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Major U.S. indexes slide further; DJI down >1.7%, leads
losses
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Energy weakest S&P 500 sector; only utilities, comms svcs gain
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Dollar, gold up >1%; crude down >7%; bitcoin down ~1%
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U.S. 10-Year Treasury yield tumbles to ~3.45%
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AFTER SVB COLLAPSE, WILL BANKS FACE MONEY MARKET FUND LIKE REGULATIONS? (1320 EDT/1720 GMT) The backstop of large depositors following the collapse of Silicon Valley Bank is likely to lead to more regulations that limit what banks can do, as the move would otherwise encourage more risky behavior, according to Brian Reynolds, chief market strategist at Reynolds Strategy LLC. “The bailout of SIVB’s depositors will change the way that investors view money market funds, bonds, and stocks and will change the way that banks are allowed to operate,” Reynolds said in a report. The Federal Reserve, Treasury and Federal Deposit Insurance Corp (FDIC) launched emergency measures on Sunday to backstop deposits and shore up confidence in the banking system after Silicon Valley Bank’s failure threatened to trigger a broader financial crisis.
“That was a good decision in the moment, as literally thousands of firms would not have been able to make their payroll,” Reynolds said. “However, this decision opens up a can of worms.” Reynolds notes that the FDIC has said it wants incentives for “large depositors to exercise market discipline.”
However, as the economy has grown, companies with a $250,000 payroll every few weeks “did not want to put that time and effort in.” And Reynolds noted that companies funded by venture capitalists were also directed to put their money into Silicon Valley Bank. “With regulators guaranteeing all depositors, there is no longer an incentive for depositors to exercise market discipline. That means that bankers are now incented to invest aggressively in rates and credit in a “heads I win, tails you lose” mentality," he wrote.
"We think that change means that there will be more
regulation to limit what banks can do, making them more like
money market funds,” Reynolds said.
(Karen Brettell)
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IN CASE YOU MISSED THEM: EMPIRE STATE, NAHB, MORTGAGES, INVENTORIES (1300 EDT/1500 GMT) What with investors dashing for safety like Chicken Littles due to fears that the sky is falling on the banking system, not to mention higher-profile data released on Wednesday, several indicators shuffled by: Factory activity in New York State plunged three times faster than analysts expected. The New York Fed's Empire State number plunged 18.8 points to -24.6, far more dire than the -8.0 consensus. An Empire State print below zero signifies monthly contraction. "Manufacturers aren’t optimistic about the outlook even though the economic data has been stronger than expected since the beginning of the year," writes Gurleen Chadha, U.S. economist at Oxford Economics.
"Past appreciation in the US dollar and the weakening in the
domestic and global economy will weigh on manufacturing."
But there's good news from the housing sector, of all places
with the mood of U.S. homebuilders is not quite as assumed.
The National Association of Home Builders (NAHB) Housing
Market index unexpectedly gained 2 points to land
at 44, well north of economists' expectations for 40.
Still, it marks the index's eighth month below 50, the
dividing line between pessimism and optimism.
"Even as builders continue to deal with stubbornly high
construction costs and material supply chain disruptions, they
continue to report strong pent-up demand as buyers are waiting
for interest rates to drop and turning more to the new home
market due to a shortage of existing inventory," says NAHB chair
Alicia Huey.
Speaking of interest rates (thanks, Ms. Huey) the average
30-year fixed contract rate edged lower last week,
falling 8 basis points to 6.71%, according to the Mortgage
Bankers Association (MBA).
This prompted a 7.3% jump in applications for loans to
purchase homes and a 4.8% increase in refi demand .
Falling Treasury yields have "pushed mortgage rates for all
loan types lower," says Joel Kan, deputy chief economist at MBA.
But Kan notes that "while lower rates should buoy housing
demand, the financial market volatility may cause buyers to
pause their decisions."
Despite last week's 6.5% uptick in overall demand, total
mortgage applications remain 56.8% below year-ago levels.
Finally, the value of goods stashed in the store rooms of
U.S. businesses inched 0.1% lower in January
instead of staying put as analysts projected.
It marks the metric's first month below zero since April
2021, and bodes ill for the "private inventories" contribution
to first-quarter GDP.
(Stephen Culp)
*****
CRUDE OIL FUTURES: LONG-TERM CHART MAGNET WORKS ITS MAGIC (1205 EDT/1605 GMT) NYMEX crude futures are down around 6% on Wednesday, hitting their lowest level since December 2021. With this, the futures are rapidly nearing their 200-week moving average (WMA) on the charts:
Since the early 1990s, this long-term moving average has acted as a powerful magnet in crude sell offs. Just shortly after Russia's invasion of Ukraine, crude futures spiked to a high of $130.50. Despite wild upside forecasts being tossed around in the market at the time, crude appeared extended vs its 200-WMA. It ended at 1.98x the 200-WMA in late-February and again in mid-June of last year.
After flirting with its 1990 and 2008 200-WMA disparity
peaks, crude reversed and a significant bear-phase set in. From
their early March 2022 high, the futures have now lost nearly
half of their value, and have come within 2% of their 200-WMA,
which now resides just over $66.00.
Between 1990 and 2018, there have been seven 200-WMA
disparity peaks, 1.38x or higher. In six of those instances,
crude ultimately retreated to, and then below, its 200-WMA. It
was only subsequent to the 2005 peak, that crude bottomed at
only 1.04x the 200-week WMA.
Of note, late last year, the U.S. Energy Department said it
would begin buying back oil for the Strategic Petroleum Reserve
(SPR), which had fallen to its lowest levels since 1983. More
specifically, last October, the White House said it would buy
back oil at, or below, about $67-$72 per barrel.
Thus, with crude now in the zone that President Biden had
said the U.S. would look to replenish the SPR, it remains to be
seen if the White House gets its fill.
That said, if the 200-WMA gives way, crude may be risk for a
much deeper decline.
Meanwhile, the S&P 500 energy sector ,down more than
6% on Wednesday, after posting its biggest yearly gain ever in
2022, is down 13.7% so far in 2023 vs an S&P 500 index gain of around 0.4%.
(Terence Gabriel)
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ECONOMY TAKES A STAB AT COOLING: PPI, RETAIL SALES (1137 EDT/1537 GMT) Two closely watched data sets celebrated the worrisome Ides of March by suggesting the Fed's repeated stabs at cooling the economy could at last be bringing down that tyrant inflation. To start with, the Labor Department's producer prices index (PPI) did Fed watchers a solid by offering the most concrete evidence of inflationary cool-down in months. The prices U.S. companies get for their goods and services at the figurative factory door unexpectedly dropped by 0.1% in February, versus a 0.3% gain forecast by economists. Year-on-year, the "final demand" measure - which tracks sales to consumers - cooled drastically, to 4.6% from January's downwardly revised 5.7%, a 1.1 percentage point plunge. "The downward surprise to February's PPI report is good news for the Fed," writes Matthew Martin, U.S. economist at Oxford Economics. "Together with the downward revision to January's increase (the report) indicates that cooling demand is leading to a further slowdown in price increases, particularly in the goods sector." Digging deeper into the data set, "intermediate demand," which refers to business-to-business sales, showed a 3.8% plunge in raw materials and a shallower 0.4% dip in processed goods. Excluding food and energy, raw and processed goods, prices rose by 1.2% and 0.1%, respectively. Core PPI - which excludes food, energy and trade services - rose by 0.2% from the prior month and 4.4% from February 2022. Here we trot out our trusty inflation dashboard yet again, which shows how much the major indicators need to cool before approaching Powell & Co's average annual 2% inflation target: In another signal that the central bank's efforts to toss a bucket of cold water on demand is working, receipts at U.S. retailers fell by 0.4% in February, steeper than the projected 0.3% decrease. Even so, the fall comes after January's gain, which was revised up to 3.2% from 3.0%. Breaking it down, a 4% drop in department store sales, a 1.8% decline in autos/parts and a surprising 2.2% slide in food/drink services all weighed on the topline, despite a 1.6% gain for non-store (online) retail, a 0.9% uptick in health/personal care items and a 0.6% rise in grocery receipts. "Sifting through the details, the picture that emerges is that the consumer is pulling back on big ticket discretionary purchases and concentrating on staples," says Thomas Simons, economist at Jefferies.
"The notion that consumers would be eating at home a little bit more after spending a lot at restaurants last month suggests that they are feeling a bit overextended." Core retail sales, which strips out autos, gasoline, building materials and food services - and most closely corresponds with the personal expenditures component of GDP - surprised in the other direction, rising 0.5% and standing on the shoulders of January's upwardly revised 2.3% surge. Analysts expected this metric to fall by 0.3%. Wall Street paid little attention to the data, as fresh worries from the banking sector sent investors fleeing for safety.
Safe-haven assets including the U.S. dollar and gold were
up, while equities were laid low by the Brutus of contagion
fears.
(Stephen Culp)
*****
WALL ST SLAMMED BY BANK SECTOR, ECONOMIC WORRIES (1013
EDT/1413 GMT)
Wall Street's three major averages are off sharply early on
Wednesday, after a brief reprieve on Tuesday, with the spotlight
currently on European banks as well as global economic concerns.
While U.S. banks are also weak, in Europe, shares of Credit Suisse tumbled to a record low after the bank's largest investor said it could not provide the Swiss bank with more financial assistance.
The collapse of three U.S. banks in recent days, including
hotshot Silicon Valley Bank, had sent jitters through U.S. bank
stocks and global markets as investors worried about what
financial sector weakness means for the economy.
Specifically referencing the financial sector's problems," Torsten Slok, chief economist at Apollo Global Management, said he now expects a "hard landing," which typically implies a big recession, compared with his previous expectation for "no landing," which implies no recession at all. Slock's changing view is driven by tighter credit conditions. With small banks accounting for 30% of all loans in the U.S. economy, and regional and community banks now likely to have to "spend several quarters repairing their balance sheets," he sees "much tighter lending standards for firms and households even if the Fed would start cutting rates later this year." As a result of all this, Slok does not see the Fed raising interest rates next week.
And the economist said: "We have likely seen the peak in both short and long rates during this cycle. Nearly all of the 11 S&P 500 industry sectors are in the red with energy falling most as oil prices are being crushed with financial stocks following close behind. All the S&P 500's banks are in the red with regional First Republic getting hit hardest. Even the biggest banks are flagging with JPMorgan down 4% and Goldman Sachs down 5%. The SPXBK hit its lowest level since Nov. 2020. The STOXX Europe 600 bank index is down more than 6% after touching its lowest level since early January. Here is your early trading snapshot taken at 1012 EDT:
(Sinéad Carew)
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U.S. STOCK FUTURES RED ON EUROPEAN BANK STRESS; U.S. DATA BELOW ESTIMATES (0900 EDT/1300 GMT) U.S. equity index futures are sharply lower in the wake of the release of the latest data on producer prices, retail sales, and a shift in concerns to European banks. The February PPI on a month-over-month and year-over-year basis came in below estimates. Ex-food/energy month-over-month was below the estimate, while the year-over-year reading was in-line with the estimate. March NY Fed manufacturing came in much weaker than expected:
According to the CME's FedWatch Tool, the probability of a 25 basis point rate hike at the March 21-22 FOMC meeting is now 56% from around 50% just before the numbers were released. There is now around a 44% chance that the FOMC will leave rates unchanged from around 50% prior to the data coming out. CME e-mini S&P 500 futures are down around 1.9%. The futures were sliding around 1.7% just before the data release.
All S&P 500 sector SPDR ETFs are lower in premarket trade. Financials are showing the biggest loss, off around 3.3%. This as the focus of the concern over banks has now shifted to Europe. The STOXX 600 Banks index is down around 7%. U.S. listed shares of Credit Suisse are slated to open down more than 25%. A check of premarket action in U.S. banking ETFs shows the SPDR S&P Bank ETF is losing more than 4%, while the SPDR S&P Regional Banking ETF is off about 5%. Of note, NYMEX crude futures are trading below $70.00, hitting their lowest level since December 21, 2021. Here is a premarket snapshot just shortly before 0900 EDT:
(Terence Gabriel)
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FOR WEDNESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
