Investors need to buckle up because the Fed is going to raise interest rates again in two weeks. Here is what you need to know.
Fed Will Raise Interest Rates
April 18 (King World News) – Peter Boockvar: I’m waving the white flag on my belief the Fed would not raise rates on May 3rd following the hawkish Waller comments Friday and which mimicked what Bullard, Mester, Barkin and Bostic have said even though those four don’t vote. Confirming the belief too is the rebound in the Atlanta wage data, the good bank earnings, and stabilized banking stats.
Also the stock market is literally rallying itself into another rate hike as it comes off as a sense of calm. With the 2 yr yield up 35 bps in just the past two weeks, it has certainly priced in the next hike. I do though repeat my belief that the Fed should call a time out, which is not ending their inflation fight but just giving themselves an extra 6 weeks to measure the fall out with the lending crunch we’re now on the cusp of experiencing.
So while another 25 bps rate increase will take the fed funds rate to a midpoint of 5.125%, if we believe Goolsbee’s estimate that the credit crunch (yes, it will be one for many small and medium sized banks) is the equivalent of a 25-75 bps rate increase, the Fed will essentially be taking rates to 5.375-5.875%, again using the mid point of the range. And for every rate hike, the banking system bleeds more deposits and which means less loans and more money gets diverted to financing the US government and their ever rising deficits…
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Financing those deficits is becoming ever more the focus because foreigners continue to balk when we don’t include the flows from the Cayman Islands. In the TIC data seen last night, Japan’s holdings of US Treasuries fell by $22.6b in February to just off the lowest in 4 years at $1.082t. China holds the smallest amount of US Treasuries since 2010 at just under $850b, down for the 15th month in the past 16 and whose declining pace really picked up after the US and EU confiscated half of Russia’s central bank reserves.
Bank Worries Persist
Yesterday you saw that I included earnings comments from big banks. Here is what the $2b market cap Washington Federal said in their earnings release Friday on the landscape:
“This is a challenging interest rate environment for bank earnings. Presently, the yield curve is inverted with long term rates being lower than short term rates…As a result, bank margins are compressing. WaFd saw its net interest margin decrease from 3.69% in the December quarter to 3.51% in the March quarter (though is still up from 2.9% in the March 2022 quarter).”
“While credit quality remains strong, with delinquent loans representing only .2% of total loans, we did experience our first quarterly net charge-off in almost a decade. We are monitoring our portfolio closely for signs of deterioration which we expect will occur as the stress of higher interest rates is realized throughout the economy.” I bolded the statement
M&T Bank is one of the best run in the country and here were some quotes from them yesterday:
“Credit remains solid with net charge-offs still below our long term average.” They did though see a rise and “The reserve build was largely due to a combination of loan growth and the anticipation of declining values for office and healthcare properties, partially offset by improved expectations for hotel, retail and multifamily property prices.”
“The net interest margin for the past quarter was 4.04%, down 2 bps from the 4.06% in the linked quarter. The primary driver of the decrease to the margin was the impact from a higher level of borrowing, which we estimate reduced the margin by 19 bps. This was partially offset by the impact from higher rates on earning assets, net of deposit funding, which we estimate added 18 bps.”
“Our experience in prior rising rate environments reminds us to expect increased competition for deposits and changing customer behavior, leading to a mix shift within the deposit base.”
They lost a net $758mm in consumer deposits in the quarter…
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Transportation
Shifting to the comments from the economically cyclical JB Hunt, one of the largest trucking/transportation companies in the country who missed earnings estimates:
“As we have discussed shifting dynamics in the market for several quarters now, it should be evident that freight demand is muted even when taking into account seasonal factors.”
“To start, we’re in a challenging freight environment, where there is deflationary price pressure for an industry that continues to face inflationary cost pressures. Simply stated, we’re in a freight recession.” I bolded the statement.
The 7% y/o/y drop in revenue in the quarter was “primarily driven by lower freight volumes, moderating pricing trends, and inflationary cost pressures, particularly in the areas of salaries and wages, insurance and claims, and parts and maintenance related expenses.”
Meanwhile In China
China’s economy in Q1 grew by 4.5% y/o/y, well above the estimate of up 4%, though we take these numbers with a grain of salt. Regardless, the Chinese consumer is driving the rebound with the reopening as retail sales in March accelerated to a 5.8% y/o/y gain, well more than the expected 3.7% estimate. The Chinese consumer should be the focus right now as they make up for a lost 3 years of time being essentially locked up. Residential real estate has stabilized with some signs of improvement while the manufacturing side will continue to be pressured by the slowing seen with global trade…
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Copper And Iron Ore Rebounding
Copper is rebounding by .4% in response and iron ore is higher by .8%. Chinese stocks though traded mixed as the Shanghai comp was up by .2% but the H share index in Hong Kong was lower by .8%. And Asian stocks generally were mostly in the red. We remain bullish on the Chinese consumer and the positive impact it will bring mostly for Asia and parts of Europe, including French consumer product companies like LVMH and Hermes, as seen last week.
As I’ve stated before our holdings in some Macau casino stocks, I follow what’s going on there closely. Macau’s Secretary for Economy and Finance yesterday said Saturday arrivals reached 98,000, the highest number seen this year. There is still a ways to go though in this recovery as that is still only 58% of 2019 levels.
Over In Europe
In Europe, the German April ZEW missed expectations coming in at 4.1 from 13 in March and 11.5 pts below the estimate. The Current Situation though did improve by 14 pts and 7.5 more than forecasted but is still deeply negative at -32.5. According to ZEW, that 4.1 expectations print “means that no significant improvement in the economic situation is to be expected in the next six months.”
The UK said they saw a 28.2k increase in March jobless claims after 3 months of declines. Thru February, they saw a big job gain of 169k, well more than the estimate of up 50k and the wage growth was up 6.6% ex bonuses, 4 tenths more than expected and maintaining the January pace. Real wage growth though is still deeply negative with March CPI expected tomorrow to be up 9.8% and the BoE is at a real crossroads right now. Gilt yields are higher on the February job numbers and the pound is higher while the FTSE 100 is lagging its peers because of this…
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Art Cashin Weighs In…
Art Cashin, Head of Floor Operations at UBS: As I just went through with Carl, Sara and David on CNBC’s Squawk on the Street, we are in a pretty critical period. We are getting earnings of some of these high cap techs, and they have been, as I said, the Clydesdales and having been pulling ahead and if their earnings are not up to snuff or are they fail to be leaders in a rally, we are going to need to broaden the market and see many more advances than declines. So, we will be watching that over the next weeks.
Importantly, today is Tax Day. So, in a week from now, as my friend, Brian Reynolds points out, we should be seeing the tax inflows and how big they are will be critical to the debt ceiling faceoff. If they are somewhat short and the faceoff comes in June or July, there is a great risk of standoff and that could be very dangerous since, for the first time ever, we have people like China and others trying to replace the U.S. dollar as the international reserve currency. I hope our elected officials realize they are really playing with dynamite. If the amount of tax revenues is larger than expected, that could push things off until September or early October and, if so, I think that would be more likely to bring a quick compromise in which both sides want to push it ahead and get it off their plates so they can get into the Presidential political challenges.
So, we have got those earnings coming up. We have got tax revenues coming in. We have got the timing of the debt ceiling and we have got a lot of the technicals pushing up against the 4170/4180 area, which could be critical on any up-move challenge.
It is somewhat like the alleged Chinese curse – May you live in interesting times. The next two weeks can prove to be potentially very interesting.
We have also gone from TINA (there is no alternative) to TIARA (there is a real alternative). So that is bringing in lower sums to equities.
In the meantime, keep your eye on yields. Keep your eye on the financials coming in with risk of mark to market landmines built in there and we will see if the bulls can hold on and remount another challenge at the resistance.
Stay safe.
Arthur
Update
Second update from Art Cashin: Just before noon the bulls circled the wagons and tried to restart a bit of a rally, so far it is not gotten full traction. And it seems to have stalled below the early morning intraday high, which was 4169.
The resistance at the 4170 to 4180 maybe a bit more formidable than some had assumed, but as the intraday high of this stage of this year, they may have some credibility.
So watch as the afternoon progresses, as they try for another shot at it. The yields are waffling a little bit and not giving a sense of direction.
Otherwise it’s all internal technicals as the market take its own pulse and temperature. So as we go to press the Bulls are attempting again, they need to rise above that 4169 level and stay above the 4140 intra-day low.
The game of the day remains on the table.
Stay safe.
Arthur
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