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Major U.S. stock indexes end lower
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Consum discr leads S&P 500 sector decliners; industrials
up most
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Dollar down, bitcoin flat; gold, crude gain
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U.S. 10-Year Treasury yield ~flat at ~3.40%
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STOCKS FINISH LOWER AFTER FED MINUTES (1615 EDT/2015 GMT)
Major U.S. stock indexes ended lower on Wednesday, with
minutes from the last Federal Reserve meeting fanning concerns
about banks and liquidity.
Nasdaq led the declines.
According to the minutes of the Federal Open Market
Committee's March 21-22 meeting, several Fed policymakers last
month considered pausing interest rate increases after the
failure of two regional banks Also, Fed staff forecast that
banking sector stress could tip the economy into recession.
Indexes had began the day higher after data showed U.S.
consumer prices rose slightly less than expected in March.
Investors have been anxious to get a better idea of the inflation picture and how much longer the Fed may need to raise interest rates. Here is the closing U.S. market snapshot:
(Caroline Valetkevitch)
*****
STOCKS TO SELL OFF AS RECESSION STORM CLOUDS GATHER: WELLS FARGO (1347 EDT/1747 GMT)
As U.S. stocks find their footing after the recent banking sector turmoil, Wells Fargo analysts say things will likely take a turn for the worse over the next few months as the economy bears the brunt of aggressive rate hikes. "Over the next 3-6 months, we expect to see a 10% correction, with the SPX trading down to 3700," the equity analysts said in a research note on Tuesday. The benchmark S&P 500 is currently trading at 4,126.65, up 7% from its lowest close in March, when equities were pressured by concerns about the health of the global banking sector. Wells Fargo analysts believe further pain is in store for equities as the Fed's monetary tightening as well as a credit crunch triggered by liquidity issues at banks take a toll on economic growth. This would present significant risk to company earnings, with margins likely come under pressure, the analysts said. Hopes of a Fed pivot helped drive gains in stocks in recent weeks, but even assuming the central bank's tightening ended in March, a near-term rally has already been priced in by markets, according to the analysts. Wells Fargo cut its 2023 EPS estimates for the S&P 500 to $200 from $210.
(Amruta Khandekar)
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WHOA, WAS THAT A FED PIVOT? (1230 EDT/1630 GMT)
Stock market monetary- and liquidity conditions over the
last year have been the harshest Doug Ramsey, chief investment
officer & portfolio manager at The Leuthold Group, has seen in
his 33-year career.
However, Ramsey says that many suspected all along that the
Fed would make the most of the cycle’s first serious crisis.
Sure enough — in the wake of the Silicon Valley Bank bailout,
Ramsey says that liquidity measures, with the exception of
money-supply growth through the end of February, have pivoted
away from their worst levels:
According to Ramsey, bond prices are a good proxy for money
conditions, and Leuthold Group's Dow Bond Oscillator (DBO)
registered a positive reading in late March for the first time
in 15 months.
"All else equal, stocks perform much better when corporate
bond prices are moving up on a six-month basis than when they
are falling. In fact, one can say that the prices of Small Cap
stocks (on average) do not rise at all when they lack the
support of the bond market," writes Ramsey.
He adds that since the Russell 2000's inception in 1979, its
annualized total return was fractionally negative (-0.6% per
annum) when the Dow Bond Oscillator was below zero.
Here is a recreation of The Leuthold Group's Dow Bond
Oscillator (10-week exponential moving average of the 26-week
percent change) in the Dow Jones Corporate Bond Index along with
the S&P 500 and Russell 2000 :
"In short, 'contemporaneous' liquidity conditions have improved markedly. Our main task now is to judge the lagged impact of last year’s drought."
Ann. TR if Ann. TR if Return Dow Bond Dow Bond Spread Oscillator Oscillator
> 0 < 0
S&P 500 14.2 2.4 11.8
Russell 17.1 -0.6 17.7
2000
(Source: The Leuthold Group. Analysis for January 1979 to date)
(Terence Gabriel)
*****
INFLATION FOLLIES: CPI COOLS, BUT THE CORE STAYS HOT (1055 EDT/1455 GMT) Inflation is coming down! Hooray! Let's do the 'pause and pivot' dance!
But wait...
Consumer prices (CPI) increased in March at a
slower-than-expected pace, according to the Labor Department.
The report showed the prices urban consumers pay for a
basket of goods and services increased by 0.1% from the previous
month and 5.0% year-on-year, landing below consensus
expectations of 0.2% and 5.2%, respectively.
But the core measure - which strips out volatile food and
energy prices - delivered precisely what analysts expected,
posting a month-on-month gain of 0.4%, and 5.6% on an annual
basis - 10 basis points hotter than the February print.
Digging into the data, a 3.5% monthly drop in energy prices
- and in particular, a 4.6% slide in gasoline - are the clear
outliers.
On the upside airfares took off yet again, rising 4% from
February, while the closely-watched owner's rent equivalent -
used to gauge the value of real estate markets - rose 0.5% and
services gained 0.3%.
"The topline is good news but the core is still elevated,"
says Peter Cardillo, chief market economist at Spartan Capital
Securities in New York. "Inflation is going in the right
direction but the fact that core remains stubbornly high suggest
that the Fed is likely to raise interest rates by 25 basis
points in May. It weakens the argument for a pause."
"(The report) indicates that structural inflation is coming
down and transitory inflation is staying high," Cardillo adds.
At last glance, financial markets have priced in a 67%
likelihood of a 25 basis point increase to the Fed funds target
rate at the conclusion of the central bank's policy meeting next
month, and a 33% chance of Powell & Co pressing "pause."
The graphic below handily shows four major indicators,
including core CPI, and where they sit relative to the Fed's
average annual 2% inflation target.
Not to be a Debbie Downer, but this report marks the 16th
consecutive month where core CPI has run hotter than wage
inflation, which means "real wages" have been in decline since
December 2021.
That's a state of affairs that can't go on forever, as the
piggy bank is a finite resource and credit limits are a thing.
Also, in case you missed it, home load demand rose by 5.3%
last week as would-be borrowers were encourage by a drop in
mortgage rates, according to the Mortgage Bankers Association
(MBA).
The average 30-year contract rate shed 10 basis
points to 6.30%. As a result, applications for loans to purchase
homes jumped by 7.8%, while refi demand was essentially unchanged.
"Prospective homebuyers this year have been quite sensitive
to any drop in mortgage rates, and that played out last week,"
writes Mike Fratantoni, chief economist at MBA.
Even so, overall mortgage demand is down 45.3% from the same
week last year, as illustrated below:
(Stephen Culp)
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WALL STREET CLIMBS AFTER CPI (1000 EDT/1400 GMT) Major U.S. stock indexes are modestly higher in early trading Wednesday after data showing U.S. consumer prices rose slightly less than expected in March. Rate-sensitive real estate and financial sectors are leading the way higher, although all major S&P 500 sectors are up in early trading. The Consumer Price Index (CPI) climbed 0.1% last month after advancing 0.4% in February, the Labor Department said in the report. Investors have been anxious to get a better idea of the inflation picture and how much longer the Federal Reserve may need to raise interest rates. They also await quarterly results from some of the biggest U.S. banks later this week. The report also kick off the first-quarter earnings season. Here is the early U.S. market snapshot:
(Caroline Valetkevitch)
*****
MICROSTRATEGY'S $4.2 BILLION BET ON BITCOIN IN PROFIT (0948 EDT/1348 GMT) Aggressive bitcoin buyer and software company MicroStrategy's $4.2 billion on bitcoin has turned green as the largest cryptocurrency hovers at 10-month highs around $30,000 level. MicroStrategy owns 140,000 bitcoins which were acquired at an average purchase price of about $29,803 per bitcoin, a company filing showed last week. Bitcoin broke above MicroStrategy's breakeven level on Monday and was last trading at $30,035. MicroStrategy has been buying bitcoin as the leading digital currency joined a rally in gold and outperformed stock markets since last month when the collapse of Silicon Valley Bank sparked turmoil in the banking sector. The Tysons Corner, Virginia-based company bought 1,045 bitcoin for $29.3 million between March 24 and April 4 and 6,455 bitcoin for $150 million between Feb. 16 and March 23.
MicroStrategy is a public company with the largest bitcoin portfolio. Its investment is 108% of its market capitalization of $3.84 billion as of Tuesday's close. Its shares have outperformed the digital coin this year as this chart shows:
(Medha Singh)
*****
MORE TROUBLE AHEAD FOR TURKEY'S LIRA AS ELECTIONS LOOM [0907
EDT/1307 GMT]
Turkey's lira , the worst performing EM currency last
year with a 29% drop, is on track for another turbulent year as
presidential and parliamentary elections scheduled for May add
to uncertainty.
A measure of volatility in the lira hit its
highest level in nearly eight months after President Tayyip
Erdogan launched his re-election campaign on Tuesday.
Support for the president, however, has dipped slightly after February's devastating earthquake amid perceptions of an initially slow response.
Erdogan's unorthodox economic policies that have hobbled the lira and sent inflation surging in recent years have added to concerns. Polls and analysts foresee a tight race, with some seeing the main opposition alliance and their candidate CHP leader Kemal Kilicdaroglu holding a slight lead against the long-reigning president. "It is reasonable to assume that if Erdogan and his AKP win, the incentive to keep the lira stable – or at least prevent its excessive depreciation – by spending billions of dollars in backdoor FX interventions will be significantly weaker allowing the lira to trade far more freely," said Piotr Matys, senior FX analyst at In Touch Capital Markets. "If the opposition wins, the key question is whether the transition of power will be relatively smooth or perhaps the Erdogan administration comes up with a long list of arguments to question the outcome and refusing to release power after governing for two decades." The lira has fallen nearly 3% since the start of the new year, hitting a fresh record low of 19.448 against the dollar last week after HSBC revised its end-year forecast for the lira to 24 per dollar from 21 previously. The lira is expected to fall about another 15% to 22.5 against the dollar in a year, according to a recent Reuters poll. "Regardless of the election outcome, we think Turkey will need to undergo a rebalancing before long, involving a large currency depreciation," said economists at Capital Economics, in a recent note. (Bansari Mayur Kamdar)
******
U.S. STOCK FUTURES PUFF UP AS HEADLINE CPI COOLS (0900 EDT/1300 GMT) U.S. equity index futures have strengthened in the wake of the release of the latest data on U.S. inflation. The March CPI on a month-over-month and year-over-year basis came in below estimates, as well as below the prior month's readings. The month-over-month core number and year-over-year print were in-line with estimates:
According to the CME's FedWatch Tool, the probability of a 25 basis point rate hike at the May 2-3 FOMC meeting is now 67% from 76% just before the numbers were released. There is now around a 33% chance that the FOMC will leave rates unchanged from around 24% prior to the data coming out. Indeed, the cooling headline numbers appear to be raising hopes that the Federal Reserve could hit pause on its interest rate hiking cycle soon. CME e-mini S&P 500 futures are gaining around 0.7%. The futures were just above flat in the moments before the numbers came out.
All S&P 500 sector SPDR ETFs are higher in premarket trade
with consumer discretionary and real estate posting the biggest gains. XLY is up 1.5%, while XLRE is rising
1.4%.
Regarding the inflation data, Quincy Krosby, chief global
strategist at LPL Financial in Charlotte, North Carolina, said,
"It was cooler than expectations by just a bit. Clearly the
inflationary pressures are moving in the right direction. The
initial reaction in the market was positive across the board.
You saw the futures market jump higher and the 2-year Treasury
yield moved lower on the release of this report."
Here is a premarket snapshot just shortly before 0900 EDT:
(Terence Gabriel, Caroline Valetkevitch)
*****
FOR WEDNESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
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CPI04122023LM premarket0412023 MicroStrategy outperforms bitcoin YTD Early US market snapshot Inflation Real wage growth MBA LG04122023Fed LG04122023DBO Closing snapshot ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
