Less hawkish hike?
That's how it sounded to me.
The Federal Open Market Committee (FOMC) increased the central bank's target range by 25 basis points on Wednesday, to a range spanning from 5% to 5.25%. This, the tenth consecutive Fed policy meeting that culminated with a rate hike, brings that target up to the 5.1% Fed Funds rate that the FOMC, at the median, had predicted for year's end in their economic projections just this past March.
Taking a look at the official statement, the FOMC led off by replacing "Job gains have picked up" and are "running at a robust pace" with simply "Job gains have been robust." This was meant to get straight to the point of justifying this most recent rate increase. At that point, the statement gets more cautious.
The U.S. banking system is mentioned next. After telling us once again that this system is "sound and resilient" the messaging changed. The Fed tells us that "recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity." The next sentence reminds us that the Fed "remains highly attentive to inflation risks." This keeps the look forward as flexible as possible.
Then it happened. A slightly less hawkish change in messaging. After announcing the 25 basis point hike, "The Committee anticipates that some additional policy firming may be appropriate" became "In determining the extent to which additional policy firming may be appropriate" as the lead in to the fact that the Fed is considering the "cumulative tightening of monetary policy" to include the much talked about lag effect as well as developing economic data.
Does that sound like a dovish hike to you? Not exactly, in my opinion, but it certainly is less hawkish. Not a pivot toward more accommodative policy, but certainly a setup for the pause we have been looking for should the FOMC go that way next month (June 14).
The Fed Chair
At the press conference that followed the statement, Fed Chair Jerome Powell referred to the change in language in that statement as "meaningful," while bringing up the "tighter credit conditions for households and businesses" mentioned in the statement. Powell went on to discuss the turmoil currently being felt across the regional banking space and even said "In principle, we won't have to raise rates as high as we would have had this not happened."
Still, though, Powell tried to be elusive, and probably succeeded in that. When asked if monetary policy was now restrictive enough, he answered, "That's going to be an ongoing assessment. We're going to need data to accumulate on that. Not an assessment that we've made -- that would mean we've reached that point. And I just think it's not possible to say that with confidence now."
Word salad. Said absolutely nothing.
Fed Funds Futures
As the wee hours pass, I see that Fed Funds Futures trading in Chicago are now pricing in a 99% probability for no rate hike on June 14. These markets are also pricing in a 55% likelihood for no change at the following meeting, on July 26. That's where the fun stops, or starts, depending upon one's perspective.
Futures markets are now adjusting for a first rate cut on September 20 (82% probability) and at least seven consecutive meetings culminating with rate cuts following that one. This market currently sees a Fed Funds rate of 4.25% to 4.5% by year's end, and a Fed Funds rate at least as low as 2.75% to 3% 12 months after that.
What could be forcing futures traders to price in such an aggressive pace of policy easing despite absolutely no signaling in that direction whatsoever by anyone at the Fed? Simple. The expectation for an outright recession, and perhaps not such a mild one at that.
On That Note...
Perhaps readers followed financial markets on Wednesday afternoon. Remember Wednesday's child? Full of woe? Well, markets fell out of bed late in the regular session on Wednesday. At least the stock market did. Treasury yields continue to fall as traders head toward perceived safety. Debt ceiling negotiations be darned.
By day's end, the U.S. 10-Year Note had paid just 3.34% at its highs, while the U.S. Two-Year Note paid just 3.81%. With the Fed pretty much stapling short-term rates in place, the U.S. Three-Month T-Bill continued to yield roughly 5.2% (give or take a couple of basis points).
The spread between what Three-Month and 10-Year paper yield reached yet another multi-decade record for negativity on Wednesday.
As often mentioned in this column, this spread is the most accurate predictor for economic recession at our (or the Fed's) disposal. -188 basis points is much worse than awful.
Maybe you caught Double Line Capital's Jeffrey Gundlach on CNBC Wednesday. Gundlach is not always right, but he is always smart and well thought out. Gundlach simply said, "Recessionary odds are pretty darn high right now." and added when talking about equities... "My suspicion is we'll break to the downside."
Equities
The Fed was not the only game in town on Wednesday. JPMorgan ( JPM) head of technical strategy, Jason Hunter wrote, "We continue to expect a sell off from that area (S&P 500 4100-4200 range) to retest medium-term support at the 3764 Dec low and 3760 Oct 61.8% (Fibonacci) retrace this spring, and look for an eventual extension back to key levels near 3500 by early summer."
Hunter added, "We believe that we'll ultimately set a cycle bottom, especially if that weak performance is accompanied by impulsive yield curve steepening. Until that setup emerges, we suggest maintaining a bearish bias and staying defensively positioned."
Wow. Tell us how you really feel. You know what would steepen the curve? Yes, higher longer-term yields, but also the Fed permitting the short-end of said curve to be priced according to supply and demand. Kind of what those Fed Funds Futures in Chicago are trying to tell us.
For the day, after having traded higher, most of your major equity indexes caved. By day's end, the S&P 500 had given up 0.7%, while the Nasdaq Composite had lost 0.46%.
The more specialized the index, the worse off it was. The KBW Bank Index surrendered 1.89% as the Philadelphia Semiconductor Index gave up 1.32%. The small-to mid-cap indexes all outperformed the broader equity market.
All 11 S&P sector SPDR ETFs shaded red for the session, with Energy ( XLE) , the Financials ( XLF) , and Materials ( XLB) , all at least 1% lower. Note that all of those sectors are cyclical in nature and cyclicals show weakness ahead of recession. Yes, that's why WTI Crude was taken out to the woodshed yet again.
The slope of the yield curve remains the driver behind banking weakness. That's at least understandable. However, weakness in Materials (and industrial commodities) as the U.S. dollar softens simultaneously? How ugly is this going to get?
Oh No!
PacWest Bancorp ( PACW) closed down 1.98% on Wednesday at $6.42. I currently see the shares trading with a $3 handle, down roughly 38% from that closing price.
Bloomberg News reported late Wednesday that the Beverly Hills-based bank (yes, another regional) is working with an advisor and considering either some kind of break-up or capital raise, though no formal sales process had yet begun.
PACW traded with a $28 handle as recently as this past March and as high as $51.81 back in February 2022.
At Least...
The ISM Non-Manufacturing Index for April was better than decent. Headline print of 51.9. New Orders at an impressive 56.1. Pricing at, oh, 59.6. That's not good.
Economics (All Times Eastern)
08:30 - Balance of Trade (Mar): Last $-70.5B.
08:30 - Initial Jobless Claims (Weekly): Expecting 240K, Last 230K.
08:30 - Continuing Claims (Weekly): Last 1.858M.
08:30 - Unit Labor Costs (Q1-adv): Expecting 4.7% q/q, Last 3.2% q/q.
08:30 - Non-Farm Productivity (Q1-adv): Expecting -1.5% q/q, Last 1.7% q/q.
10:30 - Natural Gas Inventories (Weekly): Last +79B cf.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( BUD) (0.60), ( BDX) (2.75), ( DDOG) (0.24), ( K) (0.99), ( MLM) (1.02), ( MRNA) (-1.74), ( W) (-1.71), ( ZTS) (1.26)
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