentiment that has persisted. On the London Metal Exchange, copper prices are once again getting close to the $9000 mark.

CRYPTOCURRENCY

Bitcoin’s price has stabilized around $28,000 since Monday after surging more than 25% last week. Hopes that the Federal Reserve will slow the pace of its rate hikes have boosted the value of digital currencies.

The asset’s rise still appears to depend on easing monetary policy across the Atlantic, which will materialize as economic conditions improve. Still, its sensitivity to the macroeconomic environment is waning. Bitcoin has risen sharply in the midst of banking tensions, but it is far too soon to declare that it has replaced traditional safe havens.

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