Data Watch: Bank Uncertainty Continues, but Signals on Jobs, Housing, Tech Shed New Light

(Thursday Market Open) Today provides a “dry run” for next week as the European Central Bank (ECB) makes an interest rate decision. U.S. markets were mixed in overnight trading after yesterday’s slide, and focus could start shifting the Federal Open Market Committee (FOMC) meeting concluding next Wednesday when the Fed has its own rate decision to make. 

It’s likely a function of the headlines, but absent any major news, we could see trading/volatility moderate prior to the FOMC decision, as traders and investors wait until after the news is out to make moves. But because this time the decision seems a bit less certain, we could see continued tension in markets leading all the way up to the meeting.

The ECB decision comes a day after worries about Credit Suisse CS helped push markets down globally, though CS shares rebounded after CS said it would borrow up to $54 billion from the Switzerland’s central bank. European stocks traded higher early Thursday on the news, but U.S. stock index futures were mixed as the opening bell approached.

Though volatility is a little gentler this morning after yesterday’s wild action, things are far from calm. As noted here yesterday, it’s important to monitor the news headlines but also not overreact to them. During times of increased volatility, it can be fine to reduce trading size or even wait for calmer market conditions. While volatile markets can present unique opportunities, they also present unique risks.

Continue monitoring the financial market and banking headlines, along with tomorrow’s consumer sentiment data.

Just in  

Economic data this morning centers on housing, with February housing starts and building permits easily exceeding analysts’ expectations at seasonally adjusted levels of 1.45 million and 1.542 million, respectively. Analysts had expected 1.313 million for housing starts and 1.345 million for building permits, according to Briefing.com. These are forward-looking elements, especially permits, and this report indicates potentially renewed housing market strength—a good sign for the economy as a whole.

Meanwhile, initial weekly jobless claims of 192,000 were back well below expectations and continue to confound market participants wondering when recent layoffs will show up in the data.

Shares of Dollar General (DG) slipped in premarket trading despite earnings, revenue, and guidance that matched Wall Street’s average expectations. The company also raised its dividend. In a press release, DG says its Q4 sales were strong but “below our expectations.” Discount stores are typically a category that have some advantages in a recession, if one does occur. Shoppers sometimes seek bargains when times get tough. However, DG shares have been sliding most of this year.

Meanwhile, a bit of a shift is taking shape on Wall Street, driven by tech “mega-cap” stocks. The tech-heavy Nasdaq 100 (NDX) actually rose yesterday as the other major indexes got slammed, and futures trading shows this dichotomy extended overnight. A move into big-tech stocks could reflect investors seeking perceived safety in these names, perhaps based on familiarity and ideas that they’ve weathered turmoil in the past. Also, the NDX doesn’t have exposure to financials, which were among the worst-performing sectors the last few days on Wall Street. Shares of Tesla (TSLA) and Alphabet GOOGL climbed in premarket trading.

Regional banking shares remain under pressure this morning after taking it on the chin yesterday, but some of the larger banks inched up in futures trading.

Morning rush

• The 10-year Treasury note yield (TNX) fell 4 basis points to 3.44%.
• The U.S. Dollar Index ($DXY) fell to 104.35.
• The Cboe Volatility Index® (VIX) futures remained elevated at 26.78.
• WTI Crude Oil (/CL) dropped to $67.58 per barrel, the lowest since late 2021.

Eye on the Fed

Though markets continue to price in a 73% chance of a 25-basis-point Fed rate hike next week, according to the CME FedWatch Tool,  there are good reasons not to expect one. First and perhaps most important, central banks can’t pursue their mandate of steadying inflation and promoting employment without financial stability. Instability is inherently deflationary—asset prices tend to fall and credit tightens during unstable times. When credit tightens, that can slow the economy and put a clamp on earnings growth (see more below).

Consequently, banking industry concerns may relieve some of the pressure on the Fed to continue raising rates, writes Kathy Jones, chief fixed income strategist at Charles Schwab.

“While it appears that the turmoil in the banking sector is not a sign of widespread ‘systemic’ risk to the financial system and steps are being taken to address risks to depositors, it has created ripple effects throughout the markets,” Jones says. “In our view, these developments suggest that the Federal Reserve’s rate-hiking cycle may pause, or even be near its end.”

In addition, February Retail Sales were fairly weak, the February Producer Price Index (PPI) came in lower than expected, and Empire State Manufacturing plunged, investors learned Wednesday. All this helps boost the case for a pause-to-assess by the Fed next week, says Liz Ann Sonders, chief investment strategist at Charles Schwab.

Unfortunately, even if the Fed pauses, it might not be viewed as bullish for stocks. A pause here following the Fed’s recent hawkish proclamations would likely be viewed as a sign of central bank concern about economic growth.

What to Watch

The University of Michigan reports preliminary March Consumer Sentiment tomorrow morning after the open, and analysts expect slight improvement, albeit near historically low levels. The consensus for headline sentiment is 67.2, up from the final February reading of 67.0, according to Briefing.com.

Beyond the headline, consider watching inflation expectations in the report. Last time out, year-ahead inflation expectations were 4.1%, up from 3.9% in January. That felt a little unsettling. Five-year expected inflation was 2.9%, unchanged from January.

Services-related inflation—particularly for restaurant meals, airline tickets, movies, cab fare, and other categories—kept rising in February even as inflation eased for certain goods, the government said this week. It’s more likely consumer expectations were shaped by what they pay for services day in and day out. How often does someone buy a used car? Likely not as often as they eat out or fly on a plane.

Stocks in Spotlight

Speedy delivery: The market isn’t exactly bursting with earnings news during this lull between reporting seasons, but there are a few outliers sharing quarterly data. This afternoon brings FedEx FDX, which has resolved to cut costs and raise prices as executives warned of “volume softness.” Wall Street seems to like the strategy, as FDX shares are up more than 20% year-to-date, far outpacing the broader market. The stock price stayed near its 2023 peak until the last few days when it fell sharply amid fears of economic slowing. The company’s executives have a front-row seat to both consumer and business demand, so their remarks are worth monitoring.

Market minutes

Here’s how the major indexes performed Wednesday:

• The Dow Jones Industrial Average® ($DJI) dropped 280 points, or 0.87%, to 31,874.
• The Nasdaq 100® (NDX) gained 0.42%, closing at 12,251.
• The Russell 2000®(RUT) slipped 1.74% to 1,745.
• The S&P 500® index (SPX) fell 0.7% to 3,891.

On a day when bank concerns spread to Europe and sent stock indexes down more than 1% for much of Wednesday’s session, you might think financials performed the worst of any sector. But you’d be wrong.

• Instead, energy took the worst beating, sliding more than 5%. It’s also the weakest sector so far this year, down 7.2%, versus a 2% gain for the SPX. It’s easy to say this is all about crude oil prices, now down 15% this year and below $70 per barrel for the first time since late 2021. That would tell a lot of the story. But not the entire story. As a sector, energy companies face very tough year-over-year earnings comparisons following the huge profits they reaped in 2022 thanks to 15-year highs in crude and natural gas prices following Russia’s invasion of Ukraine. That could be a weight on the sector even if crude starts to recover.
• On Wall Street, major indexes fell dramatically early Wednesday but managed to recover some of their losses by the end of the session after Swiss regulators announced they would provide equity to Credit Suisse (CS), if necessary.
• While energy led Wednesday’s losses, financials posted the third-worst performance of the day as regional banks remained under pressure. First Republic (FRC) got crushed again, falling more than 20% as Bloomberg reported it got cut to “junk” status by two major credit firms. Larger banks pared losses, but a gauge of U.S. financial heavyweights led by JP Morgan Chase (JPM) and Citigroup (C) fell to the lowest level since November 2020, Bloomberg noted.

Talking Technicals: The SPX dipped around 2% from Tuesday’s close at its lowest point Wednesday, but recovered in the last hour to finish above last Friday and Monday’s settlements. It’s too early to say if this will help things from a technical standpoint, though it might be constructive if not for the volatile landscape we’re in fundamentally. It’s also constructive that the SPX came nowhere near the weekly low of 3,808 or the December intraday low of 3,764, either of which might have drawn additional selling. 

Thinking cap

Ideas to mull as you trade or invest

Credit check: Recent U.S. bank failures and the banking troubles that stirred Wednesday in Europe put a near-term hurt on stock markets globally. The pain could last longer even if no more banks fail and the headlines start to fade, because with banks in the hot seat, they might grow increasingly wary about lending decisions. Financial instability “is inherently deflationary/disinflationary because it causes banks pull back on lending, which tightens financial conditions in turn,” Schwab’s Kathy Jones says. “Consumer confidence tends to fall, leading to lower consumption,” she adds. “And asset prices fall, leading businesses to pull back on investment.” When banks tighten credit, it can slow economic growth by limiting money available for businesses to expand, develop new products, or do mergers and acquisitions. In the longer term it can put pressure on earnings growth. “The rising risk of recession is now being exacerbated by the increased likelihood that banks will limit their lending,” research firm CFRA writes, in a Wednesday note to investors.

Known entities: In times of uncertainty, some stocks can serve as barometers of investor sentiment. Banking and energy companies are struggling due to market conditions, so where—outside of fixed income—are investors putting their money? In Wednesday’s sea of red, Microsoft (MSFT) stood out with early gains. So did Merck (MRK), Home Depot (HD), Procter & Gamble (PG), and PepsiCo (PEP). Also, large-cap names like Alphabet (GOOGL), Apple (AAPL) and Eli Lilly (LLY) managed to gain ground Wednesday. This doesn’t necessarily reflect fundamental news for any of these large firms, some of which belong to the “mega-cap” category. Instead, investors appear to be gravitating toward established names they perceive could offer shelter in the storm. Obviously, no stock offers true “shelter,” as investors learned during the March 2020 pandemic selloff. Even then, however, shares of staples companies like PG and PEP tended to fall less than technology and consumer discretionary stocks, which can be more vulnerable to interest rate gyrations and recession worries. It’s worth watching these stocks in coming days to see if investor money keeps coming their way. A rebound in tech and discretionary stocks, on the other hand, could suggest growing investor confidence. Tech is still the best-performing S&P 500 sector over the last month, even if it and all other sectors are down for that period.

Volatility primer: The recent volatility confirms the importance of building and maintaining a diversified portfolio of stocks, bonds, and other assets based on your risk tolerance, Schwab’s Kathy Jones says. “We know it’s hard to ignore volatility when headlines and TV news are focused on the market drop. However, markets historically have fluctuated and recovered. It’s important to stay focused on your plan and track progress toward your goal, not short-term performance,” she says. If you’re trading fixed income, it might be a good time to focus on quality. “Lower-rated, lower-quality bonds are likely to be the most volatile if conditions remain unsteady.” 

Calendar

March 17: February Industrial Production, February Leading Indicators, and March Preliminary University of Michigan Consumer Sentiment.

March 20: No major data or earnings.

March 21: February Existing Home Sales and start of 2-day FOMC meeting.

March 22: FOMC rate decision.

March 23: February New Home Sales.

 

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