The Week in Review 3/27/23

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford

Good Morning,

Last week was an amazing week in the markets…we absorbed more banking chaos, and yet another rate hike from the Fed, and managed to close out the week with a gain.

Only two S&P 500 sectors finished the week with declines -- real estate (-1.4%) and utilities (-1.2%) -- while the communication services (+3.4%), energy (+2.3%), and information technology (+2.0%) sectors saw the biggest gains.

Before we started the week, market participants learned that the Swiss National Bank brokered a UBS acquisition of Credit Suisse for a "take under" price of $3.2 billion.

The Federal Reserve also announced a coordinated central bank action with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to enhance the provision of U.S. dollar liquidity while offering assurances that "the capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient."

Also, a Bloomberg report early in the week indicated the Treasury Department is looking at ways to guarantee all bank deposits, if necessary, without congressional approval.

This was followed by Treasury Secretary Yellen's remark in prepared comments for the American Bankers Association that the government is prepared to intervene again "if smaller institutions suffer deposit runs that pose the risk of contagion."

This contrary to her earlier comments… before things started to unravel.

On Tuesday we learned existing home sales surged 14.5% month-over-month in February to a seasonally adjusted annual rate of 4.58 million (consensus 4.16 million) versus an unrevised 4.00 million in January. Sales increased on a month-over-month basis in February for the first time in 13 months. Total sales in February were down 22.6% from a year ago.

• The key takeaway from the report is the understanding that the median selling price declined for the first time in 11 years, underscoring the affordability challenges that have been presented by rising mortgage rates and prospective buyers' misgivings about potentially buying at a cyclical top in the housing market.

Many of the recent embattled bank stocks reacted favorably and moved higher in the first half of the week as investors anxiously awaited the FOMC decision on Wednesday, which brought sharp declines at the index level on Wednesday.

The FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 4.75-5.00% and the updated Summary of Economic Projections showed the Fed's median terminal rate of 5.10% unchanged from December.

Stocks initially rallied on this news before taking a sharp turn lower as Fed Chair Powell gave his press conference.

The selloff was hastened by Fed Chair Powell's acknowledgment that Fed participants do not see rate cuts this year. Separately, he also acknowledged his belief that the events in the banking system do not help the possibility of a soft landing for the economy. Good times!!

Altogether, Mr. Powell, by design, did not sound especially hawkish nor dovish in his commentary. Importantly though, he did not sound particularly confident in the outlook either and we suspect that lack of confidence played a part as well in undermining investor confidence that led to the selling during his presentation.

More central banks followed suit later in the week. The Bank of England announced a 25-bps rate hike and hinted at more increases in the future while central banks from Switzerland, Norway, Hong Kong, and Philippines also hiked their policy rates.

Worthy of note… the CME Fedwatch Tool now gives a 63.3% probability of no change in rates in the May 3^rd FOMC meeting, and the markets seem to be calming down.

On Friday we learned Durable goods orders fell 1.0% month-over-month in February (consensus 1.6%) following a downwardly revised 5.0% decrease (from 4.5%) in January. Excluding transportation, durable goods orders were unchanged month-over-month (consensus 0.3%) following a downwardly revised 0.4% increase (from 0.7%) in January.

• The key takeaway from the report is that it could invite questions about the strength of the manufacturing sector since it showed an unexpected decrease in headline orders while the January decrease was revised even lower.

The tone in the market shifted markedly, however, around the time that European markets closed on Friday… the tonal shift also coincided with panicky buying interest in the Treasury market subsiding.

German Chancellor Scholz and European Central Bank President Lagarde both attempted to calm markets after the DB news, but stocks were still under pressure Friday morning despite their efforts. The S&P 500, which fell below its 200-day moving average (3,932) right after the open, was down 1.0% and hit 3,909 at its low for the day.

The Nasdaq and Dow were down 1.0% and 0.9%, respectively, at their lows for the day.

By the end of Friday's session, price action suggested that the market had shaken off some of the worries that drove downside moves last week. The main indices closed the session higher despite sharp declines in Europe's major indices on the news that Deutsche Bank's cost of default insurance jumped to a four-year high.

Many stocks moved higher with Friday's rally, which saw the S&P 500 close above its 200-day moving average (3,932). Even Deutsche Bank, which was down as much as 8.3%, pared its losses to close down 3.1%.

The Treasury market also exhibited volatility this week. Ultimately, the 2-yr note yield fell five basis points this week to 3.77% and the 10-yr note yield fell two basis points to 3.38%.

Market Snapshot...

• Oil Prices – Oil prices declined over concerns about the banking sector. West Texas Intermediate crude fell 74 cents, or 1.1%, to $69.22/barrel, while Brent futures fell by 95 cents, or 1.3%, to settle at $74.96/barrel.
• Gold – Gold prices rose for the week. U.S. gold futures gained 0.5% to $1,983.80 per ounce. Silver finished the week at $22.741.
• U.S. Dollar – The dollar index rose 0.6% at 103.09. Euro/US$ exchange rate currently 1.08.
• U.S. Treasury Rates – The yield on the benchmark 10-year Treasury fell on Friday and was down by 3 basis points to 3.374%.
• Asian shares were mixed in overnight trading.
• European markets are trading in the green.
• Domestic markets are trading higher this morning.

Looking ahead...

This week will be relatively light in terms of economic news. We will receive initial jobless claims on Thursday and the PCE report on Friday. In addition to those reports, we will hear from additional Fed Governors and Presidents, including Gov. Barr, who will be testifying to the House on banks.

Have a great week!

The opinions expressed herein are those of Michael Hilger and not necessarily those of Raymond James & Associates, Inc., and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forcasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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