The market was ‘frenzied’ Tuesday as investors and traders were besieged with many lasting concerns. The lingering First Republic Bank, SVB, and Signature failures, and unending inflation issues are pressing the market, that the worst is not over. Regional bank concerts are mounting. JPMorgan Chase’s Jamie Dimon (the biggest U.S. bank), ‘closed the book’ on First Republic Bank, winning the bid to absorb it completely, besting PNC (6th largest). Adding to the ‘cloud’ over the banks, is the upcoming Fed meeting and announcement Wednesday morning. The expectation on the street is that a quarter point hike is coming. As always, Mr. Powell’s comments will be highly anticipated, with a heavy influence on the market. Morgan Stanley’s equity strategist Mike Wilson’s long view, “expect the Fed to pause interest rate hikes now through the end of the year.” Mr. Wilson was proved incorrect Wednesday morning.
Jerome Powell issued another interest rate hike of 0.25%, holding the course…and heavily indicating a continuance. The general market reaction was negative as equities ‘across the board’ fell, with the Dow Jones Industrial Average off 200 points, after falling 350 points on Tuesday as investors remained ‘jittery.’ At Mr. Powell’s press conference following the rate hike announcement he said, “we’ll be driven by incoming data,” adding “we on the committee have the view that inflation is going to come down not so quickly.” The Labor Market data continues to surprise as it remains heated, with little softening. The Fed is thoroughly confused, as labor has navigated the economy’s perils with little hesitancy. As a slight softening begins to show, and wages begin to firm, the component could slowly begin to influence the Fed and its decisions. According to many economists, analysts, and market gurus, the economy is and has been “resilient” deflecting much negative news,with indices even or off slightly.
Crude oil is now resting at $68.70 a barrel (Thursday), off another 4%. Interestingly, since OPEC’s announcement April 3, 2023, calling for a a production cut of 3.36 million barrels a day, or 3.7% of worldwide production, oil ‘gushed’ up $5.00 a barrel to $85.00 a barrel, since then oil has slid continuously down to the present day barrel price of $68.70. As a result gasoline has hovered lower and has settled in the $3.40 to $3.69 range, quite the opposite that world leaders expected at the time of the production cut. Government bonds took a hit after the rate hike announcement, with the 10-year dropping to 3.35%, while the 2-year fell to 3.85%, as the bond markets have been volatile for nearly five weeks, facing many sorts of influencing news and events, according to FactSet information. Gold is steady at $2,056, ready to ‘move’ when the market gets ‘sticky,’ a sure-fire safe haven.
Thursday’s market opened with worries about the regional banking sector, and the mounting concerns of two banks, PacWest and Western Alliance, both of which are showing strong indications of fiscal weaknesses and outflow of deposits. As is with many sub-par regional banks, quarterly deposits have dropped and net interest rates have fallen, limiting their ability to ‘weather’ deposit out-flows, a critical function of financially ‘weak’ institutions, and the back-breaking of a bank. Income derived from deposits is a key component of the bank’s bottom line. In the regional sector several banks fit the criteria. Both mentioned banks are exploring asset sales to relieve financial pressures. As Jamie Dimon has suggested many times, “banks don’t cause failure, people do.”
RUMBLINGS ON THE STREET
Randall W. Forsyth, Lead Writer of ‘UP AND DOWN WALL STREET’ of Barron’s, “The FOMC faces an economy that continues to grow despite localized bank problems, but with inflation remaining far above the Fed’s professed 2% target. Yet the market still looks for rate cuts later this year, despite the Fed’s projection of holding steady after the next expected hike. How Powell squares that contradiction will be a key question to be answered this coming week.”
Joseph Brusuelas, RSM chief economist, Barron’s “The ‘R’ word that one should use when discussing the economy over the past two years should be resilient not recession.”
Jason Forman, a Harvard University economist and former Obama White House Advisor, Barron’s “There was always at least some transitory component to inflation. Getting rid of underlying inflation is a lot harder,” said Mr.Furman. “Inflation could well continue to be stubborn. The Fed could have to raise rates more later this year. The market still isn’t fully prepared for that.”
David Ellison, Portfolio manager, Hennessy Funds, Barron’s “You make money in financials when fundamentals go from ugly to OK to good to great. We aren’t at ugly yet.”