A fork in the road for the Fed?

Stocks had a rough session yesterday dragged down by regional bank stocks and energy shares as those burning questions about the health of the banking sector just won’t go away despite assurances from the suits. A do or die moment awaits the Fed today as their actions and body language will leave a mark.

Decisions, decisions. It has been a spectacularly tense leadup to today’s Fed meeting. I could have started with a Mice & Men statement but that is too trite a statement, especially for Wall Street. The Fed had its job cut out for it these past 18 months. No one could argue that inflation was too high, nor would anyone subscribe to the Fed-designed adjective “transitory” any longer. Employment was strong, the economy strong-ish, and consumers were consuming like bingeing Honey Badgers. This was a moment for the history books and Fed members all signed up to be story worthy inflation fighters. By story worthy, I mean like nothing seen since the Volcker days, when a hike was a hike and double-digit yields were no big whoop. The Fed literally had nothing to lose. Hike rates until it hurt and then hike them more until it hurt even more, and… well, you know. Policy makers knew that eventually they would have to lay off. Either inflation would be obliterated, or a recession would ensue. Did the Fed fear a recession? No, not really, because it knew that it could quickly shift into rate cutting and stop the ship from sinking, just as it had back in 2020. Easy squeezy, right?

Are you thinking Mice & Men? One thing the zealous central bankers did not account for was a potential banking crisis. That is right, their hubris made them myopic to the one thing that could confound their grand plan. What’s worse, is that it was THEIR job to monitor the banking system . Did they screw up? You bet they did, and they admitted as much in their report on the Silicon Valley Bank failure that came out late last week. Since its release I should probably mention that another rapidly failing bank… um, failed, making that three and rounding out the three largest bank failures in US history, all within about 2 months. Nobody is arguing that the failures were not caused by the Fed’s aggressive hawkishness. To be fair, those banks made some grave mistakes, but the failures were less likely to have occurred if the Fed had taken a different course of action, or possibly paid closer attention to its ward.

So, here we are. The market is expecting the Fed to hike interest rates by another +25 basis points. The hawks were squawking all the way up to the blackout period. This time, however, there appears to be some breaks in the ranks among FOMC members who seem a bit… well, skittish, especially in the wake of a recent bank failure. You may recall that I reported that some experts believe that the financial system tightening in the wake of recent bank failures amounts to another +50 basis points of hiking. If you believe that, today’s potential hike would be more like a +75 basis-point hike. Would that be prudent given that even the Fed now expects, what it calls, a “mild” recession later this year? Inflation is slowly coming down and the labor market is slowly cooling off. Just yesterday, the JOLTS Job Openings number showed a bigger-than-expected decrease, evidence that companies are indeed pulling back on demand for workers. So, what’s a Fed to do faced with this difficult decision? If it hikes and leaves the door open for more hikes, investors… and bank executives are likely to be… well, less than comfortable, to put it mildly. If the Fed does nothing without explaining itself, anything goes in the markets, but banks will likely get another kick in the shin as investors will interpret inaction as hidden problems in the banking system. The medium ground might be a Fed hike along with an announcement of a pause. If the Fed could pull that off convincingly, that may be the best chance of your day ending up better than say… all of last year. Stay tuned, the Fed’s big moments will come at 2:00 PM Wall Street Time with the announcement (the wording will be critical) and 2:30, when Powell takes to the podium for his presser in which he will be pressed hard by members of… the press.

WHAT’S SHAKIN’ THIS MORNIN’ ☀

Advanced Micro Devices (AMD) shares are lower this morning by -7.72% after it announced an EPS and Revenue beat. AMD lowered its full-year guidance on weaker PC demand, sending shares lower. The company is expecting a rebound in the second half but warned of continued weakness in the current quarter. Potential average analyst target upside: +8.6%.

Eli Lilly & Co (LLY) shares are higher by +6.63% in the premarket after the drugmaker announced that its drug Donanemab slowed the progression of Alzheimer's Disease by 35% in its final stage trials. Shares of Biogen Inc (BIIB), a competitor with an Alzheimer's drug also in late-stage trials fell in the pre-market in response to the news. Dividend yield: 1.18%. Potential average analyst target upside: -2.0%. WHY IS THIS NEGATIVE? Because the current price of the stock has exceeded the average analyst target price. While that can be viewed as a stock being expensive, it does not mean that stock cannot go higher. Additionally, analysts commonly adjust targets in response to positive news.

ALSO, this morning, Bunge Ltd, Generac Holdings, CVS, Exelon, Emerson Electric, Builder FirstSource, Kraft Heinz, and WWE all beat on EPS and Revenues while Horizon Therapeutics, Yum! Brands, Hanesbrands, Phillips 66, and Spirit Aerosystems came up short.

YESTERDAY’S MARKETS

Stocks fell yesterday with bank fears and rate hikes on the brain of investors. The S&P500 declined by -1.16%, the Dow Jones Industrial Average fell by -1.08%, the Nasdaq Composite traded lower by -1.08%, and the bank-heavy Russell 2000 Index dropped by -2.10%. Bonds gained and 10-year Treasury Note yields fell -14 basis points to 3.42%. Cryptos climbed by +2.86% and Bitcoin gained by +3.66% on bank woes, as has been recently custom.

NEXT UP

• ADP Employment Change (April) may show a slight uptick to 148k from 145k jobs.
• ISM Services Index (April) is expected to increase to 51.8 from last month’s 51.2.
• At 2:00 PM Wall Street Time, the FOMC will announce its rate decision. The Chairman’s press conference will follow at 2:30 PM. Don’t miss this one.
• After the bell earnings announcements: Altice USA, Allstate, Equinix, QUALXOMM, Albemarle, Realty Income Corp, MetLife, Sunrun, Fastly, Williams Cos, Public Storage, Zillow, Corteva, HubSpot, and Becton Dickinson.