Weekly Market Report: March 24, 2023
Markets last week absorbed what might be viewed as a dovish rate hike from the Fed, a continuation of global banking sector anxiety, and a relatively upbeat economic calendar. Forces including decent jobs numbers, falling inflation, and a collapse in interest rates have overwhelmed the banking crisis from the stock market perspective as the S&P tacked on a second consecutive week of gains following the SVB banking failure on March 10th. Massive volatility in interest rates continued last week with the 2yr UST surging from a 3.81% close last week to 4.17% mid week high and plummeting back to 3.76% to close the week – buckle up. Commodity markets gained 1.43% on a broad move higher across metals, energy, and grains.
- The FOMC delivered a dovish 25bps rate hike, taking target Fed Funds to 4.75%-5.0%. The official statement, dot plot, and presser acknowledged this cycle is close to its peak but market anticipation of rate cuts may be premature.
- Powell made clear that Fed bank lending facilities intended to deal with banking system liquidity are distinct from monetary policy economic liquidity. Fed lending facility (emergency facility, discount window, BTFP) utilization suggests banks are stabilizing but USD needs of foreign central banks are surging with a record $60b posted in repo transactions last week.
- Goldman estimated banks hold 17% of deposits on hand and the BTFP adds another 25% of supplemental liquidity, taking overall to nearly 42%, well in excess of the 25% run that took down SVB.
- Importantly, bank lending standards, which were already tightening before the turmoil, will only increase and the corresponding drag on economic growth is a key focus.
- The deposit insurance issue has the markings of a more dangerous game of political brinkmanship in Washington which, along with the debt ceiling, translates to higher political risk looking out through 2023.
- The Fed wasn’t alone in hiking last week with the BoE (25bps), SNB (50bps), and Norges (25bps) all delivering hikes despite the banking turmoil unfolding across Europe and the U.S.
- Discerning buy side analysis on the banking sector show large unrealized losses across both HTM and AVS securities with the top five largest banks estimated at $250b, likely presenting a longer term earnings issue more so than an SVB type solvency issue.
- The strong rally in technology stocks corresponding to the nosedive in bond yields has brought S&P 500 index concentration issues back to the main stage with AAPL and MSFT representing a record 13.2% of the index.
- The global bank dragnet rotated to Deutsche Bank last week with the stock down 30% since February 1st and 21% and CDS out to a 4-year high. With no clear and substantial risk considerations, a primary driver may simply be their track record for being at the forefront of many banking crises.
Economic Release Highlights
- U.S. March PMIs (C, M, S) of 53.3, 49.3, 53.8 improved notably, coming in well above the spot estimate and above the high end of the consensus range.
- Global March PMIs (C, M, S) for the EU (54.1, 47.1, 55.6) and U.K. (52.2, 48.0, 52.8) were mixed versus forecasts but remained firmly in expansionary territory for both composite and services.
- February Existing Home Sales came in above consensus (4.580m vs 4.170m), up 14.5% MoM but down 22.6% YOY. New Home Sales of 640k were relatively in line with the 645k consensus forecast.
- Durable goods orders (MOM) missed to the downside across New Orders (-1.0% vs 1.5%), Ex-Transportation (0% vs 0.3%), and Core Capital Goods (0.2% vs 0.3% prior month).