Equity markets weakened again on Thursday, one day ahead of the release of the Bureau of Labor Statistics' two labor market surveys for April. The selloff was again quite broad in nature.
A few sectors, all defensive in nature, did escape the pressure. This time, smaller-cap stocks did not escape. Treasury securities again attracted capital. The spread between the yields of the US Ten-Year Note and the US Three-Month T-Bill hit a new multi-decade high for negativity as that spread seems to do every day. However, the yield spread between the US Ten-Year and the US Two-Year narrowed significantly. The 10-year/2-year yield spread might not carry the same weight as the 10-year/3-month, but it is still closely watched.
The banks for the most part continued to be central to this week's risk-off behavior. Yes, I know that Communication Services (XLC) was the worst-performing sector SPDR ETF on Thursday at -1.61%, but that group was disproportionately impacted by one name as Paramount Global PARA gave up 28.35%.
One day after Fed Chairman Jerome Powell told us how "resilient" the US banking system is, and just a few days after JPMorgan Chase (JPM) had to rescue First Republic Bank FRC, PacWest Bancorp (PACW) surrendered 50.6% after confirming that it was in discussions concerning its strategic options, Western Alliance Bancorp (WAL) surrendered 38.45% after denying that the bank was exploring a potential sale, and First Horizon (FHN) was slapped around for 33.16% after its proposed merger with TD Bank (TD) was terminated.
What's behind all this weakness? Weakness that has claimed Signature Bank, Silicon Valley Bank, Silvergate Bank and in Europe Credit Suisse (CS) , all in addition to First Republic? The common wisdom is that banks, regionals for the most part, have been left with large paper losses on the long-dated securities held on their balance sheets as short-term debt instruments and money market funds pull cash deposits out of that "balance" thanks to a very badly inverted yield curve.
Some think the Federal Deposit Insurance Corporation (FDIC) needs to increase the level of deposits safeguarded against the collapse of these banks beyond the current $250,000 maximum. The FDIC itself publicly has opined on this subject, though at this time it does not have the capital to insure all deposits. The Financial Times reported that Nelson Peltz of Trian Fund Management said concerning increasing FDIC coverage: "It should stop the deposit outflow from the small, regional and community banks." Peltz added, "I don't have a crystal ball and I don't know what the balance sheets of these banks look like. If this stops with First Republic being acquired by JPMorgan, I would be happy, but it may not."
Not all are in agreement on what is causing the extreme level of this recent pressure. On Thursday, American Bankers Association chief executive Rob Nichols sent a letter to Securities and Exchange Commission Chairman Gary Gensler. The letter states: "Since the two bank failures in March, some of our members have experienced significant short sales of their publicly traded equity securities that do not reflect the issuers' financial status or general industry conditions." Nichols added, "We have also observed extensive social media engagement about the health of various banks and the sector generally that appears disconnected from underlying financial realities. We urge the SEC to investigate this behavior."
On That Note...
Not everyone is terrified. After the closing bell on Thursday evening, the Barron's website ran a story showing that insiders at a number of regional banks have been snapping up shares of their own stocks as their share prices have been dislocated. The story highlights Zions Bancorp (ZION) , US Bancorp (USB) , Lakeland Financial (LKFN) and Unity Bancorp (UNTY) as banks where the publicly traded shares have been purchased by insiders in late April and early May. Almost simultaneously, Barron's sister site, Marketwatch, reported that a "key" executive at KeyCorp (KEY) had purchased 75,000 shares of that stock just this week as other executives at that bank made smaller purchases.
What have I been doing in this space? Readers know that I have maintained smallish core positions in both Bank of America (BAC) and Wells Fargo (WFC) after selling the majority of those positions at the start of this mayhem. Those were good outs. My balance left unsold has obviously performed poorly. The remains of both of those positions are close to being down 8% from net basis, which is where I'll cut them loose if I must.
As for the regionals, I already entered a very small long position in KeyCorp in April. I have more than tripled that position over the past two days. This morning that position is starting to look better after the above news broke. I have not yet decided if this is a trade or an investment.
At 08:30 ET this morning, the Bureau of Labor Statistics will go to the tape with the results from its April labor market surveys in what might be the least focused upon "Jobs Day" report that I can remember. With Big Tech, including Apple AAPL, mostly out of the way, with the Federal Open Market Committee (FOMC) having just gone to the tape with a change in policy and a slight change in language on Wednesday and with the banks currently the center of the equity market universe, there has been little intellectual capacity left for what probably matters most to economists and perhaps policy makers and investors as well, and that is labor market health.
On Wednesday, Fed Chairman Jerome Powell said he sees signs that the supply of and demand for US labor is starting to come into better balance. Powell did add, though, "The labor market remains very tight." Earlier that day, the ADP Employment Report showed 296,000 new private sector jobs created in April when the street was looking for less than 150,000. I know that the ADP report and the BLS results rarely tell the same story. Heck, the BLS's two prints -- Non-Farm Payrolls (NFP) and Employed Persons -- rarely tell the same story, so I don't know how helpful that ADP number really was.
I do know that the street is looking for an NFP print of 178,000 this morning. As readers can see below, I am at 180,000. That said, I think the most important takeaways this morning might not be in job creation, but in participation and in wage growth. Neither is expected to move much from March levels.
The real trick, thinking as an economist (not as a human), would be to get more folks competing for job openings. This would force unemployment and underemployment higher, which can turn into a loop, forcing more and more non-participants to consider entering the arena. This results in pressured wage growth. That impacts monetary policy.
You Don't Say
Bloomberg News reported on Thursday afternoon that Microsoft (MSFT) was working with and providing financial support to Advanced Micro Devices (AMD) to help expand AMD's move into AI (artificial intelligence) capable processors. This is part of a multi-pronged strategy to help Microsoft procure more of these highest-tech processors, which would result in reduced reliance upon Nvidia (NVDA) , which is considered to be the leader in the design of these types of chips.
AMD is also said to be working with Microsoft on what ultimately would be a homegrown Microsoft chip. The program, according to Bloomberg, is codenamed "Athena." All three of these names are Sarge names. AMD (+6.11%) and MSFT (+0.33%) gained on the news, while Nvidia (0.86%) sold off moderately.
April Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 180K, Last 236K.
Unemployment Rate: Expecting 3.6%, Last 3.5%.
Underemployment Rate: Last 6.7%.
Participation Rate: Expecting 62.6%, Last 62.6%.
Average Hourly Earnings: Expecting 4.2% y/y, Last 4.2% y/y.
Average Weekly Hours: Expecting 34.4, last 34.4 hours.
Other Economics (All Times Eastern)
13:00 - Baker Hughes Total Rig Count (Weekly): Last 755.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 591.
15:00 - Consumer Credit (Mar): Last $15.29B.
The Fed (All Times Eastern)
13:00 - Speaker: Reserve Board Gov. Lisa Cook.