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U.S. stock indexes advance; Nasdaq out front, up >2%
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Chip, FANG indexes up ~3%, regional banks up ~4%
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Comm svsc lead S&P 500 sector gainers; staples weakest
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Dollar slips; gold ~flat; crude up ~2%, bitcoin rises >1%
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U.S. 10-Year Treasury yield rises to ~3.57%
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PUTTING A NUMBER ON TIGHTER LENDING (1347 EDT/1747 GMT) With markets in uproar for fear of broader weakness in the financial sector, many strategists have been out talking about the likelihood of tighter lending from U.S. banks.
Morgan Stanley economists came out with a research note on Thursday saying that its bank analysts see "a meaningful increase in funding costs ahead, which will lead to tighter lending standards, slower loan growth, and wider loan spreads." The economists led by Ellen Zentner say they were already expecting a "meaningful slowdown in growth and job gains over the coming months."
So with the latest goings on, the "prospect of substantial tightening in credit conditions raises the risk that a soft landing turns into a harder one."
According to MS, its models show a permanent +10 pt tightening in lending standards for Commercial & Industrial loans leading to a 35 bp rise in the unemployment rate over the next two years. Zentner notes that smaller companies, which were a key driver of labor market resilience in recent months are "particularly sensitive to tighter bank financing conditions." So the result could be that job gains slow quickly. However, the economist says "it will take time for tighter lending conditions to show up in the macro data" with weekly initial claims providing the earliest evidence.
But she notes that recessions have arrived more than half a year after jobless claims begin a sustained rise, at least historically.
Even with everything going on MS still sees the Federal Reserve raising rates by 25 basis points after the highly-anticipated FOMC meeting next week.
(Sinéad Carew)
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SMALLER/REGIONAL BANK LOANS BY THE NUMBERS: WHO MAY BE MOST AFFECTED (1230 EDT/1630 GMT) Smaller/regional banks hold around 18% of all outstanding debt, but their share across the market varies. Some areas where they lend the most, such as commercial real estate and consumer loans, are most likely to be affected by bank failures in the space, according to UBS. The Federal Reserve’s latest Senior Loan Officer Opinion Survey showed that credit officers expected further net tightening through 2023 in commercial real estate, smaller commercial and industrial loans and credit cards, UBS notes, adding that “the latest bank failures will likely worsen the severity of the tightening.” UBS analysts including Matthew Mish found that banks with assets of $250 billion or less hold around 39% of commercial real estate debt, 30% of other loans and 25% of consumer loans, in addition to 11% of commercial and industrial loans and 15% of mortgages. Digging further into these sectors, the smaller regional banks hold around 55% of traditional commercial real estate loans and 48% of construction/development loans compared to 22% of multifamily loans. Within consumer loans the banks hold around 36% in credit card debt versus 15% in auto loans. In commercial and industrial loans, they are larger players in small business loans, with an approximate 47% share. “These are the key areas where credit supply could be most disrupted in our view,” UBS said.
The bank also added that “a key risk is if the aggressive
tightening spills over from bank to non-bank markets, akin to
during the (global financial crisis)…as recently we’ve seen less
evidence of tightening in non-bank lending standards based on
our proxy for (commercial and industrial) debt.”
Incidentally the S&P 500 financial sector turned
around as Thursdays session wore on and was last up 2% with
regional banks outperforming. The KBW regional banking index was up 3.9%.
(Karen Brettell)
*****
INFLATION MAY SLOW, BUT THE COST WILL BE SLOWER GROWTH -WFII (1320 EDT/1720 GMT) The banking sector finds itself awash with financial stress and stability concerns. Meanwhile, the Global Investment Strategy Team at the Wells Fargo Investment Institute (WFII), is noting that this marks the one year anniversary of the Fed's first interest rate hikes, and the lagged effect of tightening financial conditions is pressuring economically sensitive sectors of the economy. As WFII sees it, households' confidence in executing their spending plans intuitively goes hand-in-hand with their sense of security in their incomes and financial resources. Therefore, the increase in financial stress likely adds downward pressure on economic growth. As the economy slows, WFII says to expect faster disinflation which, historically, has been accompanied by concerns over the financial system. According to WFII, stabilizing bank stocks coupled with falling equity and bond market volatility, would indicate improving conditions. Conversely, further bank stock losses along with a rising VIX would be an issue. In terms of the S&P 500 index , WFII says that a trade below the December low of 3,783, "would probably trigger another round of selling by trend-following and momentum-driven strategies, but if the Index holds those levels, it may help restore confidence." As for equity market sector implications, WFII is reiterating their "neutral" stance on financials. They are also reiterating "favorable" ratings on tech, healthcare, and energy. Regionally, WFII continues to favor U.S. stocks over international markets. Finally, when it comes to the implications for central bank policy, WFII still expects the Fed to raise rates by 25 basis points next week, and likely another two times before a possible pause. With this, they are maintaining their year-end 2023 target of 5.25%-5.50% for the Fed funds rate.
(Terence Gabriel)
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RETAIL TRADERS FLEE AMID BANKING WOES (1231 EDT/1631 GMT) Retail punters' percentage of total U.S. stock market trading volume has dropped to the lowest in four months as stresses emerged in the banking sector. Small investors took up 12.4% of total market volume as of March 13, down from 19% on March 7, J.P.Morgan's data showed. It is was last at 13.5% on Wednesday, data showed. "Retail market share declined significantly over the last several days, suggesting that the market volatility was not primarily driven by institutional investors," said JPM analyst Peng Cheng in a note. The sudden collapse of Silicon Valley Bank and Signature Bank, two U.S. mid-size lenders last week sparked fears of contagion in the sector with Credit Suisse's woes adding to the mix.
The sudden collapse of Silicon Valley Bank and Signature Bank, two U.S. mid-size lenders last week sparked fears of broader weakness in the financial sector, sending the S&P 500 to a three month low on Monday. Since then Credit Suisse's woes have been added to investor worries.
With all this going on investors are now expecting the Federal Reserve to deliver a smaller rate hike next week amid bank fears and the market turmoil.
The S&P 500 hit a three month low on Monday, with investors increasing bets that the Federal Reserve's would deliver a smaller rate hike next week following the market turmoil. "There is still a lot of anxiety and unanswered questions. It's one of things that can occur very quickly but it takes several days if not weeks before it gets resolved or until people can get comfortable that risks have been mitigated," said Randy Frederick, managing director of trading and derivatives for the Schwab Center. "I don't think we're there yet." Mid-size lender First Republic was the most traded U.S. stock among retail traders after Tesla, according to JPM data. First Republic , which has lost ~78% of its value since March 8, when worrying news started to emerge from banks including Silicon Valley, was down ~1x% on Thursday. A report late Wednesday said the bank was exploring strategic options, including a sale.
(Medha Singh)
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THURSDAY'S DATA RODEO: JOBLESS CLAIMS, HOUSING STARTS, IMPORT PRICES, PHILLY FED (1152 EDT/1552 GMT) A chorus of indicators belted out a familiar tune on Thursday, the one with the refrain that goes "the economy is softening but the labor market is tight and the housing market looks as if it might have found a floor."
It's a catchy tune, and something of an earworm.
To start with, the number of U.S. workers filing first-time applications for unemployment benefits unexpectedly dipped by 9.4% last week to 192,000, after a week above the 200,000 level associated with healthy labor market churn. Despite new layoff announcements having become what has begun to feel like a daily ritual - particularly from the tech/tech-adjacent sectors - workers are scarce and employers are loathe to hand out pink slips willy-nilly, despite signs of softening demand. "To date, these announcements have not translated into a meaningful increase in jobless claims," writes Thomas Simons, economist at Jefferies. "There are a number of reasons why this might be, including healthy severance packages, relative ease with which workers are finding new jobs, or employers are approaching job cuts through attrition rather than outright layoffs." Ongoing claims , reported on a one-week lag, also dipped, falling 1.7% to 1.684 million, suggesting that out of work Americans are finding new gigs more quickly - a notion supported by last Friday's employment report. For its part, the housing sector appears to be undergoing something of a renovation. Groundbreaking on new U.S. homes jumped 9.8% in February to 1.450 million units at a seasonally adjusted annualized rate (SAAR), according to the Commerce Department. Analysts had expected the number to stay essentially unchanged. That's also what they expected from building permits , which is considered among the more forward-looking housing market indicators.
But those surged by 13.8% to 1.524 million units SAAR. Add that to the recent revival of mortgage demand and homebuilder sentiment, it would appear the sector has found its basement. "Sifting through the noise, we think housing starts are finding a bottom, with the ongoing need for new supply in the single-family sector and fairly resilient homebuilder sentiment keeping a floor under new home construction," says Nancy Vanden Houten, lead U.S. economist at Oxford Economics (OE). "However ... the shakeup in the financial system following recent bank failures may lead to a further tightening of lending standards for homebuilders and perhaps home buyers." It should be noted that both housing starts and building permits were given a solid boost from the multi-family segment, which perhaps suggests the pandemic-driven mass-exodus to suburbia could be starting to reverse. Next, we turn to import prices which inched down 0.1% last month, extending January's downwardly revised 0.4% decline. Digging into the Labor Department's report, a 1.9% drop in the cost of industrial supplies helped offset a 1.5% increase in imported petroleum. Year-on-year, the cost of goods and services imported to the United States actually decreased by 1.1% - the first major inflation indicator to dip below zero in the current cycle. But its clearly the outlier compared with other price gauges, most of which have a long road ahead of them before approaching Powell & Co's average annual 2% target. Finally, we wrap things up with a sad song about manufacturing from the city of brotherly love. The Philadelphia Fed's Business Index (alias Philly Fed) notched a dour reading of -23.3 this month, a slight but pitiful improvement from February's -24.3 and a far cry from the less calamitous -15.6 predicted by economists. The report marches in lockstep with the New York Fed's equally downbeat reading of -24.6 unleashed on Wednesday. A Philly Fed/Empire State number south of zero indicates manufacturing activity has contracted from the previous month. "This index has been below its neutral threshold of 0 for seven consecutive months," says Gurleen Chadha, U.S. economist at OE, who adds that "the Philly Fed survey includes responses up to Monday, so it may be capturing some of the immediate reaction to SVB’s collapse."
Wall Street appeared to be shaking off fears of contagion in
the banking sector as Thursday's session wore on. Investors
appeared to be betting on a Federal Reserve decision next week
that is less hawkish than expected just a week ago. Traders are
even betting on a small probability for a pause in hikes,
according to CME Group's FedWatch tool.
(Stephen Culp)
*****
WALL STREET OPENS LOWER WITH BANKS IN FOCUS (1021 EDT/1421 GMT) Wall Street's major averages are lower in early trade on Thursday with bank stocks in decline again due to continuing jitters over the stability of the global financial system after Credit Suisse said it was availing itself to a financial lifeline from the Swiss National Bank.
Investors have been nervous about the global financial sector since three U.S. banks have failed in the last week.
Among the S&P 500's 11 major sectors, the energy index is falling most in sympathy with declining oil futures as market sentiment about the global economy is fragile. The S&P 500 banks sector is last down ~2% with Frist Republic Bank down more than 30% after a report late on Wednesday that it was weighing options, including a sale. The company, which last traded around $20, had closed at $123.22 on March 3, before a massive sell-off kicked off. Here is your early snapshot:
(Sinéad Carew)
*****
QUESTION FOR BANKS: GOT LIQUIDITY? (0915 EDT/1315 GMT) In light of the collapse of Silicon Valley Bank and rising interest rates, it's time for global regulators to look more closely at liquidity requirements, according to Mayra Rodriguez Valladares, managing principal at banking and regulatory consultancy MRV Associates.
Revisiting liquidity rules is especially vital as major central banks are not expected to slam the brakes on interest rate hikes, Valladares said, which will continue to hit banks' bond holdings.
"Rising interest rates will continue to put downward pressure on banks' bond values, which then means that their liquidity also goes down," she said, adding that job cuts in the tech sector persist, which could result in a double whammy of these firms continuing to draw on deposits, while potentially facing trouble in servicing their loans.
Rapid withdrawals caused a liquidity crisis at SVB , forcing the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve to step in, but this could have been avoided if SVB was classified as "systematically important," Valladares noted.
"That would have allowed the Federal Reserve to receive daily liquidity information about the bank ... this is a sign for regulators in Asia and Europe as well that they need to look closely at banks' liquidity especially since inflation has not been tamed," she told the Reuters Global Markets Forum.
That may be occurring - the Fed is reportedly considering tougher rules and oversight for midsize banks similar in size to SVB. Banks also need to diversify their sources of funding to prevent liquidity mismatches, according to Valladares.
That view was echoed by Moorad Choudhry, Director at Recognise Bank and author of "The Principles of Banking", who told the forum banks should hold more liquid assets, such as short-duration Treasury bills to "hold against a stress event."
(Divya Chowdhury, Lisa Mattackal)
*****
DESPITE MARKET TURMOIL, NASDAQ COMPOSITE SCORES GOLDEN CROSS (0900 EDT/1300 GMT) The Nasdaq Composite ended Wednesday at 11,434.052, and has now risen three-straight days putting it up 2.7% for the week so far. Even though Wednesday's rise of just 0.052% was not much to speak of, it was enough for its 50-day moving average (DMA) to cross above its 200-DMA for a golden cross:
The 50-DMA crossed below the 200-DMA (a death cross) on Feb.
18, 2022. The intermediate-term moving average had been below
the longer-term moving average for 267-straight trading days.
That was the longest such streak since a 348-day trading-day run
from January 2008 to June 2009.
The 50-DMA (11,400.762) ended above the 200-DMA (11,399.865)
by less than one point, so traders will be watching to see if it
can be sustained. Nevertheless, this action may hearten bulls as
it can suggest potential that a major advance is underway.
Meanwhile, markets are digesting another batch of U.S.
economic data released at 0830 EST.
Initial jobless claims were below the estimate, while
February housing starts were greater than expected. The March
Philly Fed Business Index was weaker than the Reuters poll. Feb
import/export prices month-over-month were both above estimates.
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
61% from around 67% just before the numbers were released. There
is now around a 39% chance that the FOMC will leave rates
unchanged from around 33% prior to the data coming out.
U.S. stock index futures were mixed and little changed ahead
of this as the Swiss central bank's lifeline for embattled
Credit Suisse did little to boost investor sentiment. Markets
may have been awaiting the data for clues on the outlook for
U.S. interest rates.
E-mini S&P 500 futures are now off about 0.3% vs
roughly flat just before the data came out.
(Terence Gabriel)
*****
FOR THURSDAY'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)
