May 3, 2023
Good morning,
Fears of further fragility in the regional bank sector calmed on Monday as JPMorgan cleared the second biggest bank failure in U.S. history from the market’s collective consciousness. And investors returned their focus to the Fed decision later this week. The calm lasted for a few hours. Rumblings of other regional bank failures had traders hitting the eject button about an hour into yesterday’s trading session. Western Alliance and PacWest’s stock prices collapsed on what appears to be relatively high exposure to commercial real estate. The Regional Bank Index dropped over 5%. The S&P 500 Index, down almost 2% at its morning lows, ended the day down -1.16%. Two-year Treasury yields fell 20 basis point (-.20%) to under 4% once again (as they did on the SVB and FRC incidents).
The Fed announcement this afternoon is the key event of the day, and while yesterday’s reminder that sentiment towards the banking sector remains extremely fragile, a 25-bps rate hike is still at 86% this morning, according to the CME (Chicago Mercantile Exchange) interest rate futures market. It was at 95% on Monday but 86% is still very high that the rate hike will take place. The question for the Fed then becomes what happens next. While they will likely keep their options open for further hikes, as circumstances may warrant, their guidance will likely shift toward maintaining a restrictive (to economic growth) policy for as long as inflation remains a threat. This is known as a hawkish pause.
Futures are pointing up a little this morning (+.25%). Yesterday’s volatility was a reminder of how fast the market can turn when investors fret about bank runs. The mood around regional banks has not improved this morning – they are all down pre-market. We’ve talked before about how well stocks have behaved in the past to the end of rate tightening cycles. For equities, over the next few days, the fear of a full-blown liquidity crisis in regional banks meets the greed that normally accompanies the end of a tightening cycle. Fear is normally the stronger emotion. We’ll see.
Be well,
Mike