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Progress on the Banks?

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What’s in Today’s Report:

  • Weekly Market Preview:  Do the Banks Stabilize?
  • Weekly Economic Cheat Sheet:  Key Inflation Data on Friday

Futures are modestly higher following the successful merger of Silicon Valley Bank over the weekend.

First Citizens agreed to buy much of Silicon Valley Bank’s assets, and that resolution combined with larger deposit insurance chatter is helping stocks to rally this morning.

Economically, the only notable report overnight was the German Ifo Business Expectations and it was better than expected at 91.2 vs. (E) 88.0.

Today focus will remain on the banks and as has been the case, Frist Republic is the key – resolution for that bank remains the next step towards broader stability in the banking sector.  Economically, today we get the Dallas Fed Manufacturing Index (E: -13.5) and have one Fed speaker, Jefferson at 5:00 p.m. ET, but neither should move markets.

Dow Theory & Managing Risk-Reward in Stocks

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What’s in Today’s Report:

  • Dow Theory & Managing Risk-Reward in Stocks
  • What Is the TIPS Market Telling Us?

Money flows are decidedly risk off this morning with stock futures lower while Treasury yields fall sharply amid continued worries about the global banking system.

UBS shares are down more than 6% after Jefferies downgraded the bank following its acquisition of Credit Suisse while the bank is also under investigation regarding its bankers role in helping Russian oligarchs avoid sanctions following the Russian invasion of Ukraine.

Economically, measure of Core CPI in Japan came in hot at 3.5% vs. (E) 3.4% y/y while the European PMI Composite Flash was strong, jumping to 54.1 vs. (E) 52.0. Both data points have hawkish implication for respective central bank policy in the near term but banking fears are preventing a move higher in yields.

Looking into today’s session, there are two economic reports to watch: Durable Goods Orders (E: 1.5%) and the PMI Composite Flash (E: 49.3) while there is one Fed speaker: Bullard (9:30 a.m. ET). Markets want to see signs of slowing growth, but not a collapse, in the data, and a less hawkish tone from Bullard.

Bottom line, banks have reemerged as the primary influence on markets in the back half of the week and if the weakness in the sector continues today, stocks will have a very hard time extending yesterday’s modest bounce. Conversely if banks are able to stabilize, we could see the S&P 500 move back towards the 4,000 mark.

Fed Wildcard to Watch

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What’s in Today’s Report:

  • Dynamics Between Stocks, Bonds, and the Economy Have Changed Since Covid
  • Fed Wildcard to Watch Today
  • KBE Chart – Visualizing the Recent Carnage
  • Existing Home Sales Rebound Amid a Pullback in Mortgage Rates: Chart

Stock futures briefly spiked lower overnight in the wake of a hot CPI print in the U.K. but bond markets are steady and futures have largely stabilized as focus turns to the Fed.

Economically, U.K. CPI jumped from 10.1% in January to 10.4% in February, well ahead of estimates of 9.9%, however, both input and output PPI readings unexpectedly declined, easing some of the inflation worries this morning.

There are no notable economic reports today which will leave markets focused on the price action in the banking sector in the morning (meaningful weakness could drag the broader market lower) before attention shifts to the FOMC Meeting Announcement (2:00 p.m. ET) and Fed Chair Press Conference (2:30 p.m. ET) this afternoon.

A 25 basis point hike and no change to the dot plot is the consensus expectation but there are a lot of moving pieces to today’s meeting so watching the reaction from the Treasury market this afternoon will be critical in interpreting what today’s decision means for markets.

Fed Meeting Preview: Hike or No Hike?

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What’s in Today’s Report:

  • FOMC Preview
  • Three Reasons Oil Could Stabilize (At Least in the Near-Term)

U.S. stock futures are tracking European shares higher with banks notably outperforming while bonds retreat.

Bloomberg reported last night that Treasury Department officials are reviewing options to temporarily insure all bank deposits in order to avoid a potential financial crisis which is helping support risk on money flows this morning.

Economically, the German ZEW Survey was mixed but the Current Conditions Index was importantly not as bad as feared, helping risk assets extend the week’s gains.

Looking into today’s session, there is just one economic report to watch: Existing Home Sales (E: 4.170 million) and given the focus on the recent banking turmoil as well as the March FOMC meeting beginning, it is unlikely to move markets.

As such, a sense of “Fed paralysis” is likely to begin to grip markets today but any outsized moves in the broader banking sector, headline driven or otherwise, has the potential to impact the broader equity markets. To that point, if FRC can finally stabilize, that would be well received by investors today.

Tom Essaye Quoted in Forbes on March 14th, 2023

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‘Head Fake Rally’? Dow Jumps 400 Points On Bank Stocks’ $37 Billion Recovery

Sevens Report analyst Tom Essaye warned in a Tuesday note that the most recent market gains could be little more than a “head fake rally,” explaining that the Federal Reserve’s actions to protect depositors at Silicon Valley Bank and Signature Bank could actually cause inflation to linger even longer. Click here to read the full article.

Tom Essaye Quoted in Yahoo News on March 14th, 2023

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US Stocks Shake Off Market Jitters; Bonds Fall: Markets Wrap

Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, expects that the data will keep the Fed on track to raise rates 25 basis points next week.

“Given the bank troubles, this report isn’t bad enough to put 50 bps back on the table, but if the Fed wants to maintain credibility on inflation, then this report says they have to hike again next week and not signal they are done,” Essaye wrote. Click here to read the full article.

 

Tom Essaye Quoted in Forbes on March 14th, 2023

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Inflation Fell To 6% In February—But Some Experts Fear Banking Crisis Could Make Prices Worse

“If the bank crisis is limited to just a few banks, then the actions taken on Sunday by the Fed and Treasury will prove inflationary,” says Sevens Report analyst Tom Essaye. “By backstopping the depositors, the government has avoided the lion’s share of economic loss from this crisis,” he says, and the $25 billion Bank Term Funding Program, which offers banks loans of up to one year, will increase the Fed’s balance sheet a time when it’s actively trying to shrink it, further reversing the central bank’s recent policy actions, Essaye explains. Click here to read the full article.

Market Multiple Table Chart

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What’s in Today’s Report:

  • Market Multiple Table Chart
  • Update on Credit Suisse
  • An Important Difference Between Now and 2008

Futures are little changed despite the Swiss National Bank providing Credit Suisse (CS) liquidity, as that news isn’t eliminating general market anxiety.

Credit Suisse is rallying more than 20% pre-open after it was granted a $54 billion credit line from the Swiss National Bank.

Despite the positive CS news, investors remain very nervous and jittery about U.S. regional banks (especially FRC).

Today is an important day as there are numerous potentially market moving events this morning, with the most important being the ECB Decision (E: 50 bps hike). Markets will want to see the ECB “blink” in the face of market turmoil and hike less than 50 bps.  If the ECB sticks to a 50 bps hike, don’t be shocked to see more volatility today.

Economically, the hope that the Fed “blinks” and does not hike 25 bps next week has helped support stock and bond markets this week, so investors will want to see today’s economic data come in soft enough to make no hike more likely next week.  Key reports today are, in order of importance: Philly Fed (E: -15.8), Jobless Claims (E: 205K), Housing Starts (E: 1.315M).

Is the Fed Really Going to Turn That Dovish?

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What’s in Today’s Report:

  • Why Did the Nasdaq Rally Yesterday?
  • Is the Fed Really Going to Turn That Dovish?
  • Charts: 2-Yr Note Yield Plunges the Most in Decades, VIX Has Further to Run

Stock futures are cautiously higher and yields are bouncing globally following better than expected economic data overnight and more stable price action in U.S. bank shares while traders continue to unwind hawkish Fed policy bets ahead of today’s CPI report.

Economically, the U.K’s ILO Unemployment Rate came in at 3.7% vs. (E) 3.8% which is pressuring Gilts (down 11 bp) and lifting yields across Europe and the U.S. while the NFIB Small Business Optimism Index rose to 90.9 vs. (E) 89.9.

Looking into today’s session, focus will be on the February Consumer Price Index release before the bell with the headline expected to rise 0.4% m/m (6.0% y/y) while the all-important Core CPI figure is also expected to rise 0.4% m/m (5.5% y/y).

There are no Fed speakers today so if the inflation data comes in hot, expect a rebound in yields that would likely pressure equities as traders reassess the less-hawkish policy expectations that have been priced into rates markets since the SVB debacle began.

Additionally, bank shares (KBE) will remain in focus and if contagion fears persist and financial stocks remain under pressure, it will be hard for the broader equity market to meaningfully stabilize, much less recover some of the recent losses.

Tom Essaye Interviewed on BNN Bloomberg’s Morning Markets on March 10th, 2023

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A 50bps hike is entirely possible for the U.S. after today’s jobs data: Tom Essaye

Tom Essaye, founder and president of Sevens Report Research, joins BNN Bloomberg to discuss the latest movements in the markets after today’s jobs data. Essaye is expecting another big hike from the Fed at the upcoming meeting and discusses his take on SVP bank’s halt in trading, Silvergate’s shutdown and bitcoin. He says 2023 will be volatile and investors should remain conservative. Click here to watch the full interview.