Almost predictable. Almost.
The FOMC did what most investors and traders had expected on Wednesday. Poring through the information released two hours ahead of the closing bell at 11 Wall Street, there were only mild surprises. Nothing that might knock one's socks off.
The press conference was on its way toward if not concluding really anything, at least not blowing up U.S. financial markets. Unfortunately for the net long crowd, Fed Chair Jerome Powell might at that time have been the center of attention, but he was not the center of the universe. Treasury Secretary Janet Yellen, simultaneously appeared before a Senate Banking Committee sub-committee. Yellen, as much as Powell, if not even more so, has a profound impact upon the world of high-speed, keyword-reading algorithms.
Yellen spoke. Yellen answered questions (to the detriment of your 401K). Then Yellen would answer one question in particular, and her answer appeared to contradict both the message that Powell was trying to send, but also what she herself had messaged only recently. The race was on. Lower for equities, higher for Treasury securities (lower for yields) from the belly of the curve on out, and higher for gold as markets took a chunk out of the U.S. Dollar Index.
Yep. Almost predictable. We knew Yellen was speaking elsewhere. We were just focused on the wrong financial policy maker, who did dish out enough news on his own and on behalf of his crew.
C'est la vie.
The Fed Raises
Following their scheduled two-day clambake down in Cherry Blossom land, the Federal Open Market Committee, affectionately known in these parts as the FOMC, voted to increase their target range for the Fed Funds Rate by 25 basis points to 4.75%-5%. The Fed, in short, chose to press forward with their campaign to keep trying to tighten monetary policy, and to signal the potential for a similar rate hike in six weeks, while carrying on with its "quantitative tightening" program. Why? To keep fighting inflation. Their 2% target may have started out as arbitrary, but to the amusement of those with any kind of memory, has been institutionalized.
This, despite the recent chaos across the banking sector that had forced the central bank to provide hundreds of billions of dollars in liquidity to U.S. lenders in just one week's time. Yes, this, also despite the fact that such actions will increase the probabilities for both a recession, and a more severe recession than many anticipate.
Yes, Virginia, recessions... those caused by tighter credit conditions, regardless of whether this change has been caused through either a regulatory or voluntary change in banking culture, will be disinflationary. Perhaps even deflationary. We shall see.
The Statement
There were several key takeaways within the official statement.
For one, in the first paragraph, the statement stressed strength in labor markets in order to set up the rate hike that will be mentioned in paragraph three. "Job gains have picked up in recent months and are running at a robust pace." This replaced "Job gains have been robust in recent months."
Paragraph two was completely redone. No cutting and pasting here. "Russia's war against Ukraine" has been completely dismissed as a potential cause for uncertainty and replaced by the U.S. banking system. Of course the statement informs us that this system is both "sound" and "resilient" just before we are also informed that "Recent developments are likely to result in tighter credit conditions for households and businesses." We are also told that these conditions will likely "weigh on economic activity, hiring, and inflation." Oh, joy.
So, the FOMC is fully aware that this economy is either slowing or about to slow, that unemployment is about to expand, and that there will be downward pressure on pricing. By all means, carry on as if nothing said or written really matters. This was reckless.
Finally, after increasing the Fed Funds Rate and ahead of mentioning that the quantitative tightening program will carry on, the statement takes a slightly (sort of) dovish turn as "The Committee anticipates that some additional policy firming may be appropriate" replaced "The Committee anticipates that ongoing increases in the target range will be appropriate."
Economic Projections
There was only some mild tweaking made to the median expectations across the board for 2023. Expected GDP for 2023 moved from +0.5 % to +0.4%, Expected Unemployment moved from 4.6% to 4.5%, PCE Inflation moved from 3.1% to 3.3%, as Core PCE Inflation moved from 3.5% to 3.6%.
All this as the committee's median expectation for the Fed Funds Rate for 2023 remained at 5.1% (one more hike implied). Looking at the dot plot, there was indeed one member who had the Fed Funds Rate at 5.9% later this year.
Despite...
Senate Banking Committee Chair Sherrod Brown (D-Ohio) having said:
"There seems to be more commonality about what to do with FDIC than there was four or five days ago. By our hearing next week, we may have some clarifying thoughts that there can be some consensus."
and adding:
"I think we could find some bipartisan solutions, perhaps on FDIC changes."
Despite...
Federal Reserve Chair Jerome Powell having said:
"That is why in response to these events, the Federal Reserve, working with the Treasury Department and the FDIC, took decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system. These actions demonstrate that all depositors' savings and the banking system are safe."
Keyword... "all"
Despite...
Treasury Secretary Janet Yellen having said one day earlier...
"Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."
The Treasury Secretary Still Said...
When asked during that Senate sub-committee meeting about whether or not there was a plan to protect all U.S. depositors in the works (a change to the FDIC cap would require legislative approval.). Yellen responded:
"I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits." Yellen then added.. "This is not something we've looked at."
You've got to be kidding me. What the heck do you guys talk about as depositors run on banks? The World Baseball Classic? The latest KISS farewell tour? Call me a monkey's uncle. Yeah... I'm sure this idea has not even come up in discussion. Down went Frazier, and down went the markets.
Marketplace
In less than two hours, the environment for risk assets changed drastically. Blame Yellen. Blame Powell. Blame 0DTE options. Blame whatever you want, but bids cancelled, and programmed sell orders hit trading floors everywhere.
Of course, the banks were hit. The KBW Bank Index gave up 4.7%, as other parts of our equity market most reliant upon economic growth were slapped around. (Thank goodness we got out of those banking day trades late Tuesday when we said we would.)
The smaller-cap indexes all gave up between 2% and 3%. The Dow Transports surrendered 2.63%. Looking at broader large-caps, the S&P 500 "only" lost 1.65% as the tech-laden Nasdaq Composite lost 1.6%.
All 11 S&P sector SPDR ETFs helped paint the tape red on Wednesday afternoon. The REITs ( XLRE) , Financials ( XLF) , Discretionaries ( XLC) , and Energy ( XLE) all took fairly severe beatings, while Staples ( XLP) , and Technology ( XLK) managed to hold losses to a rough 1% on the session.
Losers beat winners by roughly 3 to 1 at the NYSE and by about 5 to 2 at the Nasdaq. Advancing volume took just a 15.1% share of composite NYSE-listed trade and a 20% share of that metric across Nasdaq listings. Trading volume was down just small for NYSE-listed securities and actually managed a day-over-day increase for Nasdaq-listed names despite the fact that most of the day's volume was packed into a less than two hour period.
Fed Funds Futures
As we work our way through the zero-dark hours on Thursday morning, futures markets trading in Chicago are now pricing in just a 48% probability for an increase of 25 more basis points to be made to the target range for the Fed Funds Rate on May 3. According to these markets, which constantly evolve, the Fed is already done raising rates. The Fed Funds Rate currently stands at 4.75% to 5%.
This level will supposedly be held until the July 26 FOMC meeting when there is a 63% chance for a rate cut. These futures markets are now pricing in a Fed Funds Rate of 4% to 4.25% by year's end, and a rate of 3% to 3.25% within 18 months.
In Other News
Coinbase Global ( COIN) gave up 8% on Wednesday and I see it trading off another 11% overnight as the cryptocurrency exchange announced that it has received a "Wells Notice" from the Securities and Exchange Commission.
SEC staff has apparently made a preliminary determination to recommend that the agency file an enforcement action against the company alleging violations of securities laws.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 196K, Last 192K.
08:30 - Continuing Claims (Weekly): Last 1.684M.
10:00 - New Home Sales (February): Expecting 647K, Last 670K SAAR.
10:30 - Natural Gas Inventories (Weekly): Last -58B cf.
11:00 - Kansas City Fed Manufacturing Index (Weekly): Expecting -18, Last -9.
The Fed (All Times Eastern)
No public appearances scheduled.
