Markets slip after Fed expects banking crisis to cause a recession

Dow was off 37 (near session lows) after a strong opening, decliners ahead of advancers about 5-4 & NAZ pulled back 102.  The MLP index stayed in the 225s & the REIT index fell 2+ to the 371s.  Junk bond funds remained in demand & Treasuries had modest buying which caused yields to slide a little lower.  Oil gained 1+ to the 83s & gold went up 11 to 2030 (more on both below).

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Fallout from the US banking crisis is likely to tilt the economy into recession later this year, according to Federal Reserve documents.  Minutes from the Mar meeting of the Federal Open Market Committee included a presentation from staff members on potential repercussions from the failure of Silicon Valley Bank & other tumult in the financial sector that began in early Mar.  Though Vice Chair for Supervision Michael Barr said the banking sector “is sound and resilient,” staff economists said the economy will take a hit.  “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the meeting summary stated.  Projections following the meeting indicated that Fed officials expect GDP growth of just 0.4% for all of 2023.  With the Atlanta Fed tracking a Q1 gain around 2.2%, that would indicate a pullback later in the year.  The crisis had caused some speculation that the Fed might hold the line on rates, but officials stressed that more needed to be done to tame inflation.  FOMC officials ultimately voted to increase the benchmark borrowing rate by 0.25 percentage points, the 9th increase over the past year.  That brought the fed funds rate to 4.75%-5.00%, its highest level since 2007.  The rate hike came less than 2 weeks after Silicon Valley Bank, at the time the 17th largest in the US, collapsed following a run on deposits.  The failure of SVB & 2 others spurred the Fed to create emergency lending facilities to make sure banks could continue operations.  Since the meeting, inflation data has been mostly cooperative with the Fed's goals.  Officials said at the meeting that they see prices falling further.  “Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year,” the minutes added.  But concern over broader economic conditions remained high, particularly in light of the banking problems.  Following the collapse of SVB & 2 other institutions, Fed officials opened a new borrowing facility for banks & eased conditions for emergency loans at the discount window.  The minutes noted that the programs helped get the industry thru its troubles, but officials said they expect lending to tighten & credit conditions to deteriorate.  “Even with the actions, participants recognized that there was significant uncertainty as to how those conditions would evolve,” the minutes said.

Fed expects banking crisis to cause a recession this year, minutes show

The IMF warned that a US economic downturn remains “within the realm of possibilities,” despite encouraging data to the upside.  Gita Gopinath, the IMF's first deputy managing director, said the fund had been surprised by the strength of the US labor market & consumer spending, prompting it to revise up its economic growth forecasts for the country.  Her comments came shortly after the latest US inflation data showed signs of cooling.  “If you look at the very recent data, you see some signs of softening,” Gopinath added.  “That gives us the possibility that we could avoid a recession,” she continued.  The IMF yesterday released its latest World Economic Outlook report, in which it said it sees the US economy expanding by 1.6% this year, up from the 1% forecast in 2022.  Still, Gopinath noted the economy remains in a precarious position, with little room for error.  “If you look at our growth numbers, we’re looking at very low growth numbers for the U.S., and so the risks of a hard landing remain,” she said.  Asked if such a shift from growth to low or even negative growth could be prompted by the Federal Reserve's ongoing interest rate hikes, Gopinath said it was conceivable.  “It is within the realm of possibilities that events of this kind could happen,” she said.  However, she added that central banks had so far been striking a good balance.  “This is a very difficult time for central bankers,” Gopinath said.  “I think, as of now the Fed, has been correct about keeping its eye on inflation and of course adjusting depending upon how the data comes in.”

IMF warns hard landing ‘within the realm of possibilities’ for U.S. economy

The Environmental Protection Agency proposed new tailpipe emissions limits that could require as much as 67% of all new vehicles sold in the US by 2032 to be all-electric, representing the country's most aggressive climate regulations to date.  The proposed limits would surpass Pres Biden's previous commitment to have EVs make up roughly 50% of cars sold by 2030 & accelerate the country's clean energy transition.  The limits would also substantially reduce climate-changing emissions from the transportation sector, the largest source of US greenhouse gases.  Despite a rise in EV sales in the US in recent years, EV sales accounted for only 5.8% of all the 13.8M new vehicles sold in the country last year, an increase from 3.1% the year before.  The US is the world's 3rd-largest market for EVs behind China & Europe.  The limits wouldn’t require a specific amount of annual EV sales but rather set pollution standards for cars & trucks, which would force the auto industry to sell a lot more EVs in order to meet the requirements.  The agency projects the standards would avoid nearly 10B tons of carbon emissions through 2055, equivalent to more than twice the total US carbon emissions in 2022.  EPA Administrator Michael Regan announced the proposed limits.  The limits will be made available for public review & comment & will likely face legal challenges.  “This is a very ambitious proposal,” Regan said.  “This proposal solicits a number of ways to achieve these goals and we plan to strategically engage all our stakeholders.”  Urgently replacing gas-burning vehicles with all-electric models would help the Biden administration achieve its commitment to reducing US greenhouse gas emissions by at least 50% by the end of the decade & reach net-zero emissions by 2050.  Depending on the compliance pathways manufacturers select to meet the standards, the EPA said, it projects that EVs could account for 67% of new light-duty vehicle sales & 46% of new medium-duty vehicle sales in model year 2032.  However, the proposed limits would present a slew of challenges for automakers.  Auto companies are already investing Bs in factories & battery technology to support EVs.  But a rapid adoption of EV technology would require more widespread & reliable charging infrastructure & more materials necessary for EV batteries, among other things.  John Bozzella, CEO of the Alliance for Automotive Innovation, a trade association that represents major automakers, said that the EPA's proposed regulation “is aggressive by any measure” & sets “very high” automotive electrification goals over the next few years.

Biden proposes toughest auto emissions rules yet to dramatically boost EV sales

Gold futures posted a 2nd straight session gain to settle at their highest in nearly a week, supported by a decline in the $ after data showed US consumer prices rose by a less-than-expected 0.1% in Mar.  Prices for the metal ended higher, but off the session highs, as Richmond Fed Pres Tom Barkin said there is "more to do to get core inflation back down" to where the Federal Reserve would like it to be.  His comments raised the potential for more interest-rate hikes.  Gold for Jun rose $5 to settle at $2024 an ounce.

Gold futures post back-to-back session gains

Oil futures climbed, with US prices settling at their highest so far this year.  Crude oil has been supported by the surprise OPEC+ decision to cut production, as well as by ongoing weakness in the $, optimism about Chinese pent-up demand & the recent upsurge in other commodity prices like gold & silver.  The weaker US consumer price index data raised doubts over whether the Federal Reserve will hike interest rates at all next month.  Falling interest rate expectations are reducing recession concerns & helping to support $-denominated asset prices.  May West Texas Intermediate crude rose $1.73 (2.1%) to settle at $83.26 a barrel.  That was the highest front-month contract finish since Nov 16.

U.S. oil futures mark highest settlement since November

The Dow was having a good day following the inflation report which was favorable,  Then the Fed meeting minutes were released & Dow sank 200.  In addition, the tone of the IMF forecasts have been largely gloomy, another negative sign.  The chart below shows it has been a long time since the Dow was able to get above 34K again.

Dow Jones Industrials