Investors were relieved on Tuesday when the CPI report was roughly in-line with expectations and banks stabilized after the SVB Financial (SIVB) crisis. The question now is whether this is just a temporary respite or will the bulls be able to generate some positive momentum as we head into the Fed interest rate decision one week from today.
European banks are sharply lower this morning as troubled Credit Suisse Group AG (CS) falls on news of 'material weakness' in its risk assessment process. This issue led to the demise of Silicon Valley Bank, and it is now a question that the Fed is addressing with new rules that will target regional banks in the $100 billion to $250 billion range.
While the Fed, FDIC, and Treasury Department have dealt with the immediate issue of protecting deposits, they have no easy way to fix the issue of huge unrealized losses in bond portfolios due to high-interest rates. The Feds have developed a program for banks to borrow against those assets at face value, but earnings in the banking sector are taking a hard hit, and the market is struggling to reflect those lower valuations.
The market reaction to the banking crisis would be much worse, but there is hope that the Fed will be forced to take a less hawkish posture, which will relieve some of the short-term pressure. That doesn't fix the inflation issue, but there is hope that the aggressive rate hikes that have already taken place are starting to bite and will allow the Fed to be less hawkish.
Currently, the market is expecting a 0.25% hike next Wednesday. There is PPI, retail sales, and oil inventory news this morning that may cause some market movement, but it is unlikely to change the Fed's position on a 0.25% hike. However, if the banking crisis accelerates in the next week, that could push the Fed to pause completely while things are sorted out.
Regional banks are under pressure again on Wednesday morning, and that spills over into the Russell 2000 (IWM) , which contains many of the smaller financial stocks. IWM is trading down 1.6% in the very early going. Oil (USO) is another problem area, as it was now testing support from way back in January 2022. Weakness in commodities illustrates that economic weakness is building.
Technically, small-caps are lagging very badly now. The group has already given back all its gains for the year and is testing the December lows. The next stop on the elevator will be the current bear market lows that occurred in October. If small-caps make that trip, then the rest of the market is going to be under extreme pressure as well.
The bulls made a good try on Tuesday, but they don't have short-squeeze or FOMO fuel to help them as it did back in January. There are just too many fundamental and economic problems to overcome, and the price action isn't strong enough to scare out the bears.
Buckle up and adjust your trading goggles. It is going to be a bumpy ride.