Where to begin?
What a day. What a week. What a time to be alive.
Early on Wednesday, global equity markets including U.S. equities, appeared well on their way to something far worse than a "run of the mill" risk-off kind of day. You know the story or stories by now. Systemically significant Swiss banking giant Credit Suisse ( CS) came under intense pressure as news broke that both the Saudi National Bank (a major backer) and the Swiss National Bank/Swiss government were not coming to the rescue. This placed the entire European and to a lesser degree U.S. banking sectors under pressure as well. This news came on the heels of three successive U.S. regional banks that had failed for different reasons.
This also came after a series of quite negative-looking U.S. macroeconomic data-points for the month of February had been released on Tuesday morning that had left many investors wondering if the U.S. was already in, or about to enter into an economic recession with the potential for a much harder landing than most had considered previously. Investors poured into U.S. Treasuries, once again warping the yield curve and several key spreads while exiting equities in a broad way.
However, of late, almost regularly, the trend going into the closing bell seems to run counter to the general direction for the session. Can every single afternoon present as the result of a short-squeeze? Seems doubtful. How about a 0DTE-inspired gamma squeeze? Seems more probable than a daily short-squeeze. But really? To this degree, and this broad? Algos gone wild? I think you're getting warmer now.
Swiss Mess
One must realize that European banks are facing some of the same problems as their U.S. counterparts. Rising interest rates are harmful to, not aiding in profitability as net interest margins dwindle, and as other instruments such as short-term sovereign debt instruments provide a better environment for cash deposits than do savings accounts. This as technology has made money easier than ever to move from point A to point B both rapidly and in size.
Markets largely reversed at least to some degree after Swiss Regulators and the Swiss National Bank at least started to discuss before the public finding ways to keep Credit Suisse liquid. Comments around providing liquidity if necessary that came in the afternoon (if you work on the U.S. East Coast) forced a bid back into U.S. equity markets late in the session as bond traders simultaneously took profits.
Late Wednesday night the actual news broke. Credit Suisse would preemptively strengthen its liquidity position by exercising an option to borrow CHF50B (about $54B) from the Swiss National (central) Bank under a covered loan facility and a short-term liquidity facility. Credit Suisse will also make a cash tender offer for 10 USD denominated senior debt securities worth up to $2.5B and 4 Euro-denominated senior debt securities worth up to E500M. These offers expire on March 22 (Fed day).
European markets have at least calmed on this news, while the ordinary shares of Credit Suisse remain volatile but appear to at least have found a level.
U.S. Macro
The macro economic data hit the tape in a fast and furious fashion Wednesday morning. First and foremost, February headline PPI (producer-level prices) printed at -0.1% month over month and 4.6% growth year over year. These numbers were well below the +0.3% and 5.4% that economists were looking for as well as down from January's revised (lower) 5.7%. At the core, February PPI printed flat (0.0%) month over month and up 4.4% year over year. These numbers, too, were both below what had been projected as well as down from January.
As the BLS released those numbers, the Census Bureau was releasing February data for Retail Sales. Here too, we saw a contraction. February retail sales printed -0.4% from January at the headline and -0.1% ex-autos. Sizable decreases were seen across furniture sales, department stores and even food services and drinking places, which have historically been strong post-pandemic.
Still at 08:30, as the two above data-points were published, the New York Fed released its March results for the Empire State Manufacturing survey. This is a doozy. While general conditions showed deterioration for a fourth month in a row and an eighth in nine, several key categories showed sharp drop-offs from what were already weak February results. New Orders, Shipments, Inventories, Number of Employees and Average Workweek all showed serious weakness as even Prices Paid and Prices Received, while still growing, did slow.
The data left most market participants wondering just how hard this landing is going to be? Incredibly, the Atlanta Fed's GDPNow model for the first quarter was revised later on Tuesday morning... higher. After what appeared to be a complete set of deflationary/recessionary economic published that morning, Atlanta took Q1 up to growth of 3.2% (q/q SAAR) from 2.6% as the inputs for gross personal consumption expenditures, gross private investment, and real government spending were all increased.
More realistically, Goldman Sachs ( GS) gave a boost to that firm's estimate of the probability for a U.S. recession over the next 12 months to 35% from 25%. The new and revised median estimate of economists surveyed by Bloomberg News places this likelihood at 60%.
Fed Fund Futures
Thank goodness they are in their "blackout" period. Could you imagine if we had this crew of empty barrels rolling downhill while all of this was going on? As if algorithmic overshoot was not already a problem.
At my latest check, and remember Fed Funds futures pricing probably has as much to do with intraday Treasury market volatility as anything the FOMC might do or say, I see Fed Funds futures trading in Chicago pricing in a 70% likelihood for a 25 basis point increase next week to bring the target range for the benchmark up to 4.75% to 5%.
At this moment, this would be the terminal rate (though this changes constantly) and hold through the July 26 meeting where there would be a rate cut, and there is now a 69% probability that a July cut would be for at least 50 basis points. The CME FedWatch Tool now shows a probable Fed Funds rate of 3.25% to 3.5% by summer of 2024.
Perhaps More Amazing...
What could be crazier than the Fed trying to find a level for the Fed Funds Rate and continuing to draw $95B per month from its balance sheet through the "quantitative tightening" program?
Try reading what JP Morgan ( JPM) strategist Nikolaos Panigirtzoglou is talking about. Bloomberg News is reporting that Panigirtzoglou said, "The usage of the Fed's Bank Term Funding Program is likely to be big." While Panigirtzolou does not see large banks participating in this program, he sees the maximum usage of this program as close to $2T, which would be the par amount of bonds held by U.S. banks outside of the five largest.
So, does the Fed end up fighting inflation? Or does the Fed pour kerosene on the fire in order to prevent some kind of economic armageddon? $2T seems awfully high. I think the price is probably lower than that, but that does nothing to change the conundrum faced.
Trading Notes
On what was largely a "down" day, two stocks that we have discussed recently both approached pivot levels as each swam upstream.
Just yesterday, I gave you a $197 pivot for Meta Platforms ( META) . That stock rallied almost 2% on Wednesday after a 7% rally on Tuesday.
I don't own any of these shares yet. I have seen META trading as high as $202 this morning. As readers know, I want to see at least one successful retest of that pivot from above. Then, upon that successful test, we can look at a target price of around $226.
One week ago, we revisited Advanced Micro Devices ( AMD) . Readers know that this is my largest holding (as well as one of my favorite CEOs). A week ago, I gave you a $90 pivot up from $79 and a $104 target, up from $94.
Readers will see AMD knocking on that $90 door, so we are not yet adjusting any levels, as both Relative Strength and the daily Moving Average Convergence Divergence (MACD) have improved and the stock's 50-day simple moving average (SMA) approaches a "golden cross" over its 200-day SMA. This will be a name of focus for the rest of the week.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 205K, Last 211K.
08:30 - Continuing Claims (Weekly): Last 1.718M.
08:30 - Export Prices (February): Expecting -0.2% m/m, Last 0.8% m/m.
08:30 - Import Prices (February): Expecting -0.2% m/m, Last -0.2% m/m.
08:30 - Building Permits (February): Expecting 1.34M, Last 1.399M SAAR.
08:30 - Housing Starts (February): Expecting 1.315M, Last 1.309M SAAR.
08:30 - Philadelphia Fed Manufacturing Index (March): Expecting -15.1, Last -24.3.
10:30 - Natural Gas Inventories (Weekly): Last -84B cf.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ( FDX) (2.73)
