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Bull Case vs. Bear Case Part II (Tactical Ideas and My Opinion)

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What’s in Today’s Report:

  • Bull Case vs. the Bear Case Part II (Tactical Ideas and My Opinion)

Futures are little changed as global inflation and regional bank liquidity stress both remain elevated.

The Fed’s balance sheet shrank slightly as discount window borrowing dropped –22 bln. while BTFP lending increased 10.7 bln. as bank liquidity stress didn’t get much worse, but it didn’t get much better, either.

On inflation, EU HICP fell to 6.9% from 8.5% y/y, but core HICP rose to 5.7% from 5.6%, reflecting still sticky inflation.

For the final day of the first quarter focus will be on inflation and specifically the Core PCE Price Index (E: 0.4%, 4.7%) and investors need to see that number at or below expectations to further the “Fed Pivot” idea that’s supporting stocks.  We also get Consumer Sentiment (E: 63.4) and the five-year inflation expectations and there’s one Fed speaker Williams (3:05 p.m. ET).  As mentioned, if the data and Williams support the “Fed Pivot” idea, stocks can extend the rally.  If they refute that idea, stocks could give back some of the recent gains.

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.

Fed Takeaways

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What’s in Today’s Report:

  • Is the More-Dovish-Than-Expected Fed Decision a Bullish Gamechanger? No. Here’s Why
  • Fed Decision Takeaways
  • EIA Data Takeaways and Oil Update

U.S. equity futures are rebounding modestly this morning but the price action is tentative as yesterday’s volatile reaction to the Fed decision and Yellen’s push back on “blanket” deposit guarantees are digested.

Looking overseas, the Swiss National Bank moved forward with a 50 bp rate hike overnight which showed policy makers’ increased confidence in the global banking system and continued commitment to reign in inflation pressures.

Looking into today’s session, there are a few economic reports to watch including: Jobless Claims (E: 195K) and New Home Sales (E: 645K).

There are no Fed officials scheduled to speak today but there is a 10-Yr TIPS auction at 1:00 p.m. ET which could offer some insight to the market’s view of long term inflation trends.

Bottom line, the late day selloff in equities yesterday was once again led by bank stocks after Treasury Secretary Yellen pushed back on the idea of expanded deposit insurance levels and today, that means bank stocks will again be in focus. If banks are able to stabilize, stocks broadly should be able to as well, but if we see more selling pressure, expect more volatility over the course of the day.

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.

Catalysts to Watch This Week

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What’s in Today’s Report:

  • Roadmap for the Catalysts This Week
  • Economic Takeaways – Inflation Is Still High and the Consumer Is Still Healthy (For Now)
  • FOMC in Focus This Week – Will The Fed Signal a Pause?

Stock futures are little changed but cross-asset money flows remain cautious with Treasuries and gold both trading higher as the latest developments in the global banking sector are digested.

Swiss regulators brokered a deal for UBS to take over Credit Suisse for $3.2B over the weekend, a steep discount from CS’s $8B market value on Friday but global bank shares are relatively stable to start the week today helping the broader market hold steady in early trade.

The Fed and several other major central banks coordinated efforts to boost liquidity in dollar swaps over the weekend in their latest attempt to ease strains in the global financial system, which so far, is being received fairly well.

There are no notable economic reports today and no Fed officials are schedule to speak which will leave focus on the price action in banks today. If financials can hold above last week’s lows, that will be a positive, but if the selling pressure continues, the broader market is likely to be dragged lower with the banks as the March Fed meeting comes into focus.

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.

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 Quoted in Forbes on March 6th, 2023

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Stocks Poised For Rally—But Don’t Expect It To Last, Noted Morgan Stanley Bear Wilson Says

“Don’t confuse the market’s ability to withstand last year’s headwind with an invincibility towards what could be this year’s headwind” of slumping economic growth, Sevens Report analyst Tom Essaye wrote in a Monday note. Click here to read the full article.

Powell Testimony Takeaways

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What’s in Today’s Report:

  • What Powell’s Comments Mean for Markets
  • Powell Testimony Takeaways

Stock futures are stable as yesterday’s Powell-driven losses continue to be digested while the yield curve is hitting new cycle lows with the 2-Yr Note holding above 5% for the first time since 2007 while the 10-Yr hovers just below 4%.

Economic focus was on German data o/n as Industrial Production topped estimates while the previous Retail Sales print was revised notably higher, bolstering Bund yields.

Looking into today’s session, focus will be on labor market data early, especially considering Powell’s “data dependent” policy comments from yesterday’s testimony.

The ADP Employment Report (E: 175K) will hit the wires before the bell and then JOLTS (E: 10.6 million) will be released after the open. Investors want to see some deterioration in the jobs market but not an all-out collapse while any indication of declining wages would be well received. International Trade in Goods and Services (E: -$69.0B) will also be released this morning but is less likely to move markets.

From there, Powell’s two-day testimony continues before the House Banking Committee today at 10:00 a.m. ET and investors will continue to listen intently for further clues about policy plans and terminal rate expectations.

Finally, there is a 10-Year Treasury Note auction at 1:00 p.m. ET that could move yields and ultimately impact the bond market, specifically if the auction tails and rates move meaningfully higher.