Raw nerves as rates rise and banks gasp

Stocks had another bumpy ride on Friday, ultimately closing higher as banking sector fears would not abate. Votes on FOMC votes vary wildly and they are changing rapidly… and often.

Get your money’s worth. Come on, you have done this once or twice, or you have at least witnessed it happen. You order a soft drink at your favorite fast-food joint, movie theater, or convenience store, and the worker hands you an empty cup. You think, “that’s cool, it’s self-serve,” and you proceed to the long row of spigots holding back all sorts of sugary, bubbly goodness. First, you must add some ice. You press the lever, and the machine starts to gurgle, and in a delayed reaction, an avalanche of ice tumbles into and around your cup. You, being in charge of the venture, want to make sure that there is not too much ice, because that means less drink, and you want your money’s worth. So, you pour out some ice to make more room in the cup. When you are satisfied with the ratio, you move on to the tap underneath your favorite soft drink label, you place your cup underneath, and you press the button. This is where real skill comes in. As the stream shoots into the cup, and the beverage nears the top of the cup, you must make a lightning-fast decision of when to stop pressing. It is not easy. If you stop too early, your cup will not get completely filled. If you wait too long the soft drink will spill over the top of the cup and cause a sticky mess… disaster. If you are the conservative type, you will release the button early leaving a bit of space, but if that space is too much, you are likely to press the button quickly for just a quick squirt. If after that squirt you are still not satisfied, you are likely to go for another quick press. Now you are dangerously close to the top but satisfied… hopefully.

Sound familiar? Of course, it does, that is exactly what the Fed is doing with interest rates. It knows that the rates are dragging on the economy. It also knows that those rates are nearing the edge and one or two more quick squirts may push the economy over a ledge. A bit of economic pain is necessary to right inflation, but a full-blown recession would not be appreciated. This recent banking debacle, which is looking more and more like it has been contained, is the warning sign that the soda is nearing the rim of the cup. Despite the warning, the Fed has chosen to tap the button for a quick +25 basis-point jolt. The rates markets, in response, have sent a message that this is it for the hikes. The delayed effects of this last hike and the others that led up have put significant pressure on the banking sector, and in the wake of some of their colleagues’ public and painful collapse, healthier banks are likely to tighten up their lending policies. So, in addition to borrowing rates being high, it is likely that getting credit approval will become that much more difficult for not just consumers, but also businesses that rely on credit for just about everything. Ultimately, that will cause lower consumption and corporate investment, which in theory, should ease inflation pressure.

Later this week, we will get the PCE Deflator which is the Fed’s preferred inflation gauge. The Fed, according to its latest projections, released last week, expects PCE inflation to end the year at +3.3%. Last month’s read came in at +5.4% and this next release is expected to show a decline down to +5.1%. If the number comes in as expected, we still have a long way to go to get where the Fed expects it to be by December. The Fed also expects at least one more rate hike before the end of the year. Fed Funds futures and swaps markets are expecting Fed Funds to be around -75 basis points lower by year-end. This is, indeed, a tricky moment. As with the soda example above, the closer you get to the top, each additional quick press has a higher risk. Once you are satisfied that your drink is as close as you are going to get it to the top, you must remove the cup and place a lid on it. If you were too aggressive with your final squirts, you are likely to have it spill all over your wrist. Press carefully.

WHAT’S SHAKIN’ THIS MORNIN’

The financial sector is higher led by banks in the premarket, with 18 out of the top 20 premarket gainers in the financial sector. Names like First Republic, KeyCorp, Zions Bancorp, Truist, FifthThird, PNC Financial, and Charles Schwab are all markedly higher in the premarket. The move is driven by news that a deal has been reached to sell SVB in addition to banking officials pledging further support to the sector.

DISH Network Cop (DISH) is lower by -2.29% in the premarket after the company was downgraded to NEUTRAL from BUY by UBS. The company, further, lowered its 12-month price target to $10 from $27. Potential average analyst target upside: +126.3%. WHY IS THIS SO HIGH? This number is simply the difference between the stock’s price and the average 12-month price targets of Wall Street analysts. It is in no way a recommendation and it does not mean that the stock will actually achieve the targets.

FRIDAY’S MARKETS

Stocks reversed early gains to close higher on Friday as bank stocks weighed on the bulls. The S&P500 rose by +0.56%, the Dow Jones Industrial Average climbed by +0.41%, the Nasdaq Composite Index traded higher by +0.31%, and the Russell 2000 Index advanced by +0.85%. Bonds gained and 10-year Treasury note yields fell by -5 basis points to 3.37%. Cryptos decline by -2.72% and Bitcoin fell by -2.52%.

NEXT UP

• Dallas Fed Manufacturing Activity (March) may have improved to -10.0 from -13.5.
• Fed Governor Philip Jefferson will speak today.
• The week ahead: a few high-profile earnings releases along with more housing numbers, more regional Fed reports. Consumer Confidence, GDP, Personal Income / Spending, PCE Deflator, and University of Michigan Sentiment. Check out the attached economics release calendar for time and details.