Fed's Decision Awaited Amid High Inflation and Elevated Bank Stress

Barry Adams
21 Mar, 2023
New York City

A sharp rebound in regional banks led benchmark indexes higher after Investors put their faith in government reassurances.  

Benchmark indexes advanced for the second day this week after investors bid up regional banks following comments from the U.S. Treasury Secretary. 

Secretary Janet Yellen showed the government's willingness to extend financial guarantee to uninsured deposits at all regional banks "if needed."

The supportive comments lifted stocks of battered down mid-sized banks. 

A third of all U.S. lending to businesses and consumers is provided by about 75 mid-sized banks with assets between $50 billion and $200 billion. 

Investors are increasingly focused on the health of the U.S. banking system after the sudden collapse of Silicon Valley Bank and the $30 billion deposit infusion in the First Republic Bank. 

Customers with uninsured deposits with balances larger than $250,000 may move deposits to larger banks in the event of a panic, leading to wider bank runs. 

Across the Atlantic, banks also rebounded after the ECB president reassured lawmakers that financial institutions have capital and liquidity above demanded by regulators. 

Despite the reassurances from the two top central banks in the world, fears of the 2007-08 crisis haunted investors and equity-like volatility was palpable in Treasury debt trading.

Central bankers are making strong statements to calm nervous markets but there is no denying the fact that banks are heading for more losses in the required holdings of government securities and rising interest rates will only add more stress on balance sheets of banks. 

Investors also reviewed the latest data on home sales ahead of the interest rate decision by the Federal Reserve after the two-day meeting. 

Traders are anticipating the Federal Reserve to slow down the rate hike to 25 basis points in the light of growing stress in the banking system.  

 

Existing Home Sales Advanced in February

Existing home sales increased in February, halting declines for the 12-months in a row, the National Association of Realtors said Tuesday. 

Existing home sales, which includes single and multi-family units, increased 14.5% in February from the previous month, but declined 22.6% from a year ago. 

Monthly increase in annual pace was the largest increase following 22.4% rise in July 2020. 

The median existing-home sales price eased 0.2% from the previous year to $363,000 and  the inventory of unsold existing homes was unchanged from the previous month at 980,000 at the end of February, equivalent to 2.6 months' supply at the current monthly sales pace.

"Inventory levels are still at historic lows," Yun added. "Consequently, multiple offers are returning on a good number of properties."

First-time buyers accounted for 27% of all sales in February, down from 31% in January and 29% a year ago, and Individual investors or second-home buyers purchased 18% of homes in February, up from 16% in January but down from 19% a year ago. 

Individual investors make up for the bulk of the purchase.  

 

Indexes & Yields 

The S&P 500 index increased 1.3% to 4,002.87 and the Nasdaq Composite index advanced 1.6% to 11,860.11. 

The yield on 2-year Treasury notes increased 17 basis points to 4.17%, 10-year Treasury notes inched up 12 basis points to 3.59% and 30-year Treasury bonds advanced 6 basis points to 3.72%. 

Crude oil futures price for immediate month delivery increased $1.69 to $69.61 a barrel and natural gas price rose 8 cents to $2.30 a thermal unit. 

 

U.S. Stock Movers 

Regional banks led the gainers after beaten down banks advanced following comments from the U.S. Treasury Secretary Janet Yellen.

First Republic Bank soared 34.6% to 11,750.69, KeyCorp increased 6.0% to $12.35 and PacWest Bancorporation jumped 15.6% to $11.93. 

UBS Group AG soared 9.1% to $20.48 a day after the largest Swiss jumped 3% following the forced takeover of Credit Suisse engineered by the Swiss government and the Swiss National Bank. 

Credit Suisse Group AG increased 1% to 96 cents in New York and jumped 5% to 4.7% to 86 Swiss cents.  

Foot Locker Inc increased 6.1% to $42.28 a day after the specialty athletic retailer posted better-than-expected same store sales. 

The retailer is also increasing its focus on selling online and plans to offer a deeper selection for younger children and kids. 

Tesla Inc increased 4.1% to $12.35 after Moody's lifted the electric vehicle makers' bond rating from speculative or "junk bond" to Baa3. 

The Baa3 is the lowest tier in the 10-tier investment grade rating system. 

 

European Markets Rebound After ECB Reassurances and Joint Actions by Central Banks

European market indexes rebounded on the optimism that the joint actions by major central banks following the rescue of Credit Suisse stemmed the contagion from spreading. 

Despite the rebound on Tuesday, the selloff in European banks is far from over. Interest rates in Europe are still in negative territory and not restrictive enough. 

The sustained increases in interest rates are expected to expand unrealized losses in the government bond holdings at all banks- small and large. 

Investors are questioning the health of the European banking system and worried that the banks may not have means to raise capital in the event of sharp crunch in liquidity or panic driven deposit outflows. 

At least for now, investors set aside the liquidity and deposit outflow worries and bid up bank and financial services stocks. 

The UK budget deficit jumped to a record high in the month since record keeping began in 1993, the Office for National Statistics said Tuesday. 

The public sector debt, excluding banks, increased £9.7 to £16.7 billion after the government expanded fuel subsidies to a wider group of people.   

The UK government has estimated the full-year deficit in 2023 to be around 6.1% of GDP. 

  

Indexes & Yields 

The DAX index jumped 1.8% to 15,195.34, the CAC-40 index advanced 1.4% to 7,112.91 and the FTSE 100 index increased 1.8% to 7,536.22. 

The yield on 10-year German Bunds rebounded to 2.29%, the French bonds to 2.81%, the UK gilts to 3.37% and the Italian bonds to 4.11%. 

The euro inched higher to $1.079, the British pound edged lower to $1.218 and the Swiss franc edged lower to 92.27 cents. 

Brent crude oil increased $1.58 to $75.38 a barrel and the Dutch TTF natural gas futures for immediate month delivery edged up 2.13 to 41.46 per MWh. 

 

Europe Stock Movers 

European automakers advanced after February vehicle registrations increased at a faster pace after semiconductor shortages eased. 

New passenger cars registrations in the European Union rose 11.5% to 802,763 vehicles in February, following an 11.3% increase in January.

Registrations rose in most markets in the union and Spain led the region with an increase of 19.2% followed by 17.4% in Italy. 

In the first two months of 2023, registrations in Spain jumped 32.1%, in Italy rose 18.2%, in France increased 9.1% and in Germany edged up 0.2%. 

Battery electric vehicle registrations increased 12.1% of total but petrol-fueled vehicles led with 36.9% market share.  

BMW AG increased 1.8% to €97.34, Renault SA rose 3.7% to €36.76, Stellantis NV, the parent of Fiat and Chrysler, increased 2.2% to €16.19. 

Pernod Ricard increased 0.9% to €202.40 and the French spirit and wine company said its American unit has agreed to acquire a majority stake in Skrewball, the maker of peanut butter flavored whiskey brand.   

The company is also in the middle of repurchasing €300 million of its stock between February 20 and April 6 and not to exceed the share price of €320 a share.