The issues in the banking sector remain and this week Treasury Secretary Yellen said in Senate testimony that not all banks would be provided full support for depositors in contradiction to what she said after the Silicon Valley Bank depositor rescue. Not a clear message and it certainly looks like they have no plan which will breed continued uncertainty. In addition, First Republic Bank has yet to find a buyer as as the institution needs fresh capital as their balance sheet has been impaired by higher interest rates. There is no fix to this problem for many banks other than raising new equity capital (or getting bought) and unfortunately the market is closed for that right now. That will be readily apparent when Q1 earnings reports are released and investors begin to ask more probing questions.
I expect that banks will need to play defense now and loan officers will begin to tighten underwriting standards and restrict credit. This will also likely affect the amount of spending done by corporations as you can see to the chart on the right. The blue line represents a survey of loan officers and you can see there is a good relationship with CAPEX/R&D growth (black line). The most recent loan officer’s survey indicates companies will soon pull back on investment monies which in turn will flow through to lower GDP numbers in the coming quarters.
The Yield Curve
Look no further than the yield curve to see how bond investors view the economy. As you can see the blue line (Friday’s close) has dropped dramatically over the last month (grey line). The 5Yr tenor has been leading the curve lower and bond traders use this tenor as a barometer in the direction of the economy. Essentially, the curve is becoming more inverted and Fed Funds futures are now beginning to price in a rate cut in the summer months. This implies inflation numbers should come down and/or we are entering into a recession.
The Fed meeting this week was another disappointment as Powell dodged questions at his presser on Wednesday about the state of the banking system. The policy statement implied there may be more rate hikes needed but I think the yield curve above provides all we need to know on what the Fed will be doing in the coming months.
The Bond Market
The volatility in interest rates has impacted the new-issue market as losses on current bond holdings causes bond investors to tap the brakes. This is all part of the Fed’s plan to slow down the economy and it is working. As you can see on the graphic to the right, the best credits in the bond market are limited in placing deals. In the high-yield market, companies are having a hard time raising any money at all. So far, investment grade companies have placed $59.9B in new bonds this month, compared with March’s five-year average of $179 billion. This is a sign credit will be harder to come by in the coming months.
The Stock Market
Stocks were slightly higher this week after bouncing from the 38.2% FIB at $380 on March 13th. Prices did peak this week during the Fed meeting on Wednesday in a sign of disappointment over the messaging by the Fed. Given all of the negatives emanating from the banking system, it will be a challenge to breakout over the February high at $418. A break below the low established on 12/22 at $375 would likely bring an acceleration to the downside so now we wait for the market to signal which big move comes next.
Economic Data
- Existing home sales for February totaled 4.58mm (400k more than expected) while inventories are tight at 2.6 months of supply. Home prices were unchanged compared to last year and the NAR said “Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines. Moreover, we’re seeing stronger sales gains in areas where home prices are decreasing and the local economies are adding jobs.”
- The Bank of England raised rates by 25 bps to 4.25% and the Swiss National Bank hiked by 50bps to 1.5%.
- Core durable goods orders were unchanged over the last month with weakness in orders for vehicles/parts, machinery and computers/electronics but strength in orders for electrical equipment and metals.
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President, Kisco Capital