Markets slide while the FED meets to decide future interest rates

Dow dropped 396, decliners over advancers 4-1 & NAZ retreated 84.  The MLP index was off 3+ to the 219s & the REIT index declined 3+ to 367.  Junk bond funds edged higher & Treasuries were purchased which reduced yields (more below).  Oil sank 2+ to the 73s & gold recovered 3 to 1995.

AMJ (Alerian MLP Index tracking fund)

 

 

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Treasury yields fell ahead of the start of the Federal Reserve's next meeting, which is expected to conclude with a fresh interest rate policy decision.  The yield on the 10-year Treasury was down by more than 3 basis points to 3.536% & the 2-year Treasury  was trading at 4.129% after falling by 1 basis point.  Yields & prices have an inverted relationship & one basis point is equivalent to 0.01%.  The Fed's latest meeting is due to start today, with fresh policy decisions & guidance expected at its conclusion tomorrow.  Investors are anticipating a further 25 basis point interest rate hike from the central bank.  They will also be closely watching for hints about when rate hikes are likely to be paused or rate cuts could begin.  Since the Fed's last meeting, officials have hinted that rates may have to remain elevated for longer as inflation remains uncomfortably high.  On Fri, the Fed's favored inflation gauge, the personal consumption expenditure price index, came in 0.3% higher on a monthly basis, in line with expectations.  Meanwhile, concerns about higher rates putting pressure on the economy & leading to a downturn have spread among investors.  In Q1, GDP rose by 1.1% at an annualized pace, far below estimates.

Treasury yields fall as investors await Fed meeting start, weigh policy outlook

Treasury Secretary Janet Yellen warned that the US may run out of measures to pay its debt obligations by Jun 1, earlier than the gov & analysts had been expecting.  In a letter to House Speaker Kevin McCarthy, Yellen said new data on tax receipts forced the dept to move up its estimate of when the Treasury Dept “will be unable to continue to satisfy all of the government’s obligations” to potentially as early as Jun 1, if Congress doesn't raise or suspend the debt limit before then.  This date is earlier than analysts were expecting.  Goldman Sachs' latest estimate this week put the deadline at some point in late Jul, though the bank's economists acknowledged that weaker-than-expected tax receipts could advance that timeline.  Pres Biden called the “big four” congressional leaders — Senate Majority Leader Chuck Schumer, Senate Minority Leader Mitch McConnell, McCarthy & House Dem Leader Hakeem Jeffries — to invite them to a May 9 meeting at the White House to discuss the debt limit.  The Congressional Budget Office also revised its estimate for the x-date yesterday.  “Because tax receipts through April have been less than the Congressional Budget Office anticirpated in February, we now estimate that there is a significantly greater risk that the Treasury will run out of funds in early June,” wrote CBO director Phill Swagel.  While there is technically a month between the date of the letter & the earliest x-date, congressional calendars showed yesterday that there are only 8 legislative days this month when both the House & Senate will be in session at the same time.  This could significantly impact any effort to hammer out a last-minute deal in person on a debt-ceiling hike, one that could win enough support to pass in the Rep-controlled House & the Dem-led Senate.

The U.S. could hit the debt ceiling by June 1, much sooner than expected, Yellen warns

Pfizer (PFE) reported Q1 revenue & adjusted earnings that topped expectations, despite a decline in sales driven by the lower demand for the company’s Covid vaccine.  EPS was 97¢ which compares with $1.37 for Q1-2022.  The company reported Q1 sales of $18.3B, down 29% over the same period a year ago.  Sales of the Covid vaccine declined $10B (75%) compared with the same qtr last year, primarily driven by lower contracted deliveries & demand in intl markets.  The decline was also due to lower US gov contracted deliveries as the country prepares to shift Covid products to the commercial market later this year.  Excluding Covid product sales, Q1 revenue grew 5% over the same period a year ago.  The company maintained its 2023 sales forecast of $67-71B & PFE also reiterated its full-year adjusted EPS outlook of $3.25-3.45.  But PFE continues to expect Covid-related sales to decline this year.  The company reaffirmed its forecast of $13.5B in Covid vaccine sales in 2023 & $8B in revenue for Paxlovid.  A Pfizer spokesperson said the company expects this year to be a “transition year” for Covid sales before “potentially returning to growth in 2024 and beyond.”  Excluding Covid products, PFE expects 7-9% revenue growth this year.  The stock fell 15¢.
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Pfizer earnings and revenue top expectations despite Covid vaccine sales decline

While traders are waiting to hear from the Fed, nervous ones are buying safe haven investments (gold & Treasuries).  Meanwhile increasing the debt ceiling is becoming a very big decision which will probably be decided at the last minute (as usual).  And that could be felt in the stock market.

Dow Jones Industrials

 

Markets drifted lower as traders wait for FOMC meeting comments

Dow finished lower, down 46 to session lows, in uneven trading, decliners over advancers 3-2 & NAZ was off 13.  The MLP index was little changed, staying close to 224 & the REIT index fell 3 to 371.  Junk bond funds hardly budged & Treasuries had very heavy selling, raising yields substantially.  Oil fell 1 to the 75s & gold pulled back 8 to 1991 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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US manufacturing pulled off a 3-year low in Apr as new orders improved slightly & employment rebounded, but activity remained depressed amid higher borrowing costs & tighter credit, which have raised the risk of a recession this year.  Despite the weakness in factory activity & demand for goods reported by the Institute for Supply Management (ISM), there was a build-up of inflation pressures last month.  The ISM said its manufacturing PMI increased to 47.1 last month from 46.3 in Mar, which was the lowest reading since May 2020.  The forecast called for 46.8.  It was the 6th straight month that the PMI remained below 50, which indicates contraction.  And activity could remain subdued as the ISM noted that customers' inventory levels "are now at the low end of the 'too high' level," & "likely not conducive to future output growth."  Though a separate S&P Global survey showed manufacturing expanding for the first time in 6 months in Apr, factories continued to report hesitancy among customers to place orders because of higher prices and economic uncertainty.  The ISM says a PMI reading below 48.7% over a period of time generally indicates the economy is in recession.  The ISM said 73% of manufacturing gross domestic product was contracting, up from 70% in Mar.  But it noted that fewer industries declined sharply. 

US manufacturing contacts again in April but pulls off 3-year low

State treasurers & other top finance officials from 27 states urged Pres Biden to end what they said was his "unconscionable" policy of forcing people with good credit scores to subsidize mortgage loans of higher-risk borrowers & warned Biden's plan would be a "disaster."  Biden's plan was outlined just a few weeks ago by the Federal Housing Agency (FHFA) & is set to take effect today.  The plan is aimed at helping lower-income borrowers afford their monthly mortgage payments – it would do so by forcing people with good credit scores to pay more each month for their mortgages, extra payments that would be credited to the loans of higher-risk borrowers.  The controversial policy has been attacked by both Reps & Dems, including Pres Obama's former Federal Housing Administrator.  Today, financial officers from 27 states weighed in & said it was clear the policy was a mistake even before it takes effect.  "It is already clear that this new policy will be a disaster," they wrote in a letter led by Pennsylvania Treasurer Stacy Garrity that was sent to Biden & FHFA Director Sandra Thompson.  "It amounts to a middle-class tax hike that will unfairly cost American families millions upon millions of dollars.  And – at a time when the real estate market has already slowed considerably due to high interest rates – it will further depress home sales."  "We urge you to take immediate action to end this unconscionable policy," they wrote.  The state finance officers blasted the plan for turning the normal system of home buying incentives "upside down" by hurting people who make sound financial decisions.  "[T]the policy will take money away from the people who played by the rules & did things right – including Ms of hardworking, middle-class Americans who built a good credit score & saved enough to make a strong down payment," they wrote.  "Incredibly, those who make down payments of 20 percent or more on their homes will pay the highest fees – one of the most backward incentives imaginable."  It noted that the forced extra payments will be used to hand out "better mortgage rates to people with lower credit ratings."  Others have said the plan would make it easier for people with shaky credit histories to afford more expensive mortgages, a move that could put more people at financial risk.

States revolt against Biden admin's new mortgage redistribution rule

American Airlines(AAL) pilots have voted overwhelmingly to allow their labor union to call a strike while the carrier said talks for a new contract are getting close to a conclusion.  Pilot strikes are rare & would require permission from the federal National Mediation Board.  The vote doesn't mean a decision to call a strike would happen immediately.  More than 96% of its pilots participated in the vote & 99% of them voted to allow the union to call a strike, the Allied Pilots Association (APA) said.  The APA called the strike authorization vote in Mar as talks for a new deal dragged on.  CEO Robert Isom had said the airline was ready to raise pay to match rival Delta Air Lines (DAL), whose pilots approved a 4-year deal earlier this year with 34% raises & other improvements.  “Today marks a proud milestone in our pilot group’s unity and resolve and an important step on our path to securing the contract we have earned and deserve — one that prevents management from operating at a discount to our competitors and includes our ‘must have’ quality-of-life priorities,” APA pres Capt. Ed Sicher wrote to pilots.  A spokeswoman for AAL said the carrier believes a deal is “within reach” & that a “handful” of issues are left to complete.  “The finish line is in sight,” she saidt.  “We understand that a strike authorization vote is one of the important ways pilots express their desire to get a deal done and we respect the message of voting results.”  The stock was up 25¢.
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American Airlines pilots vote for potential strike while airline says negotiations are progressing

Gold fluctuated between gains & losses as traders assessed JPMorgan Chase's winning bid for the failed lender First Republic Bank & the Federal Reserve's interest-rate hike path.  The rescue of First Republic Bank in a gov-led deal fueled optimism that the worst of banking drama may be over.  While both gold held below recent highs, it continues to show real underlying strength.  Still, the 2nd-largest US bank failure reminded investors that further troubles may lie ahead.  That may prompt the Fed to slow down its cycle of rate hikes.  Gold for Jun fell 8 to settle at $1991 an ounce.

Gold prices end at lowest in over a week as dollar strengthens ahead of Fed decision Wednesday

Oil futures settled lower, giving a portion of the back-to-back gains last week.  Overall oil prices have generally shifted lower over the past month as the economics overshadow other factors.  Last week brought a seemingly set of supportive inventory data, with a more than 5M barrel weekly drop in crude supplies & uptick in refined product demand.  However the numbers struggled to translate to meaningful price support as crude continued to come under pressure on concerns around upcoming demand.  Jun West Texas Intermediate crude fell $1.12 (1.5%) to settle at $75.66 a barrel.

Oil prices end lower on ‘economic headwinds’

Trading was choppy today.  Between the unrest in the banking industry & the Fed meeting later this week, there is plenty to be absorbed.  These conditions may continue until Powell gives his comments on Wed.  Dow has been near 34K for months.

Dow Jones Industrials 

Markets mixed after JPMorgan takes over First Republic

Dow went up 60, advancers modestly ahead of decliners & NAZ slid back 34.  The MLP index crawled higher in the 224s & the REIT index was off 2+ to the 371s.  Junk bond funds were a little lower & Treasuries saw heavy selling, driving yields higher ahead of the FOMC meeting.  Oil dropped 1+ to the 75s & gold fell 7 to 1991.

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Regulators took possession of First Republic, resulting in the 3rd failure of an American bank since Mar, after a last-ditch effort to persuade rival lenders to keep the ailing bank afloat failed.  JPMorgan Chase (JPM), a Dow stock, already the largest US bank by several measures, emerged as winner of the weekend auction for First Republic.  It will get all of the ailing bank's deposits& a “substantial majority of assets,” the bank said.  JPM is getting about $92B in deposits in the deal, which includes the $30B that it & other large banks put into First Republic last month.  The bank is taking on $173B in loans & $30B in securities as well.  The Federal Deposit Insurance Corp (FDIC) agreed to share losses on mortgages & commercial loans that JPM assumed in the transaction, & also provided it with a $50B credit line.  JPM will mak a payment of $10.6B to the FDIC.  The transaction will cost the FDIC's Deposit Insurance Fund an estimated $13B, according to the regulator.  By way of comparison, the SVB process cost the fund about $20B.  JPM stock rose 3.53.
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JPMorgan Chase takes over First Republic after US seizure of ailing bank

Treasury yields edged higher ahead of a highly anticipated meeting of the Federal Open Market Committee.  The yield on the 10-year Treasury was trading around 3.481%, up 3 basis points & the 2-year Treasury yield was up almost 4 basis points at 4.101%.  Yields & prices move in opposite directions & one basis point equals 0.01%.  The Fed is expected to announce a 25-basis point interest rate hike Wed at the conclusion of its meeting.  Investors are particularly interested in any guidance on how long rates will remain elevated & when rate cuts could get underway.  It follows GDP figures last week indicating slower-than-expected economic growth in Q1.  The personal consumption expenditure index, meanwhile — one of the Federal Reserve's preferred inflation gauges — rose on the previous qtr, coming in at 4.2%.

10-year Treasury yield ticks higher ahead of Fed meeting

The crisis that led to the downfall of 3 regional US banks in recent weeks is largely over after the resolution of , according to JPM CEO Jamie Dimon.  JPM emerged as the winner of a weekend auction for First Republic after regulators decided that time had run out on a private sector solution.  The FDIC seized the bank & JPM just announced that it was acquiring nearly all of the deposits & most of the assets of First Republic.  “There are only so many banks that were offsides this way,” Dimon said shortly after the deal was announced.  “There may be another smaller one, but this pretty much resolves them all,” Dimon added.  “This part of the crisis is over.”  In the wake of the sudden collapse in Mar of Silicon Valley Bank (SVB) & Signature Bank, investors have punished other lenders that had similar characteristics to SVB.  Companies with the highest percentage of uninsured deposits & losses on their balance sheet were most scrutinized.  The Mar turmoil exposed poor management by some midsized banks that essentially bet that interest rates wouldn't rise; when rates did rise, the banks were caught “offsides” with unrealized losses from bonds on their balance sheet.  But the $30B injection of deposits into First Republic last month bought time for the industry, allowing mid-sized banks to report Q1 results in recent weeks that in many cases showed a stabilization of deposits.  That eased investor fears that many more lenders would soon topple.

Jamie Dimon says ‘this part of the crisis is over’ after JPMorgan Chase acquires First Republic

Cleaning up the banking mess was not easy, but it looks like there is a sense of calm currently.  Investors will now concentrate on the announcement by the FOMC after its meeting on Wed.

Dow Jones Industrials