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Moment of Truth: Does the Fed Signal a Pause?

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What’s in Today’s Report:

  • Moment of Truth:  Does the Fed Signal a Pause?
  • Weekly Market Preview:  Important New Insight into the Hard vs. Soft Landing Debate
  • Weekly Economic Cheat Sheet:  ISM Manufacturing Today, Services Wednesday, Jobs Report Friday (It’s a Very Busy and Important Week)

Futures are little changed as markets digest the FRC seizure and asset sale to JPM and look ahead to this week’s FOMC decision and important economic data.

First Republic (FRC) failed over the weekend and was seized by the FDIC.  Assets were then sold to JPM who will effectively absorb the bank.  FRC’s failure was widely expected, and as such it’s not a new negative on markets.

Economically, the Chinese April manufacturing PMI missed expectations and fell back below 50 (49.2 vs. (E) 51.4.).

Today there is only one notable economic report, the April ISM Manufacturing PMI (E: 46.8), and markets will want to see stability in the data (so no further declines).

On the banks, again FRC’s failure was priced in last week, so it’s not a new negative on markets.  The key now is seeing if any other regional banks with large uninsured deposits come under pressure, so as we said last week, we’ll be watching WAL, CMA and ZION over the coming days.

Market Multiple Table: April Update

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What’s in Today’s Report:

  • Market Multiple Table: April Update
  • S&P 500 Chart – Cautious Trade Ahead of Today’s CPI Report

Equity futures are slightly higher while the policy-sensitive 2-Yr Treasury yield is pushing further beyond 4% in pre-market trade as focus is exclusively on today’s CPI report.

Economically, Japanese PPI came in at 0.0% vs. (E) 0.1% which is adding a slight tailwind to risk assets this morning.

Looking into today’s session, all eyes will be on inflation data ahead of the open: CPI (E: 0.3% m/m, 5.2% y/y), Core CPI (E: 0.4% m/m, 5.6% y/y).

From there, focus will shift to the Fed as Barkin speaks ahead of the bell (9:10 a.m. ET) and Daly speaks mid-day (12:00 p.m. ET), before the latest FOMC meeting minutes will be released at 2:00 p.m. ET. Any hawkish commentary or verbiage within the minutes will likely weigh on stocks and push yields higher.

Bottom line, the CPI data will be the main catalyst today and to recap yesterday’s “CPI Preview” the “good scenario” is a headline below 5.2% with Core below 5.5%, the “bad scenario” is a headline between 5.2% and 6.0% with Core at 5.6%, and the “ugly scenario” is a headline above 6.0% with Core above 5.6%.

Why Bank Stocks Dropped Sharply Yesterday

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What’s in Today’s Report:

  • What’s Happening with the banks, Silvergate and Silicon Valley Bank

Futures are slightly lower following Thursday’s steep afternoon selloff and as nervous investors look ahead to the jobs report.

Economically  German CPI met expectations (8.7% y/y).

Silicon Valley Bank (SIVB), which is now at the heart of the crypto/VC bank turmoil, fell farther overnight and that stock needs to stabilize for markets to recoup yesterday’s losses.

Today there are two important events to watch.

The first is the jobs report, and expectations are as follows:  E: 215K Job Adds, 3.4% Unemployment Rate, 0.3% m/m/4.7% yoy Wages.  Especially after yesterday’s selloff, markets need a “Just Right” number to reduce rate hike expectations.  Second, markets will be looking for a business update from SIVB about their capital raise and sustainability going forward, and if the bank shored up its finances, that would likely create a solid rally in stocks.

FOMC Meeting Preview

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What’s in Today’s Report:

  • FOMC Preview
  • VIX Chart – Is Volatility About to Surge Again?

U.S. stock futures are tracking European markets lower this morning amid a hawkish reaction to strong economic data and disappointing earnings from UBS and Samsung.

Economic data in Europe showed a reversal back higher in French inflation and better than-feared growth in the EU which is resulting in more hawkish money flows ahead of the several key central bank decisions this week and that is ultimately weighing on risk assets this morning.

Looking into today’s session, there are a few economic reports to watch in the U.S. (in order of importance): Q4 Employment Cost Index (E: 1.1%), Consumer Confidence (E: 109.0), Chicago PMI (E: 45.1), and the Case-Shiller Home Price Index (E: -0.5%).

With the FOMC Meeting getting underway, the macro focus will be on rate markets and expectations for the terminal rate as tomorrow’s 25 basis point hike is priced in with nearly 100% confidence. If market-based terminal rate expectations rise today, expect further pressure on risk assets and lower equity prices broadly.

Meanwhile, earnings season continues in full force today with notable releases coming from: UPS ($3.58), GM ($1.65), XOM ($3.32), MCD ($2.45), CAT ($3.95), and AMD ($0.67).

Technical Outlook for Growth vs. Value

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What’s in Today’s Report:

  • Current Technical Outlook for Growth vs. Value
  • Cooler Than Feared German CPI Roils Currency Markets

Markets are trading with a risk-on tone this morning following favorable economic data overnight while traders look ahead to today’s domestic data and the release of the Fed minutes.

Economically, France’s December CPI headline fell to 5.9% vs. (E) 6.3% y/y while Composite PMI headlines across Europe were revised solidly higher from the Flash prints. Those data points indicate a faster drop in inflation and more resilient economic activity which bolsters the prospects of a soft landing.

Looking into today’s session, we get a few notable economic reports this morning including: Motor Vehicle Sales (E: 13.7 million), ISM Manufacturing Index (E: 48.0), and JOLTS (10.1 million) before the focus will turn to the release of the December FOMC Meeting Minutes at 2:00 p.m. ET.

Bottom line, optimism about quickly retreating inflation rates overseas and better-than-feared growth readings are driving risk-on money flows overseas today and if we see more of the same in the U.S. data today, that can continue. Regarding the Fed Minutes, any positive mention about progress on getting inflation under control will be well received and could see the pre-market gains extended into the afternoon.

Five Market Questions That Need to be Answered in 2023

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What’s in Today’s Report:

  • Five Market Questions That Need to be Answered in 2023 (And Which Answers are Positive or Negative)

Futures were volatile overnight but are now little changed following the Bank of Japan’s shock announcement of an effective interest rate increase.

The BOJ announced that it is widening the trading band on the 10 year Japanese Government Bond to 0.00% – 0.50% from the previous 0.0% – 0.25%.  This amounts to a 25 basis point rate hike.

Economic data was positive as German PPI fell more than expected (-3.9% m/m vs. (E) -2.2%) in what is another sign of global dis-inflation.

Today there is one economic number, Housing Starts (E: 1.4M), but that won’t move markets.

Instead, focus will be on the fallout from the BOJ surprise “ rate hike.”  Bottom line, markets dropped late last week and yesterday in part on higher global bond yields (following the hawkish ECB announcement) so this rate hike by the BOJ is another headwind and I’d not be surprised to see stock decline modestly on this news today, barring any positive surprises.

Tom Essaye Quoted in Benzinga on September 28th, 2022

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Bank Of England Begins Purchasing UK Bonds To Stabilize Market, 10-Year US Treasury Rates Hit 4%

“Going forward, this currency and bond market volatility absolutely adds downward pressure on stocks and increases the chances we see a funding crisis of some sort that could send stocks sharply lower,” Tom Essaye said. Click here to read the full article.

What Currencies and Bonds Are Saying About the Fed

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What’s in Today’s Report:

  • Better-Than-Feared WMT and HD Earnings Drive Trading
  • Why Currency and Bond Markets Are Not Signaling a “Less Hawkish” Fed
  • Chart: S&P 500 Quietly Closes at Fresh Highs
  • Economic Takeaways: Housing Starts and Industrial Production

U.S. futures are tracking European shares lower following disappointing economic data out of the EU ahead of today’s release of the July FOMC meeting minutes.

U.K. CPI jumped to a new multi-decade high of 10.1% vs. (E) 9.8% in July while the Q2 Eurozone GDP Flash dipped to 3.9% vs. (E) 4.0%, rekindling concerns about stagflation.

Looking into today’s session, focus will be on economic data early with Retail Sales (E: 0.1%) due out before the bell as well as more retailer earnings including: TGT ($0.71), LOW ($4.63), and TJX ($0.68).

Then there is one Fed speaker, Bowman, at the open (9:30 a.m. ET) before focus will shift to the July FOMC meeting minutes which will be released at 2:00 p.m. ET.

Bottom line, the market will want to see more good earnings and guidance out of the remaining major retailers due to report quarterly results today as well as a not-as-hawkish-as-feared set of Fed minutes released this afternoon, if this latest leg higher in stocks is going to continue. Otherwise, we could be set up for a pullback into the back half of the week as stocks have become near-term overbought without any new meaningfully positive catalysts.