Dow finished down 280 but well off early lows, decliners over advancers about 4-1 & NAZ crawled up 5. The MLP index sank 8 to the 212s & the REIT index was off 2 to the 366s. Junk bond funds continued to be sold & Treasuries rallied, driving yields sharply lower. Oil lost 3+ to 68 & gold went up 6 to 1917 (more on both below).
AMJ (Alerian MLP Index tracking fund)
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Americans pulled back on spending at retail stores in Feb as demand cooled in the face of stubborn inflation & high interest rates. Retail sales, a measure of how much consumers spent on a number of everyday goods, including cars, food & gasoline, fell 0.4% in Feb, the Commerce Dept reported. That is slightly below the 0.3% decline projected & a marked drop from Jan, when sales rose 3.3%. Consumers spent less at restaurants, auto dealerships, furniture & home stores & department stores, & more on necessities like groceries. Excluding spending on autos, which is often volatile, retail sales declined 0.1% in Feb. The data comes at an increasingly uncertain time for the economy: Back-to-back reports released this week indicate that inflation is cooling ever so slightly, but that it remains about 3 times higher than the pre-pandemic average. At the same time, the Federal Reserve is in the midst of the most aggressive rate-hike campaign since the 1980s as it tries to cool the economy. Rising interest rates could force consumers to pull back on spending. Officials have already approved 8 straight rate increases, lifting the federal funds rate to 4.50-4.75%, well into restrictive levels. In recent weeks, policymakers have indicated that rates may need to climb higher than previously anticipated in the face of hotter-than-expected economic data. However, rate-hike expectations were thrown into uncertainty after the implosion of Silicon Valley Bank on Fri roiled global markets & triggered fears of a broader financial meltdown. About 58% of investors now expect the central bank to pause its tightening trajectory during its 2-day meeting on Mar 21-22 amid fears over the banking system.
Americans aren't spending money like they use to at stores
Goldman Sachs lowered its 2023 economic growth forecast, citing a pullback in lending from small- & medium-sized banks amid turmoil in the broader financial system. The firm lowered its growth forecast by 0.3 percentage points to 1.2% under expectations that smaller banks will attempt to preserve liquidity in case they need to meet depositor withdrawals, leading to a substantial tightening in bank lending standards. Tighter lending standards could weigh on aggregate demand, implying a drag on GDP growth already affected by tightening in recent quarters, Goldman economists wrote in a note to clients. “Small and medium-sized banks play an important role in the US economy,” the analysts wrote. “Any lending impact is likely to be concentrated in a subset of small and medium-sized banks.” Banks with less than $250B in assets comprise about 50% of US commercial & industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending & 45% of consumer lending. While the 2 recent bank failure, Silicon Valley Bank & Signature Bank, account for just 1% of total bank lending, Goldman noted that lending shares are 20% for banks with a high loan-to-deposit ratio & 7% for banks with a low share of FDIC-insured deposits. The analysts assume that small banks with a low share of FDIC-covered deposits will reduce new lending by 40% & that other small banks will reduce new lending by 15%, leading to a 2.5% drag on total bank lending. The effect of tightening would have the same impact on demand growth as would an interest rate hike of 25-50 basis points.
Goldman Sachs cuts GDP forecast because of stress on small banks
Oil prices fell, as traders feared a brewing banking crisis could dent global economic growth. West Texas Intermediate futures fell more than 6% to $66.85 per barrel. That would be WTI's biggest one-day drop since last Jul 12, when it plunged 7.9%. Brent crude, the intl benchmark, slid 5.8% to $72.98 per barrel. The oil market is going to be stuck in a surplus for most of H1, but that should change as long as there is not a major policy mistake by the Fed that triggers a severe recession. WTI crude’s plunge is at the mercy of how much worse the macro picture gets. A retest of Oct's lows could add increased downward pressure on WTI crude.
Oil tumbles 6%, heads for worst day since July as banking crisis routs markets
Gold prices advanced to settle at a fresh 6-week high as banking-sector worries resurfaced with shares of Credit Suisse plunging, reigniting fears about the US banking sector & pushing investors to anticipate a policy pivot from the Federal Reserve. Gold futures for Apr gained $20 (1.1%) to settle at $1931 per ounce. That was the highest settlement for the yellow metal since Feb 1.
Gold ends at 6-week high as turmoil at Credit Suisse spurs renewed concerns over banking sector
US oil prices fell below $70 for the first time in over a year on growing evidence of weak oil demand & fears that the banking sector’s troubles will drag down the global economy. West Texas Intermediate crude futures, the US benchmark, fell 4.7% to $68.01 per barrel. WTI hasn’t been this cheap since 2021. Brent crude, the international benchmark, slid 5.2% to $73.43 per barrel. The Intl Energy Agency reported that oil has been accumulating in storage tanks as supply has been strong & demand has remained slack. After global inventories surged by 52.9M barrels in Jan, a sign that demand exceeded supply by almost 2M barrels a day, early statistics from the US, Japan, and Europe indicate they kept rising in Feb. There's simply too much oil being produced & not enough demand to sop it up. Even Russia was able to increase its production in Feb, despite sanctions.
Oil Falls Below $70 for First Time Since 2021
In an extremely volatile time for stocks, this has been unusually volatile. There is a lot to sort out with the big Fed meeting coming next week. The inflation news is good in that it should make the Fed officials feel better about their work. However improved inflation data signals that the economy is weak. In the meantime, the Dow has returned to where is was in late Oct. Unfortunately the health of the economy continues to be troubling for investors.Dow Jones Industrials
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