Not much happened in the stock market this week but we did get inflation data that suggests prices are sticky and that means the Fed may continue hiking rates to fight inflation. However, the Fed may be at a crossroads in choosing the fate of many financial institutions like we saw in the 1980s fight against inflation (S&L Crisis).
Bank balance sheets are being decimated as as loan values plummet and depositors take their money elsewhere seeking higher returns. The Fed should admit they were too aggressive over the past year and pause so that they can assess the damage and the lagged effects of their tightening policies.
For example, PacWest Bank reported in an SEC filing on Thursday that their deposits fell 9.5% in the first week of May! This is a massive outflow and and I expect more troubles from this sector in the coming months.
Also, the Senior Loan Officer Survey may be an esoteric report but it is gaining significance as it shows how financial institutions are restricting credit (see adjacent chart). The survey mentioned there are tighter standards across many lending categories including small and medium business, commercial real estate and all consumer loan categories.
This is problematic as small businesses make up 99.9% of all businesses in the U.S. and account for 45% to 50% of U.S. GDP. It is no wonder that economists are beginning to predict a recession is looming.
The Stock Market
The S&P 500 ETF continues to trade sideways (six weeks and counting) and hovering below major technical resistance at $418. A breakout above this level could re-test the August 2022 high at $430 (‘B’) and a failure here would find support in the $380 area. There are a handful of stocks that are outperforming and keeping the indices up at this level so the rest of the market will need to turn higher if we going to see higher prices in 2023.
The Yield Curve
The spike higher we are seeing in the 1Mo tenor below is due to the debt ceiling. Surprising to see it push this high as the politicians in Washington always come to some agreement but the bond market is showing there is concern regarding this negotiation process. Treasury Secretary Yellen has said that cash becomes scarce for the Federal government around June 15th but the official deadline is the 1st.
Politicians have a lot of work to do in the next two weeks as they need to agree on a debt ceiling deal, pass it through a committee and then vote on the legislation. A short window for a Congressional process which means we need to see terms of a deal come together in the coming days.
- The PPI (producer-price index), increased 2.3% in April from a year earlier which is the slowest pace since January 2021. The cooling of prices may be good to stem inflation, however, it may also signal the economy is in the process of contracting.
- The April CPI (consumer price index) increased +4.9% and ex-food/energy was +5.5%. This the 10th consecutive month that the headline CPI rate has slowed, and it’s at its lowest rate since April 2021.
- Weekly unemployment claims are trending higher as layoffs are rising. This past week, unemployment benefits rose by 22,000 to a seasonally adjusted 264,000 on Thursday. This is the highest level since October 2021.
- Manufacturers of construction equipment, trucks, building supplies and industrial software are still ringing up sales. This may be attributable to a lag in the economy attributed to supply-chain bottlenecks due to the pandemic years. The new factories are adding to demand for materials, equipment and the systems needed to operate the plants once they are completed.
- Home prices fell in nearly a third of U.S. metro areas in Q1 according to the National Association of Realtors. The decline is the most in a decade but most of the decline was attributed to the western states. Nationwide, the median single-family existing-home sale price fell 0.2% which is the first year-over-year price decline since 2012.
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President, Kisco Capital