Wednesday's Market Minute: One Last Regional Bank Twist

Tuesday’s trading session was interesting because it was basically the opposite of what’s been the norm for the past quarter. Regional bank stocks rallied while the rest of the market slid, with high-quality mega-cap tech stocks doing the worst. There are lots of cross-currents right now – from the debt ceiling, to earnings and Federal Reserve speakers – so it’s hard to know exactly why the shift happened, but if it continues, it could be a key sign that things are changing.

The important thing to realize is that the collapse of multiple regional banks this spring has not had the calamitous effect that investors and policymakers expected two months ago. In fact, in perhaps an incidental homage to the Covid era – when emergency stimulus sent the quarantine economy booming – policymakers’ immediate response to shore up regional banks and expand the Fed’s balance sheet once again proved to be stimulative to markets. Much of this can be attributed to the market’s assumption that the economic fallout from regionals would be severe enough to cause the Federal Reserve to cut interest rates later this year. 

Instead, the stock market is surging, helping to loosen financial conditions. And corporate bonds show no signs of abnormal stress, with credit spreads little changed this year. Commercial and industrial loans were squeezed in the immediate aftermath of Silicon Valley, but have not fallen off a cliff and are fairly steady. Tuesday’s purchasing managers index was surprisingly strong as the services economy continues to chug. Consumers are being more careful about spending on expensive discretionary luxuries, but they’re confident enough in the labor market to keep jumping on whatever new homes come up for sale.

All of this points to a better-than-expected economy, which increases odds that inflation stays sticky, and reduces the odds of any rate cuts this year. In fact, if PCE doesn’t don’t show a substantial decline this week, it’s starting to look like we’ll get another rate hike this summer.

I’ve been watching the dollar like a literal hawk, and it is firming. Bitcoin’s been weak too, and that’s often a sign that central bank tightening is ahead. If the regional bank ETF KRE trades back to $45, it will be another sign that the economic cliff this group was supposed to send us over was just the latest doom-and-gloom myth that bulls adopted into their narrative to try and pressure the Fed to look the other way on inflation.

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