Despite the banking woes this month, the indices found a way to rebound into the end of the first quarter. The Fed has a lot of issues to deal with but the wheels did not come off aside from the regional banks. Loan valuations remain an outstanding problem but the Fed did add $400B to its bond holdings over the last month and stocks generally go higher when that happens. Thanks, Jerome!
If banks stocks stabilize, they will be able to raise capital and as long as depositor flows are stable they won’t need to liquidate their holdings. The Fed is aware of this and will likely keep rate increases modest over the next few meetings. So, the hawkish policies will take a backseat to bank stability and we should see the lagged effects of rate increases begin to show up in the inflation data in the coming months. So, not a bad time for the Fed to tap the brakes and see what happens next.
The Stock Market
Seasonality in April is good for stocks and it looks as though it will be no different this year. The S&P did spike lower mid-March on the banking problems to $380 (38.2% FIB) and this level held as support as did the green trend line from the all-time high. This means that $380 is now a significant support level and the momentum from this area of the chart looks like we will re-test the 2023 high at $418 in April.
The momentum indicators at the bottom of the chart have also flipped into positive territory in a sign the bulls are gaining control of the tape.
The Yield Curve
Long yields keep dropping and the Fed is likely to keep raising rates on the front-end so an inverted yield curve will remain until the Fed begins cutting rates. Net of inflation, the long bonds are trading at negative rates so that helps financing longer-term assets and implies the Fed will eventually get their way with lower inflation numbers.
Economic Data
- The Fed’s favorite inflation measure, the Personal Consumption Expenditures (PCE), came in at 5% with the core rate at 4.6% which was at expectations. The core rate is now below the Fed Funds Rate and should continue to fall in the coming months.
- The March Chicago PMI continues to show contraction at 43.8 vs 43.6 in February.
- The Dallas manufacturing index for March falls to -15.7 from -13.5.
- The Richmond March manufacturing index rose 11 pts but still is below zero at -5.
- Core inflation in the eurozone hit a record in March, increasing the likelihood that the European Central Bank will raise its key rate again in May. The European Union’s statistics agency said consumer prices in the eurozone were 6.9% higher in March than a year earlier, a decline from the 8.5% rate of inflation recorded in February and the lowest in just over a year. Energy prices drove the sharp fall. But the core rate of inflation, which excludes volatile food and energy prices, rose to 5.7% from 5.6%, the highest level since records began in 2001. (WSJ)
- Money market funds attracted more than $300B in the past month in a flight to quality by investors. Analysts at Bank of America noted that prior surges have denoted the end of Fed tightening cycles.
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