“You’re on your own kid,” said Janet Yellen

Stocks got beat up in a volatile session which included a mostly expected rate hike and a backpedaling comment from the Treasury Secretary. Bonds had a wild ride as well as traders adjusted yields to match new expectations.

He said, she said. That just about sums up yesterday’s markets as the two most powerful financial figures in the world shared their thoughts with us. First, you probably know by now that the Fed raised its key lending rate by another +25 basis points in a unanimous decision by the FOMC. There was very little speculation going into the policy meeting that there would be a negative upside surprise, meaning a +50 basis-point hike, but the markets implied a high-probability of a +25 basis-point increase. I have written many times that the Fed, surprisingly, listens to the markets for cues. If the market allows it, the Fed will do it. I reminded you yesterday that it is the market itself that actually tightens credit, the Fed makes the policy and follows up with market operations. In this and many other cases, the market has already tightened credit to include the rate hike. Similarly with stocks, which more recently have been taking its cues from the bond markets.

Let’s quickly cover what Powell said and what his comments means to us. First, based on the policy statement and on Powell’s remarks, it is clear at this point, that peak rates are near. That means the Fed is looking to end its hiking soon. The Fed anticipates, further, that rates may need to be at these levels for an extended period of time. How long that translates to is anyone’s guess but the newly released dot plot, can give us a clue, of where, at least, the FOMC members think that the turning point may be. Remember that the dot plot shows us where each of the FOMC members forecast Fed Funds to be in the future. Yesterday’s release shows Fed Funds closing out 2023 at 5.125%, which implies one more +25 basis-point rate hike. The dots also show that the Fed members, on median, believe that rates will come down at some point in 2024 and end up at around 4.25%. That would be -75 basis points lower than where we are today, and a full percentage point below where the dot plot expects rates to be at the end of 2023. Remember that the dots only show year-end projections, so there may be more hikes in 2024 before the Fed starts cutting. The dot plot released yesterday was very similar to the prior one except for slight inconsistencies. The current year-end 2024 projected rate was slightly higher than the last projection which is consistent with the Fed’s “higher for longer” message. Additionally, the one lone dovish dot that appeared on the bottom of the prior plot is missing. That is likely the projection from known dove and former Vice Chair Lael Brainard who left the Fed for the White House earlier this year. So, nothing really new on the monetary policy front. In reality, what everyone wanted to know about yesterday was “what is up with the banking sector?”

Powell made some interesting comments on that. Foremost, he said that the banking sector is robust and that the SVB situation was isolated and due to mismanagement. Remember that an important role of the Federal Reserve is bank oversight, so we would hope that Powell’s assessment is an informed one. He did say that the Fed was taken by surprise by the SVB debacle and that the Fed would close any gaps to prevent the issue from re-occurring. Thanks, Jay! But won’t this additional hike put more pressure on the already pressured banks? The Fed Chair agreed that, yes, it would cause banks to tighten up their lending even more. Powell was surprisingly unable, or unwilling to quantify just how much drag on the economy the ongoing tightening and bank mini crisis would have. He did agree that banks would likely tighten up lending even more and that the move would act as an overall monetary tightening. Finally, he still believes that a so-called soft landing is possible. The market’s response to the policy, the hike, and the comments were somewhat positive. But it didn’t take too long for the market to shift focus.

While all the hoopla was going on with live coverage and commentary at the Federal Reserve, former Fed Chair and current Treasury Secretary Janet Yellen was speaking as well. What she said changed the market’s dynamic dramatically. She appeared to walk back earlier comments that the Treasury would provide a full backstop for the banking sector. She said that raising FDIC insurance levels was not something to consider at this time. This comment was consistent with Powell’s comments in which he would not commit to a full backstop. It would seem that both of them got the memo that a “full backstop” was a political livewire, and… you know, when in DC. The memo that the market got from that was to sell financials into the close and the sector led the broader markets significantly into the red. There was nothing really new in all of yesterday’s Fed release and Yellin’s comments, but the market was a bit on edge (justifiably so) and traders were secretly hoping for some positive overtures. That was clearly not on the menu yesterday.

WHAT’S SHAKIN’

Accenture PLC (ACN) shares are higher by +4.63% in the premarket after it announced that it beat EPS and Revenue targets by +8.10% and +1.64% respectively. The company also provided forward guidance that was in line with estimates. The companies forward PE of 20.34x is higher than the 12.36x median of its peers. Dividend yield: 1.77%. Potential average analyst target upside: +23.7%.

Regeneron Pharmaceuticals Inc (REGN) shares are higher by +7.01% in the premarket after it announced positive results in its Phase 3 trial of Dupixent to treat COPD. REGN created the biologic and markets it worldwide with partner Sanofi (SNY) whose shares are higher by +6.37% on the news. Potential average analyst target upside: +11.7%.

YESTERDAY’S MARKETS

Stocks swooned late in the session led by financials after the Fed Chair and Treasury Secretary came short of “anything it takes” to help the banks. The S&P500 fell by -1.65%, the Dow Jones Industrial Average traded lower by -1.63%, the Nasdaq Composite Index dropped by -1.60%, and the Russell 2000 Index declined by -2.83%. Bonds gained and 10-year Treasury Note yields pulled back by -17 basis points to 3.43%. Cryptos fell by -4.30% and Bitcoin gave up -2.71%.

NEXT UP

• Initial Jobless Claims (March 18) is expected to come in at 197k, slightly higher than last week’s 192k claims.
• New Home Sales (Feb) is expected to have declined by -3.1% after gaining +7.2% in January.
• Kansas City Fed Manufacturing Activity (March) may have declined to -2 from 0.