One week ago, in this column, we mentioned what had felt to us at the time as almost a broad lack of public interest in financial markets. Thinking about this one week later, that "lack of interest" presents itself in our opinion more like a cautionary pause. Now, we have I think a better understanding of what at least for the past week, especially toward the end of the past week, had appeared to turn into cautious kind of optimism.
We had made a point of discussing the VIX (or fear index) and its descent below 17 last week. That index went out this past Friday below 16. Equity market trading volumes had been rather anemic. I would not call last week's volumes robust, but as several mega-cap tech corporations had reported earnings last week, trading volume did, to a degree, improve. That trading volume also appeared better over the final three business days of the week, which were in general, "up" days.
I do not intend to sound like I am forming some kind of bullish thesis. Far from it. What happened, I think, was that the environment for price discovery, which is what we need to be concerned with, for that is where folks like myself and perhaps yourself, must excel, regardless of personal sentiment. I personally still see a majority probability that the US goes into recession this year, and I still see the environment for interest rates as remaining in a difficult place, that will end up being less easily manipulated according to what may become pressing economic necessity than perhaps our central bankers are cognizant of.
Oh, and on that note, at least the FOMC was mired in their media blackout period last week. Their collective inability to run at the mouth undoubtedly at least in some way, assisted in lending some level of support to our financial marketplace. At least the "blackout" period gave keyword reading algorithms less room for overshoot for the week past.
Investors must look back and decide. Was last week's market resilience the result of "better than feared" large-cap earnings? Was this resilience a response to a batch of less than hot, but not quite catastrophic macro? Or, as just mentioned... was this the result of the Fed's inability to muck things up? If that was the case, then investors had better look out this week. Perhaps, and this may have been the real catalyst... it was the fact that First Republic Bank (FRC) fell out of bed last week, and markets were put in the place of anticipating an effective rescue?
First Republic Bank
We knew that news would break on Sunday. It actually broke at zero dark-thirty on Monday morning. Federal and state of California regulators seized First Republic Bank making this bank the "new" second largest US banking failure ever, smaller than only Washington Mutual back in 2008, but larger than Silicon Valley Bank or Signature Bank (SBNY) were this past March. First Republic was the 14th largest lender in the US as of the end of calendar year 2022, and held $229.1B in assets at the time of its seizure.
The real news this morning would be that JP Morgan (JPM) had agreed to acquire $173B in loans and about $30B in securities from FRC, while assuming all of FRC's remaining $92B in deposits (whether insured or not). As part of the deal, the FDIC has entered into a loss-sharing agreement with JP Morgan and JP Morgan will receive $50B in financing from the FDIC. The federal agency currently estimates that it will suffer a $13B loss associated with rescuing First Republic.
Now, with this news out, how will the market react? The rescue had started to be baked into price discovery late last week. Overnight, into this morning, the reaction has been almost muted, as if this was almost understood, and now, the market turns its attention on to if not larger items, at least the next items.
The macroeconomic data reported last week was not "good." Not by any stretch. It was, however, better than feared in many spots. This sort of held markets in place, at least to a minor degree. We learned that April manufacturing surveys out of the Dallas, Richmond and Kansas City Federal Reserve regional districts remained awful at best. We learned that for April, Consumer Confidence plummeted and badly missed what had been the consensus view. We learned that for March, Personal Spending simply stopped growing even as Personal Income held its own. We also learned that Durable Goods Orders ex-Defense surprised to the upside, while ex-aviation, those orders fell out of bed.
We also learned that thanks partially to an aggregate lack of inventory building, that the US economy grew (1.1% q/q, SAAR) far slower than had been anticipated for the first quarter. When dissected on a monthly basis, we see that clearly the US economy had been stronger in January and weakest in March.
In other words, the economy visibly lost momentum as the quarter wore on. What does that mean for the second quarter? What's problematic, was that the inflation-related data that hit the tape last week tended to not play so nice. This could very well provoke tighter monetary policy for a longer period of time that financial markets might be less than comfortable with.
Impacting that inflationary impact, last week, data for home prices for February printed above expectations. In addition, Core PCE prices printed hotter than expected, both for the month of March as well as for the entire first quarter. In addition, the Q1 Employment Cost Index hit the tape both up from the fourth quarter and above consensus view.
Here's where things get a bit dicey. I have focused a lot on the Fed's recent mixed messaging. Certain officials, such as new Chicago Fed Pres. Austan Goolsbee has expressed a willingness to listen to the data and show some patience. That's the camp that I have not been shy about belonging to. Others have been more hawkish, and consistently so. Problem is, for Goolsbee and others such as Philly's Patrick Harker and Fed Gov, Lisa Cook who have appeared to be more pragmatic (my opinion) than their peers, these recent numbers are not "patient-approach" friendly.
One would think that the recent data would provoke the hawks to hold their ground and possibly persuade those less than hawkish to allow for some movement. Remember, as I have said before, nobody at this Fed is truly dovish. What we have here are hawks and moderates. Not much else.
Fed Funds Futures
As these zero-dark hours pass on Monday morning, I currently see Futures trading in Chicago showing an 86% likelihood of a 25 basis point increase being made to the target range for the Fed Funds Rate this Wednesday afternoon (May 3rd). There remains a 14% probability for no rate hike at all on that date. This would bring the Fed Funds Rate up to 5% to 5.25%. This remains what these markets see as the likely "terminal rate", which is where the FOMC will take their pause and try to hold for a while.
Futures currently see that pause lasting until November 1st, when the first rate cut is priced in. This market also sees the US benchmark rate at 4.5% to 4.75% by year's end, and 3% to 3.75% about a year and a quarter down the road. These "projected" rates appear to be a bit higher at least for early 2024 than they had been in the very recent past.
First quarter earnings season is coming out of a very heavy week and heading right into another one. Last week, among the mega-caps, the winners were Microsoft (MSFT) and Meta Platforms (META) , while results from both Amazon (AMZN) and Alphabet (GOOGL) were far less well received by the marketplace.
According to FactSet, 53% of the S&P 500 have now reported their first quarter results. Of those, 79% have beaten expectations for earnings (up from 76% last week) and 74% (up from 63% a week ago) have beaten revenue projections. For the quarter, the blended (results & projections) rate of earnings "growth" now stands at -3.7% (up quite nicely from -6.2% last week) from the year ago comp on revenue growth of 2.1%. For the full year, still relying upon FactSet for data, consensus view is for earnings growth of 0.8% on revenue growth of 2.9% (up from 2.1%).
Across sectors, the strongest earnings growth is still expected to be shown by Consumer Discretionaries (current expectations: now +47.8, up from +36.3% last week), with Industrials a very distant second (current expectations: now +18.5%, up from +12.5% last week) as those two sectors are easily outpacing projections.
Six of the 11 sectors are still expected to show year over year earnings contraction, with Materials (-30/3%), Health Care (-19.5%), Technology (-12.6%), and Communication Services (-11%) all contracting by double digits in percentage terms.
For the full calendar year, estimates are improving slightly. Consensus view (still using FactSet supplied data) now calls for CY 2023 S&P 500 earnings growth of 1.2% (up from +0.8% on revenue growth of 2.2%, and up from +2.1%).
As mentioned earlier, equity markets, at least at the headline-indexed level, ended last week in a better place than where they had entered it. That said, overall equity index performance was truly mixed, with the parts of the equity market more heavily reliant upon economic growth, or more sensitive to interest rates struggling to keep pace with the broader indexes.
Trading volumes, also as mentioned previously, have started to recover. Readers will see that the Nasdaq Composite had tested and retested its 21 day EMA (exponential moving average) repeatedly the week prior to last. Then, last week, the index lost that line, found support at its 50 day SMA (simple moving average), which was crucial, and then retook that thin, green line with some gusto as the week wore on.
The S&P 500 also lost and then was able to retake its 21 day EMA, but without testing its 50 day SMA? What we must ask ourselves now is, does it need to pass that test in order to confirm last week's Thursday and Friday strength? I'll let you know after I see how the FRC news breaks on Sunday night.
For the week past, the S&P 500 gained 0.87%, after rallying 0.83% on Friday. The S&P 500 closed last week up 8.59% year to date. The Nasdaq Composite put together a positive run of 1.23% last week after gaining 0.69% on Friday. This put this index up 16.82% for 2023. The Philadelphia Semiconductor Index has been the market beast this year, but has now struggled to make progress for more than a few weeks. This index posted yet another losing week (-0.88%), even after gaining 1.81% on Friday. This index now stands up "just" 18.28% for the year.
This leaves us with the Russell 2000. The small-cap index gained 1.01% on Friday, to still close out the week down 1.26%. The Russell is now up just 0.44% for 2023. We have had to keep a close eye on the KBW Bank Index for the past several weeks for obvious reasons. With First Republic Bank in the news, this week was no different. We'll have to continue to watch this index. The KBW rallied 1.49% on Friday, to still close the week 1.95% lower. The KBW is off 19.41% this year.
Six of the 11 S&P sector-select SPDR ETFs shaded green for the week. "Growthy" type stocks led the way. Communication Services (XLC) ran 3.83% for the five day period, while Technology (XLK) popped for a gain of 2.08%. Not a single S&P SPDR sector ETF gave up a full percentage point for the week.
According to FactSet, the S&P 500 now trades at 18.1 times forward looking earnings. That's down from 18.2 times a week ago and 18.3 times two weeks ago. This ratio remains close enough to the S&P 500's five year average of 18.5 times, while still standing well above its 10 year average of 17.3 times.
The Week Ahead
The week to your immediate front, will be another busy one. The headline event for the economy as well as for the marketplace will likely be the FOMC policy statement released this Wednesday as well as Fed Chair Jerome Powell's press conference that follows that event. I am expecting somewhat hawkish messaging after last week's inflationary looking data. Regardless of the fact that a fourth US bank has now been pushed to the point of seeking some kind of coordinated rescue.
It seems almost odd to name a Fed policy decision and the sour fate of yet another US bank as the top financial news stories for this week, given that this is April "Jobs Week." While traders and investors work their way through those two events and March data for Construction Spending and Factory Orders as well as March JOLTs data, they will then move onto the BLS labor market surveys -- that rarely agree either with each other or with the ADP employment report -- this Friday. Wall Street is looking for Non-Farm Payrolls of about 180K (salted, peppered and spiced).
As far as earnings are concerned, there are some headline levels released on the way. Maybe not quite as many as we saw last week, but an even heavier week in terms of overall releases.
Just to highlight a few headline caliber companies that will be reporting this week, you'll hear from NXP Semiconductors (NXPI) , BP PLC (BP) , Cummins (CMI) , Sysco (SYY) , Uber Technologies (UBER) , Advanced Micro Devices (AMD) , Ford Motor (F) , Livent Corp (LTHM) , Starbucks (SBUX) , CVS Health (CVS) , Estee Lauder (EL) , Albemarle (ALB) , Apple (AAPL) , and Block (SQ) , among others.
Economics (All Times Eastern)
09:45 - S&P Global US Manufacturing PMI (Apr-rev): Flashed 50.4.
10:00 - SM Manufacturing Index (Apr): Expecting 46.7, Last 46.3.
10:00 - Construction Spending (Mar): Expecting 0.1% m/m, Last -0.1% m/m.
The Fed (All Times Eastern)
Fed Blackout Period.