Nail biting and lots of questions

Stocks rallied yesterday as exposed nerves from bank turmoil eased… just a bit. Bond yields jump to adjust expectations for today’s Fed meeting.

Check for doneness before consuming! We are finally at the big day. Sadly, I have been writing this for the past several Fed meetings. I, like many others are hoping to get some sort of direction out of policy makers. Monetary conditions were far too loose for far too long before the Fed got the notion to start hiking in 2022 which not only contributed directly to inflation, but also indirectly by sending consumers the message that the market and the global banking system was supportive of their “to the moon” mentality. As a result, the Fed had to play catch-up and raise rates aggressively in a compressed period of time, causing a bit of chaos in the capital markets… and beyond, as we have learned in these past two weeks.

By now, the markets have taken their medicine and consumers are starting to get the message. Based on the latest economic releases, the supply chain, which played a big role in the founding of this spate of inflation has cleared up somewhat. Remember when it was hard to get shipments of semiconductors? Now those same manufacturers are laying off workers. On that note, so are many other companies that swelled their workforces during the pandemic when the markets… and the Fed supported the aggressive hiring. Yes, industry, as well has gotten the message to stop spending money. It seems that the Fed has finally managed to turn the ship around, however it is still heading in the wrong direction, carried on by the current. So, the big question is do they gun the engines and continue aggressively raising rates, or wait and see if the current finally reverses and brings inflation back under control?

Prior to the banking turmoil of the past 2 weeks, the market had its money on the “gun it one last time for good measure strategy,” but it was obvious that the fixed income markets were beginning to get a bit nervous about the future as the yield curve, already inverted, inverted to levels not seen since the turmoil of the early 1980s. Yield curve inversions almost always predate recessions, and while the level of depth does not predict the severity of the recession, it does have a bigger negative impact on some aspects of the economy… LIKE THE BANKING SECTOR. It should, therefore, not be completely surprising to find out that lending institutions are under a bit of pressure in the current climate. Perhaps the real canary in the coal mine was not the yield curve inversion but the banking sector’s now very public troubles.

On that note, I will leave you with a chart that shows the yield curve inversion prior to the past 4 recessions. On it you will notice something interesting. The yield curve typically inverts AND THEN STEEPENS rather sharply just before a recession, kind of like the “2-minute warning.” The past few weeks of bank sector stress has caused the yield curve to steepen quite a bit. It was inverted by as much -104 basis points earlier this month and it now stands inverted at only -58 basis points. Looking at the chart, you will also notice that Fed Funds, represented by the blue line, peaked right around the yield curve flattening reversal. Now, to be clear, they are closely connected, but it is unclear exactly which predates the other. The reality is that the Fed makes the policy but ultimately the markets determine the rates. Is the market telling us and the Fed something? Right now, futures and overnight swaps appear to be giving the Fed a pass to raise interest rates by another +25 basis points today. Under normal circumstances, I would go with that as the best probability. However, given the fact that the banking sector has shown some signs of weakness, it is anyone’s guess what policy makers may do today. More interestingly, it will be interesting to see, despite its rate decision, what the Fed’s financial forecast, due out also today, will show and whether it will include impacts from the recent developments.

WHAT’S SHAKIN’

NIKE Inc (NKE) shares are lower by -1.04% in the premarket. The company announced that it beat EPS and Revenue estimates, however its gross margins came in thinner than expected, worrying some. The company explained the shortcoming on lower retail pricing required to reduce excess inventory. That is consistent with what we have been hearing from other manufacturers and retailers. It is consistent with lower consumer demand and should be viewed as positive in the fight against overall inflation. Not so much, NIKE. Dividend yield: 1.08%. Potential average analyst target upside: 8.9%.

Enphase Energy Inc (ENPH)  shares are higher by +1.48% in the premarket after Susquehanna analysts raised their rating to POSITIVE and raised the company’s expected 12-month price target. This follows recent EPS estimate revisions by analysts and another upgrade by Raymond James to OUTPERFORM. Potential average analyst target upside: 40.5%.

YESTERDAY’S MARKETS

Stocks rallied yesterday as nerves calmed and Janet Yellin doubled down on the Treasury’s commitment to backstop banks. The S&P500 gained +1.30%, the Dow Jones Industrial Average climbed by +0.98%, the Nasdaq Composite Index rose by +1.58%, and The Russell 2000 Index advanced by +1.88%. Bonds declined and 10-year Treasury Note yields added +12 basis points to 3.60%. Cryptos gained +2.25% and Bitcoin added +0.26%.

NEXT UP

• THE FOMC WILL ANNOUNCE ITS RATE DECISION at 2:00 PM Wall Street Time. The Chairman’s Press Conference will commence at 2:30 PM Wall Street Time, which will no-doubt come with lots of volatility… as it usually does. Investors will be looking for the Chair’s comments on the recent banking issues, and of course, hints about future policy moves.