Digestive disarray

Stocks rebounded yesterday as investors nerves calmed with UBS’s announced takeover of Credit Suisse. Investors sold their bonds to buy stocks… like in the olden days.

All directions. The Fed starts its 2-day policy meeting today, and you can bet that there will be plenty of bran muffins left on the muffin tray by the time lunch is served. Some central bankers may even forego the neatly placed turkey warps for a swig of Pepto Bismol, Milk of Magnesia, or even Brioschi (bet you forgot about that). Yes, even for these what appear to be emotionless bankers, this current decision will be a tough one.

They still have to contend with high inflation, which in times of old was the spark of social revolution. Employment is strong, so under normal circumstances the Fed would have carte blanche to hammer inflation with its biggest hammer. And they have been doing just that. There are, of course, many signs that its hammering is working, albeit slowly. Business growth has slowed according to the latest earnings season, and it is expected to continue its slowdown in the coming quarters. Employment, which still appears to be strong, will ultimately begin to show signs of slackening, as layoffs and hiring freezes continue to dominate the news feeds, Amazon being the latest tech giant announcing an additional 9k job cuts just yesterday.

And then there are the banks. Investors just like to assume that banks are fine. They work closely with the feds to make sure all is good. They never complain, nor do they celebrate; they are after all… bankers. In good times they would give away free toasters when you agreed to open up a passbook savings account. In bad times, they would find creative fees to charge you in order to incentivize you to deposit more money. We were all so hung up with the Fed and its rate hiking, assuming that the banks would do better with higher interest rates. No need to worry about the banks as mortgage rates literally jumped from 3 ¼% to over 7% in 2022 alone. With the ability to charge so much more, the bankers ought to have been lunching on Lobster Thermidor and caviar. But we now know that they were not. The inverted yield curve made it difficult for banks to make healthy lending margins. Some resorted to taking more risk, while others cut expenses (no more free toasters or lollipops). The smarter banks were prepared, and they diversified their portfolios. The less-prepared banks struggled to maintain healthy earnings leading some investors to pull their deposits. The outflows of funds would not normally be a problem… unless those reserves were primarily in underwater bonds which fell in 2022 with the Fed’s rate hikes. Well, you know the story by now.

These days, post-pandemic, contagion means something quite different than it did in 2019. We know better than to just believe that all is OK, and that there won’t be any future… well, spikes, or strains, or whatever. We also know that the banking authorities stepped in with extraordinary measures to avoid a larger crisis. In Europe, one of the oldest banking institutions is no longer in existence after a central bank-brokered sale to its archrival. For the record, the Fed had to approve those extraordinary measures enacted 2 weekends ago, so Fed members are as close to this crisis as one can get. Let’s just say they know the extent of the stress on the banking system. They also know that economists are anticipating GDP declines in Q2 and Q3 (-0.4% and -0.1%, respectively, on median). Consumer spending growth is expected to grind to a halt in the fall and private investment (corporate spending) is forecasted to continue to decline for this current and the next 2 quarters. All that brings the probability for a recession to 60%, according to the median expectation of top economists. That is, to be fair, a little lower than it was in January.

If the Fed decides on foregoing the now-almost-anticipated quarter point hike, it risks its credibility as fierce inflation fighter. Further, it may signal to investors that Fed members may be aware of some other flaws in the banking system that the general public is unaware of. Hiking will show The Bank’s confidence in its already deployed countermeasures and its sureness in its inflation fighting policy. We are certainly going to learn a lot more tomorrow afternoon when the Chair takes the podium in his post announcement presser. His lunch tomorrow will most likely consist of clear broth and some warm ginger ale.

WHAT’S SHAKIN’

Amazon.com Inc (AMZN) shares are higher by +0.81% in the premarket after it announced 9,000 job cuts expected in the next few days. The cuts will be in its cloud services and Twitch units. These are in addition to the 18,000 already cut jobs. Amazon nearly doubled its workforce to meet demand during the pandemic years and now continues to right size in this current slowdown… investors like that. Potential average analyst target upside: +37.9%.

Lots of banks are on the premarket gainers, including First Republic (+14.78%), KeyCorp (+4.71%), US Bancorp (+4.01%),Fifth Third Bancorp (+3.74%), Truist Financial Corp (+2.78%), and Bank of America (+1.84%).

YESTERDAY’S MARKETS

Stocks gained in yesterday’s session as fears of a bigger banking crisis eased. The S&P500 climbed by +0.89%, the Dow Jones Industrial Average jumped by +1.20%, the Nasdaq Composite advanced by +0.39%, and the Russell 2000 Index traded higher by +1.11%. Bonds declined and 10-year Treasury Note yields gained +5 basis points to 3.48%. Cryptos added +1.33% and Bitcoin climbed by +0.38%.

NEXT UP

• Existing Home Sales (Feb) may have gained +5.0% after declining by -0.7% in January.
• Janet Yellen will speak at an ABA event this morning. Should be a fun time .
• Earnings after the closing bell: Nike and GameStop.