Markets Slide After Powell and Yellen Comments

Barry Adams
22 Mar, 2023
New York City

Market indexes turned up after the rate hike but sharply fell after comments from the Federal Reserve Chairman. 

As widely expected, the Federal Reserve raised the fed funds target rate range by 25 basis points to between 4.75% and 5.0%. 

The accompanying statement from the Federal Reserve after the policy decision showed that the Fed is considering to increase rate one more time and then pause.

 “The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” shattering all expectations of a rate pause. 

 “Rate cuts are not in our base case” for the rest of the year 2023, Powell answered during a press conference after the rate decision. 

Adding to the downward pressure on broader indexes was comments from the U.S. Treasury Secretary Janet Yellen. 

Yellen said that the FDIC is not considering providing a "blanket insurance" to bank deposits in the Q&A session with the Senate appropriations subcommittee hearing. 

The central bank, in a node to the rising stresses in the U.S. banking system, said "the U.S. banking system is sound and resilient" and added that "some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

The Federal Reserve also lowered its economic growth projection in 2023 but also revised slightly higher its estimate of inflation and core inflation in the year from its December projection. 

The fast moving banking crisis has complicated the Fed's decision making because rising rates are contributing to losses in generally considered safe investments in Treasury securities.

Inflation in recent months has eased but core inflation, which excludes volatile energy and food prices, has stayed stubbornly high. 

The Fed is battling two opposite trends, higher interest rates are needed to curb 4-decade high inflation and higher rates will increase losses in Treasury securities held by banks of all sizes. 

The Fed has been advertising the need to bring down inflation to its preferred level of 2% from the current rate near 8% and the central bank's credibility is on the line if it pauses before the substantial reduction in inflation. 

Despite the multiple rate hikes over the last twelve months, interest rates are still negative and not restrictive enough. 

 

Indexes & Yields 

The S&P 500 index increased 3.63 points to 4,005.50 and the Nasdaq Composite index added 8.04 points to 11,866.72. 

The yield on 2-year Treasury notes edged 4 basis points higher to 4.22%, 10-year Treasury notes inched up 3.61% and 30-year Treasury bonds edged up 1 basis point to 3.72%. 

Crude oil decreased 26 cents to $69.50 a barrel and natural gas futures edged down 10 cents to $2.25 a thermal unit. 

 

U.S. Stock Movers 

 PacWest Bancorp decreased 2.4% to $11.93 and the regional bank in focus said it has "solid liquidity and stabilized deposit balances" in its latest update to investors. 

Total available cash is $11.4 billion, which exceeds $9.5 billion in uninsured deposits. The bank said deposit withdrawals were $6.8 billion in the current quarter to March 20. 

The bank also confirmed it borrowed $3.7 billion from the FHLB, $10.5 billion from the Federal Reserve Discount Window, and $2.1 billion in Bank Term Funding Program,

GameStop Corp soared 45.6% to $25.70 after the specialty retailer swung to a profit and posted a surge in gross margin. 

Nike Inc decreased 1.4% to $123.88 after the athletic footwear and apparel maker reported higher revenue and earnings in its latest quarter. 

However, gross margin suffered after the company used markdowns and promotion to liquidate inventories.  

 

Calmness Returned to European Markets  

European markets broadly advanced after calmness returned to financial markets.

Coordinated actions between governments and central banks soothed market nerves after the rescue of the second largest bank in Switzerland. 

Bond yields were stable and the euro advanced after the ECB president Christine Lagarde said, in her prepared remarks ahead of a conference, "inflation is still high, and uncertainty around its path ahead has increased."

While energy price inflation is easing but domestic prices are still rising and "If this continues and aggregate demand picks up from its current compressed levels, we could see a handover from imported to domestic price pressures that keeps overall price pressures high," noted Lagarde in the statement. 

Real wages have declined in the Euro Area and rising wages are likely to contribute to higher inflation in the months ahead. 

 

Euro Area Current Account Surplus Expanded In January 

The current account surplus in the Euro Area increased in January after the international goods surplus increased, the European Central Bank said in a report Wednesday. 

The current account surplus increased to Є17.0 billion from Є13.0 billion in the previous month, reflecting €14 billion surplus in international trade in services, €11 billion surplus in goods and €1 billion rise in primary income. 

These surpluses were partly offset by a deficit of €9 billion in secondary income. 

Current account deficit was €98 billion or 0.7% of the euro area GDP in 12 months to January, compared with a surplus of €252 billion or 2.0% one year earlier. 

Separately, the Swiss National Bank said current account surplus widened to Sfr 14.7 billion in the fourth quarter of 2022 from Sfr 9.1 billion in the same period a year ago.  

 

UK Inflation Accelerated In January  

Consumer price inflation unexpectedly increased in February after falling for four month in a row, the Office for National Statistics reported Wednesday. 

Consumer prices rose at a faster pace of 10.4% in February after rising at 10.1% in January, after food and non-alcoholic beverages inflation accelerated to 18.0% from 16.7% in the previous month. 

Restaurant and hotel price inflation increased to 12.8% in February from 10.1% in January and apparel and footwear inflation increased to 8.1% from 6.2% and health services cost increased 6.8% from 6.2% in the previous month. 

On the other hand, transportation services inflation slowed to 2.9% from 3.1% and housing and utilities prices rose at a slower pace of 26.6% from 26.7% in the previous month. 

On a monthly basis consumer prices advanced 1.1% from January.   

 

Europe Indexes & Yields 

The DAX index increased 0.1% to 15,216.19, the CAC-40 index advanced 0.2% to 7,131.12 and the FTSE 100 index gained 0.4% to 7,566.84.  

The yield on 10-year German Bunds held at 2.28%, French bonds closed at 2.83%,the UK gilts edged up to 3.44% and the Italian bonds increased to 4.14%. 

The euro strengthened to $1.08, the British pound to $1.22 and the Swiss franc to 91.82 cents. 

Brent crude oil rose 42 cents to $75.74 a barrel and the Dutch TTF natural gas fell 5.7% to Є39,9 per MWh. 

 

Europe Movers  

Banks across the eurozone eased after rebounding in the previous session. 

Deutsche Bank, Commerzbank, BNP Paribas, HSBC, Societe Generale, and UniCredit declined between 1% and 3%.

L'Oreal, Pernod Ricard and Thales advanced between 1% and 2%. 

Mercedes Benz, BMW and Renault added between 0.6% and 1.0%.