Thursday, May 4, 2023

Markets fall as fears grow of banking contagion

Dow sank 353, decliners over advancers 3-1 & NAZ dropped 67.  The MLP index pulled back 3+ to the 214s & the REIT index was steady in the 363s.  Junk bond funds drifted lower & Treasuries continued to see heavy purchasing which lowered yields.  Oil slid another 1 to the 67s & gold jumped 29 to 2066 (in record high territory).

AMJ (Alerian MLP Index tracking fund)


 

 




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The number of Americans filing for unemployment benefits came in higher than expected last week, an early sign the labor market is beginning to soften in the face of higher borrowing costs.  Labor Dept shows initial claims for last week hit 242K, higher than the 2019 pre-pandemic average of 218K claims.  That is also above the level recorded the previous week, which was revised slightly lower to 229K.  Continuing claims, filed by Americans who are consecutively receiving unemployment benefits, fell slightly to 1.8M, a decrease of 38K from the previous week.  For months, the labor market remained a strong point in the slowing economy, despite an aggressive interest-rate hike campaign by the Federal Reserve.  The most recent projections from the Fed show that officials expect unemployment to rise to 4.6% by the end of next year, up from the current rate of 3.5%.  That could mean more than 1M Americans lose their jobs between now & the end of the year.

Jobless claims come in higher than expected ahead of April jobs report

The Federal Reserve announced another 25 basis point interest rate increase & said that inflation continues to run high & the process of getting it down to the 2% target rate still has a long road to go.  The rate hike brings the federal funds rate to 5.00-5.25%, the highest level in 16 years.  Although economic growth has slowed, Federal Reserve Chair Jerome Powell told reporters that the labor market remains tight, with the unemployment rate still low in Mar, at 3.5% . Inflation also remains well above the central bank's 2% target, coming in at 5% in Mar, according to the Consumer Price Index (CPI), a measure of inflation.  "With today's action, we have raised interest rates by five percentage points in a little more than a year," Powell said.  "We are seeing the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy, particularly housing and investment. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation."  The central bank's statement hinted at a pause in interest rate hikes, but Powell said that the Fed would continue to lift rates if needed & that cuts were unlikely coming this year.  What that means going forward will depend on how tightening credit conditions continue to impact households & businesses, but economists are optimistic that the interest rate increase may be the last for this year.

Fed doubles down on the fight against inflation, raises rates another 25 basis points

The rout in regional ballnks picked up steam again today, with several stocks suffering sizeable losses.   PacWest (PACW) sank 45% in early trading & was halted for volatility.  The slide began yesterday following news that the bank was exploring strategic options, including a potential sale.  The bank said that it “will continue to evaluate all options to maximize shareholder value.”  Meanwhile, Tennessee-based First Horizon (FHN) also fell 38% after the regional lender & TD Bank (TD) announced that they were terminating their merger agreement.  The banks said in a press release that the move was due to uncertainty around when TD would receive regulatory approval for the deal & was not related to FHN. These moves come less than a week after First Republic (FRC) was seized by regulators & sold at a discount to JPMorgan Chase (JPM & a Dow stock), marking the the 3rd failure of a regional bank since the start of Mar.

Regional bank stocks continue to slide on Thursday with PacWest leading the way down 40%

Regional banks are all under selling pressure, leading the stock market lower.  Powell's comments on interest rates yesterday were basically hawkish which adds to the selling of stocks.  As shown below, Dow is at about a 5 week low.

Dow Jones Industrials

 






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