The hearing dominated Tuesday morning television at the financial networks. I won't lie. This was some tough stuff to watch or keep listening to, from the perspective of someone who consumes as much of this kind of material as anyone. If one did pay enough attention or simply read the newspapers, (I know, they're not news "papers" anymore), then one already foresaw a likely increase in regulation on the horizon for the US banking system.
Before the Senate Banking Committee on Tuesday morning appeared the Federal Reserve Board of Governors Vice Chair for banking supervision Michael Barr, FDIC Chair Martin Gruenberg, and Nellie Lang who is the US Treasury Department's Undersecretary for domestic finance. The attacks were bi-partisan. Sen. Tim Scott (R) of South Carolina said, "By all accounts, our regulators appear to have been asleep at the wheel." Jon Tester (D) of Montana said, "It Looks to me like the regulators knew the problem, but nobody dropped the hammer."
In defense, Michael Barr spoke up, "Fundamentally, the bank (Silicon Valley) failed because its management failed to appropriately address clear interest-rate risk and clear liquidity risk." Barr also said, "I anticipate the need to strengthen capital and liquidity standards."
Nellie Lang, speaking along the same lines said, "We must ensure that our bank regulators and supervision are appropriate for the risks and challenges that banks face today." On the same matter, Martin Gruenberg spoke up, mentioning that the recent regional bank failures "Demonstrate the implications that banks with assets of $100B or more can have for financial stability. The prudential regulation of these institutions merits attention, particularly with respect to capital, liquidity and interest-rate risk."
Among the steps likely to be taken, these regulators outlined at Tuesday's hearing, according to Bloomberg News, would be enhanced and upgraded stress tests to include multiple scenarios covering a variety of likely sources for contagion, a long-term debt requirement for larger but not globally systemically important banks, and newly revised liquidity rules. It is also expected that on May 1st, the FDIC will make public plans for potentially changing the limit for deposit insurance coverage, which is currently $250K.
These steps, while apparently necessary, will place increased drag on the velocity of money, which in turn will suppress economic growth. I don't think that there is any way around that right now without creating increased "opportunity" for moral hazard and subsequently, both financial and systemic hazard. In this electronic age, are there truly non-systemically important institutions? Does anyone exist entirely or mostly in their own little ecosystem?
The Outlier
There's always an outlier. It's just not usually the planet's largest money manager. Strategists at BlackRock (BLK) , in a note to clients, wrote, "We don't see rate cuts this year - that's the old playbook when central banks would rush to rescue the economy as recession hit. We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts."
Note that these strategists do not argue that the US is not headed into recession, but instead that the central bank will be less sensitive to the impact of said recession as the priority is placed upon price stability, at least until full employment also forces itself back into the equation.
For emphasis, the note adds, "We think the Fed could only deliver the rate cuts priced in by markets if a more serious credit crunch took hold and caused an even deeper recession than we expect."
Marketplace
This news got Treasury securities moving. The US Ten Year Note sold off small, while the US Two Year Note sold off a bit more sharply. The spread between the yields of these two products moved toward a greater inversion by day's end and away from the narrow spread experienced going into the weekend.
This spread went out last night at -47 basis points. I see it at -48 bps through the zero-dark hours very early on Wednesday morning as investors appear to have placed a bid under the entire curve from the Two Year Note on out the long end. WTI Crude showed strength on Tuesday as the US Dollar continued to soften. This trend has continued overnight.
"Overall, though, my view on the market hasn't changed much. It's been a mostly crummy oversold rally and it's been a giant chopfest."
- Helene Meisler (taken from Tuesday evening's note)
Equities acted lost on Tuesday. The S&P 500 gave up 0.16%, while the Nasdaq Composite surrendered just 0.45% largely due to the 0.85% hit absorbed by the Philadelphia Semiconductor Index. The small to midcap indexes were mixed, while the Dow Transports and the KBW Bank Index were up modestly.
One might have expected a more negative reaction as news broke of Russia's intention to place tactical nuclear weapons inside Belarus, and Belarus quickly moved toward verbally threatening its closest NATO aligned neighbors. One would have been wrong.
Across the 11 S&P sector SPDR ETFs, there were five winners and six losers, but only Energy (XLE) at up 1.55% ended the day either up or down more than one full percentage point. Cyclicals outperformed Defensives that in turn, outperformed Growth. Winners beat losers at the NYSE by a rough 3 to 2, as losers beat winners by about 5 to 4 at the Nasdaq. Advancing volume took a 66.1% share of composite NYSE-listed trade, but just a 34.7% share of that metric for Nasdaq-listed names.
Again, trading volumes continue to dwindle. NYSE-listed composite trade decreased 5.2% day over day and 18.4% from the week ago comp, while composite Nasdaq-listed trade dropped 6.8% d/d and 16.4% w/w. On the index level, Tuesday was the lightest day of trade across the S&P 500 since March 8th, and for 2023 to date across the Nasdaq Composite, as Monday had been only 24 hours earlier.
One trading note. The day's largest large-cap winner was McCormick (MKC) . The flavor enhancing giant closed up 9.53% after providing solid guidance. I profiled this name for Real Money on Monday and opened a short position in this name after that piece was published. All it took was a good look at the firm's Statement of Cash Flows and Balance Sheet to put a doubt in my mind that Tuesday's gains could be held by this stock.
Of course, European equities and US equity index futures are showing overnight strength as UBS Group (UBS) brought back Sergio Ermotti as CEO replacing Ralph Hamers in that role as it merges operations with Credit Suisse (CS) . Ermotti had already led UBS for nine years and is seen as the more experienced hand going into such a large planned restructuring.
Most Surprising Story
AMC Entertainment Holdings (AMC) popped 13% on Tuesday and another 3% overnight in response to a report at the "Intersect" website that put forth the idea that Amazon (AMZN) could be considering a possible acquisition of the troubled chain of movie theaters.
Most Disappointing Story
News broke on Tuesday that last week a second test flight of Lockheed Martin's (LMT) ARRW hypersonic missile prototype failed to transmit "in-flight" data after separating from a B-52H Bomber off the coast of southern California. There are two more scheduled tests for this particular missile type, and then a reassessment.
The ARRW (Air-Launched Rapid Response Weapon) is the US Air Force's top hypersonic weapons program under development (The US Army and US Navy have separate programs thank goodness) and its success is considered crucial if the US is to catch up to and compete with both China and Russia in this kind of technology. Being in third place in the development of the most deadly and indefensible weapons ever invented behind two potentially rival nations is simply not an option. Americans need to wake up to this threat.
The fact that Russia has deployed hypersonic weapons on several occasions during its war in Ukraine and is now placing nukes in Belarus should be enough of a wake up call. On that note, China is considered to be ahead of Russia on these weapons and likely already has a deployable hypersonic weapon capable of hitting US targets in the Pacific. This is why LMT sold off on Tuesday.
The stock needs to hold the thin blue line, which is the 50 day SMA (simple moving average)($467).
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.48%.
07:00 - MBA Mortgage Applications (Weekly): Last 3.0% y/y.
10:00 - Pending Home Sales (Feb): Expecting -1.6% m/m, Last 8.1% m/m.
10:30 - Oil Inventories (Weekly): Last +1.117M.
10:30 - Gasoline Stocks (Weekly): Last -6.4M.
The Fed (All Times Eastern)
10:00 - Speaker: Reserve Board Gov. Michael Barr.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CTAS) (3.03), (PAYX) (1.24)
After the Close: (RH) (3.36)
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