If you’re in a hurry skip to Final Thoughts…
Last Week On Wall Street
Stocks tumbled last week as investors reconsidered their interest rate expectations after Fed Chair Powell’s Congressional testimony that rates may need to go higher. Stocks also were rattled when a west coast bank was placed into receivership on Friday following a run on deposits. The Dow Jones Industrial Average dropped 4.44%, while the Standard & Poor’s 500 lost 4.55%. The Nasdaq Composite index fell 4.71% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 0.37%.
Rate Fears, Bank Scare
Congressional testimony on Tuesday by Fed Chair Jerome Powell that interest rates may require a higher increase faster than planned unnerved investors, dimming the hopes of any pause in rate hikes this summer. After stabilizing the following day, stocks trended lower as the financial sector came under pressure. The lower move was triggered by a specialty bank's liquidity issues, though regional and money center banks could not escape the selling. Labor market strength in a Friday report exacerbated rate-hike anxieties, though cooling wage gains balanced an above-consensus new jobs number. Markets appeared to take the employment report in stride but fell on worries arising from the shutdown of a tech-centric bank.
Powell’s Congressional Testimony
Fed Chair Powell last week testified on Capitol Hill during which he acknowledged that the economy was running hotter than he had expected. He said that labor market strength and stubbornly elevated inflation may require the Fed to raise rates quicker than anticipated and above levels previously contemplated. The market did not respond well to Powell’s change of tone. Many now see the potential of a 0.50% rate hike coming out of the Federal Open Market Committee’s (FOMC) March 21-22 meeting instead of the expected increase of 0.25%. Powell did say that the FOMC would consider the monthly employment report released last Friday and upcoming inflation reports before arriving at a decision.
This Week: Key Economic Data
Tuesday: Consumer Price Index (CPI).
Wednesday: Producer Price Index (PPI). Retail Sales.
Thursday: Jobless Claims. Housing Starts.
Friday: Industrial Production. Consumer Sentiment. Index of Leading Economic Indicators.
This Week: Notable Companies Reporting Earnings
Wednesday: Adobe, Inc. (ADBE), Lennar Corporation (LEN).
Thursday: FedEx Corporation (FDX), Dollar General Corporation (DG).
Two important things happen this week. One already happened, the other happens tomorrow at 8:30 AM.
The first thing. Well, we said the Fed would hike rates until they broke something. They broke something. Silicon Valley Bank and a few others were taken over by the FDIC this weekend because of losses they incurred on their investment portfolio and ensuing bank runs this caused. Losses are incurred by these big banks because as interest rates soared higher and the value of their bond holdings declined. As you may know, interest rates and bond prices have an inverse relationship. Rates up bond prices down. Rates down, bond prices up, Uncle Sam is going to backstop them because if he didn’t it would cascade into a nasty mess. We certainly don’t need that. The Fed has pushed rates up faster than any time in history. Rather than take a break, they just kept turning the screw to make sure the economy would slow down. Anyone who has ever read instructions when putting something together has read the phrase “do not overtighten.” Why, because something breaks. Just one more turn we think to ourselves and then one of two things happens… suddenly the screw turns too easily and we have stripped it or we see a crack or it protrudes from the other side. All bad scenarios. So, the Fed has broken a few banks which has created huge demand for safe haven assets in the near term.
The second thing. Tomorrow at 8:30 am the most widely recognized measure of inflation, the consumer price index (CPI) is released for February. The news will move the markets. Inflation has been in a downtrend since October except for January when we saw a hotter than expected number. This caused stocks to fall and more fire and brimstone talk from the Fed about interest rates. More turning of the proverbial screw. We’ll learn more about the inflation trend tomorrow morning. The Fed is now in a difficult situation. The screw is pretty tight, but can they go one more time and have it just right or will one more turn cause more harm than good. CPI tomorrow is likely to make that decision for them.