Regional bank stocks came back under pressure this morning after yesterday's rate hike, which raised new fears about pressure on the banking industry and possible recession. Apple reports after the close today, and the ECB raised rates this morning. The April jobs report bows tomorrow.
Regional banks back under pressure after Fed hikes rates another 25-basis-points
Market continues to price in probable rate cuts later this year, despite Powell hinting at none
Volatility knocking on the door of 20, yields down as bank shakiness puts economic fears in focus
Alex Coffey, Senior Trading Strategist, TD Ameritrade
(Thursday market open) Regional banks, along with the rest of the market, are back under pressure this morning after the latest Federal Reserve rate hike. Shares of PacWest (PACW), Western Alliance (WAL), and Zions Bancorporation (ZION) all fell by double digits in premarket trading. PACW’s stock price, in particular, cratered after Bloomberg reported that the company was considering a sale and PACW said it’s “considering all strategic options.”
This morning’s action shows that while many had hoped the banking crisis was isolated and in the rearview mirror, risks remain, and the market is hypersensitive to those risks. The more we hear about situations like PACW considering options, the more the issue stays front and center—and the harder it is for the market to move on as investors wait for the next shoe to drop.
Yesterday’s 25-basis-point rate hike from the Federal Open Market Committee (FOMC) didn’t surprise the market but left questions about whether the current cycle of rate increases is over. The FOMC statement hinted that a pause is possible, but Fed Chairman Jerome Powell said in his press conference that high inflation and a tight labor market mean the Fed will remain “data dependent,” and appeared to rule out rate cuts in the near future.
Traders had priced in hopes for one to two rate cuts later this year, but Powell’s remarks threw a wet towel on that and helped send stocks into retreat late yesterday. The fed funds rate is now 5% to 5.25%—that’s the highest in 16 years. Combined with the Fed’s efforts to reduce money supplies and the recent credit tightening in the banking industry, recession fears are surging.
As unlikely as it may seem after the Fed’s latest hike and Powell’s stalwart words about rates remaining high, the market continues to price in lower rates starting in the second half of the year. This likely indicates investors’ gloomy assessment of the economic picture going forward.
WTI Crude Oil (/CL), a useful barometer of economic sentiment, descended to new five-week lows by the end of Powell’s press conference. Many “cyclical” sectors of the market, which tend to do better when the economy grows, were among the laggards on Wall Street Wednesday.
The European Central Bank (ECB) raised rates 25 basis points this morning, slowing the pace of hikes. This came after growth in core inflation eased slightly, according to data earlier this week. Economic growth remains lethargic, however, and higher rates could make things even more sluggish.
U.S. weekly initial jobless claims rose to 242,000 from a revised 229,000 the previous week. This was near analysts’ expectations and well above levels seen earlier this year—a sign the job market could be slowing.
The jury’s still out on whether the Fed has another rate hike up its sleeve. What seems less likely after yesterday’s FOMC meeting and Powell’s press conference is a rate cut anytime soon, barring a massive economic crisis.
“We have a view that inflation is going to come down not so quickly,” Powell said at the press conference in comments that were quickly followed by a reversal in the stock market’s initial post-FOMC decision gains. “It will take time, and if that forecast is right, it wouldn’t be appropriate to cut rates.”
However, Powell added that the Fed is “much closer to the end than to the beginning” of a rate hike cycle that’s now reached 10 FOMC meetings in a row and 500 basis points, though he declined to indicate that the FOMC is done tightening the screws. He also indicated that the worst of the banking crisis may be behind us.
The labor market remains robust and inflation is well above the Fed’s 2% goal, Powell said, noting that the Fed remains committed to returning inflation to 2%. He added that inflation has fallen and bounced in recent months, meaning progress hasn’t been linear, and indicated he’d like a few months of data to see if any lower trend continues.
In that, he may be recalling former Fed Chairman Paul Volcker, who was forced more than once to raise rates again when inflation resurfaced after he lowered them. The Fed likely would suffer a major blow to credibility if it retreats and then backtracks by making another hike.
“The most important thing is what Powell didn’t say,” Schwab’s chief investment strategist Liz Ann Sonders told CNBC in an interview Wednesday after the Powell press conference. “He didn’t reinforce the market’s expectations for rate cuts in short order.”
The probability of a pause in rate increases at next month’s FOMC meeting is 96%, according to the CME FedWatch tool. The tool prices in a nearly 50% chance cuts start as early as July, and 100% chances that rates will be back below 5% by the end of this year. The market still doesn’t buy what the Fed’s selling.
Jobs up next: We’ve been through the Fed meeting, and Apple (AAPL) earnings come after the close. Part three of this week’s triple-play is scheduled for 8:30 a.m. ET Friday with the April Nonfarm Payrolls report. Here’s what analysts expect, according to Trading Economics:
March saw the labor participation rate finally claw back to prepandemic levels—another sign of the economy returning to more normal conditions and something Powell referenced positively in his remarks yesterday. Any uptick in this category would likely be welcome, as it would suggest more workers competing for openings, which could help tame wage-driven inflation. The Fed has an eagle eye on the labor market, looking for any sign of cooling, especially in the services sector.
Apple on the clock: Apple is often viewed as a bellwether for the global economy, and its stock represents roughly 6% of the S&P 500’s® (SPX) market capitalization. AAPL had a weak holiday quarter, missing analysts’ revenue and earnings estimates. Any surprises today—good or bad—could have an impact on the broader market. Shares are down more than 1% ahead of the opening bell today amid concerns about iPhone demand.
The market digested a handful of other earnings news as the season’s biggest two weeks wind down.
Qualcomm (QCOM): Shares plunged after the company delivered soft guidance and said in its conference call that mobile phone demand keeps decreasing, according to Barron’s. The company also sees no evidence of a meaningful recovery in China, the media outlet reports. Weak phone demand doesn’t sound promising for AAPL.
ConocoPhillips (COP): The energy firm had a mixed outing, reporting earnings per share that beat Wall Street’s estimates but coming up short on revenue. Shares inched higher in premarket trading.
CHART OF THE DAY: OPTIMISM SQUELCHED. This intraday chart of the S&P 500’s (SPX—candlestick) performance yesterday shows how an initial rally after the FOMC’s statement lost its steam after Powell indicated in his press conference that rate cuts are unlikely. WTI crude (/CL—purple line) tracked equities closely, and serves as a barometer of economic sentiment. Data sources: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Let’s eat out: Leisure and hospitality is the category to watch in tomorrow’s April jobs report if you want a decent barometer on services sector growth. The March data showed 72,000 jobs added in Leisure and Hospitality, mainly at food services and drinking places, the Bureau of Labor Statistics said. That was down from the six-month average monthly gain of 95,000. Still, employment in the category remains 368,000 below prepandemic levels, implying growth may not be finished. One thing to remember, though, is that if lower-paying businesses like restaurants and bars create fewer jobs, it may limit the decline in hourly wage growth across all sectors.
Mixed signals: A small piece of data yesterday appears to raise questions about a common theme in the market lately. The idea is that smaller banks, facing the need to pay 4% rates on deposits if they want to keep customers while simultaneously holding millions of mortgages they loaned at 3%, will pull back on loans or raise rates for those they do make. This, in turn, will put the brakes on small businesses, which depend on smaller banks for loans to expand and hire. This could certainly still be the case, but Wednesday’s ADP National Employment report showed small establishments of one to 49 employees adding 121,000 jobs in April. This occurred well after the highly publicized failures of two banks in March, implying that at least for now, small businesses aren’t feeling the pinch of tighter credit. One month isn’t a trend, and this growth occurred before First Republic Bank (FRC) failed last weekend, so maybe the May update will provide additional clarity.
Fresh look at banks: “The Q1 earnings reports highlighted the have and have nots when it comes to deposit flows and asset sales,” writes Jeffrey Kleintop, Schwab’s chief global investment strategist. “Potential big bank buyers of troubled banks are holding back to get a better price and expedited approval process. That means stockholders of troubled banks can get wiped out, as a potentially self-fulfilling run on the stocks can generate renewed deposit flight and make it impossible to raise equity or achieve a sale prior to a closure by regulators.”
May 5: April Nonfarm Payrolls, and expected earnings from Cigna (CI), Johnson Controls (JCI), Warner Bros. Discovery (WBD).
May 8: March Wholesale Inventories and expected earnings from Tyson Foods (TSN).
May 9: No major earnings or data expected.
May 10: April Consumer Price Index (CPI) and core CPI.
May 11: April Producer Price Index (PPI) and core PPI, and expected earnings from JD.com (JD).
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold. unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.