Bank Stocks Struggle Again, While Fed Pause Hopes Grow Following Cool PPI

Fresh financial industry worries sent stock futures plunging again early Wednesday, causing new debate about whether the Federal Reserve will hike rates next week or decide to pause amid the current banking concerns. Cooler-than-expected February wholesale prices and retail sales data also could fuel ideas of a Fed pause.

As shares of Credit Suisse (NYSE:CS) dropped more than 20% amid concerns about the bank’s stability, the probability of a Fed pause resurfaced in futures trading. There’s now a nearly 50% probability that the Fed won’t raise rates next week, according to the CME FedWatch Tool. Just yesterday, the chance of a 25-basis-point hike stood near 80%.

Then as the morning continued, the February Producer Price Index (PPI) came in at a surprising -0.1%, when it had been expected to rise 0.3%. Core PPI—which strips out food and energy—was flat. In addition, the government downwardly revised January’s hot PPI data, which indicates that the pricing environment may be improving. All of this might make it easier for the Fed to deliver a pause next week at its meeting, given the banking industry worries.

Treasury yields stepped back early Wednesday along with rate hike odds. Yields on the shorter end of the curve fell most as investors piled back into fixed income, seeking perceived safety. The United States 2-Year Treasury yield, which is among the most sensitive to rate policy, dove nearly 19 basis points to just above 4%.

The 10-year Treasury yield fell a more modest 9 basis points to 3.54%. Both of those readings were near the lows from earlier this week before markets showed signs of stabilizing yesterday. Regional bank stocks—which rebounded yesterday after falling sharply Friday and Monday—are under pressure again this morning, and the dollar—another so-called “safe haven”—also rose.

Let’s put things in perspective: These are anxious times in the market, no doubt. Volatility, as measured by the Cboe Volatility Index® (VIX), is back above 27 this morning. That said, Credit Suisse has had issues for many years. Even last October, the Wall Street Journal described Credit Suisse as trying to recover from a “near-existential crisis” as it cut thousands of jobs and sought new capital. This doesn’t mean investors should be sanguine, but it’s never a good idea to make trades out of emotion.

This situation is still developing. It’s important to monitor the news headlines but also not overreact to them. During times of increased volatility, it can be fine to reduce trading size or even wait for calmer market conditions. Though volatile markets can present unique opportunities they also present unique risks.

This week’s SPX low of 3,808 is a possible technical support level to watch on any further pullbacks.

Just in

As noted above, PPI fell 0.1%, and core PPI was flat in February. Analysts had expected PPI to rise 0.3% and the core PPI to rise 0.4%.

A cooler PPI outlook is often a harbinger of easier times ahead for CPI, as well. When companies face less price pressure on the wholesale side, they can sometimes ease price growth for their customers.

Retail Sales

Retail Sales, like PPI, came in well under expectations for February, though January’s reading remained hot (it was actually revised even higher). Retail sales fell 0.4%.

After a massive 3% month-over-month increase in January (2.4% if you strip out automobile sales), the consensus for February Retail Sales growth had been 0.3%, according to Trading Economics.

Morning rush

• The 10-year Treasury note yield (TNX) fell 12 basis points to 3.51%.
• The U.S. Dollar Index ($DXY) rose slightly to 104.6.
• The Cboe Volatility Index® (VIX) futures climbed sharply to 27.59.
• WTI Crude Oil (/CL) fell to $70.30 per barrel after dropping briefly below $70 for the first time since late 2021.

Eye on the Fed

Tuesday’s February Consumer Price Index (CPI) report—which was basically on target with Wall Street’s expectations—initially helped solidify ideas of a 25-basis-point rate hike next week before this morning’s market gyrations. The PPI reading this morning added to the impression that the Fed might decide to hold off on a rate hike this time. The meeting is next Tuesday and Wednesday.

If the Fed does hike, the odds are highest of a 25-basis-point increase, according to the CME FedWatch Tool. That’s the hike the market had built in prior to last week’s bank failures, and returning to that expectation likely eased volatility yesterday. Now, of course, as mentioned above, the chances of a pause are close to 50/50.

Think of it this way: While a “hot” CPI report would have put the Federal Reserve in a very tough place trying to fight inflation amid upheaval in the banking sector, a cool CPI might have implied weaker economic activity, potentially exacerbating fears that the bank turmoil wasn’t an isolated occurrence.

Rising rates often “break” things in the economy, which seemed to happen with Silicon Valley Bank (SIVB). The Fed probably wanted to make sure nothing systemic is happening before hiking again.

What to Watch

We’re not done with data yet this week. Tomorrow morning’s weekly initial jobless claims could get a close look after the previous week showed a mild increase, something the Fed might welcome as it tries to cool the labor market.

While no one wants people to lose jobs, the fact is there were thousands of layoffs over the last few months, and the mystery is why those claims aren’t showing up in the data. One week isn’t a trend, but seeing the number bump up to 211,000 a week ago, along with an increase in continued claims, was encouraging if you’re hoping for signs of a slowing job market. Analysts expect another slight gain in jobless claims to 215,000, according to Briefing.com.

Stocks in Spotlight

In what could provide housing market confidence, shares of home builder Lennar (NYSE:LEN) (LEN) rose 2% in premarket trading after beating earnings estimates. The company holds its conference call this morning.

Quarterly results are expected after the close from Adobe (NASDAQ:ADBE) (ADBE), with Dollar General (NYSE:DG) (DG) and FedEx (NYSE:FDX) (FDX) on tomorrow’s schedule before the open and after the close, respectively.

Software company ADBE’s earnings later today follow better-than-expected results in December. The company’s CFO told Barron’s at the time that ADBE isn’t immune to a softening macro economy, but the critical role its software plays “services us well in an environment like this.” The company guided for revenue of between $4.6 billion and $4.64 billion in fiscal Q1. The tech sector’s been on a nice earnings win streak lately, so we’ll see if ADBE can carry the torch up another flight.

Market minutes

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI) climbed 336 points, or 1.06%, to 32,155.
• The Nasdaq 100® (NDX) rose 2.32% to 12,199.
• The Russell 2000® (RUT) added 1.87% to close at 1,776.
• The S&P 500® index (SPX) climbed nearly 65 points, or 1.68%, to 3,920.

Bullish conviction reappeared Tuesday after several days of absence, bolstered by better performance from regional bank stocks following last week’s bank failure. The stock market saw higher-than-average volume, another sign of investor conviction behind the rally, and stocks strengthened into the close. Advancing stocks outpaced decliners by a 3-to-1 pace.

Both the U.S. dollar and Treasures, which had soared earlier this week amid a flight to perceived safer assets, eased as well on Tuesday. The 10-year Treasury note yield traded near 3.67% late Tuesdays, near its 50-day moving average (MA). It’ll be interesting to see where it goes now after recently retesting last autumn’s highs following weakness in January and early February. A bit less volatility in yields might allow the stock market to trade without looking over its shoulder so much.

Small-cap stocks, crushed earlier this week in part because of regional bank softness, bounced back nearly 2% Tuesday. The RUT is packed with regional bank stocks, making it particularly vulnerable to weakness in that industry. It’s also more exposed to the domestic economy than other major indexes, because smaller companies tend to have less overseas business, so it remains a good barometer for the market’s recession fears.

Talking Technicals: Looking at the RUT again, keep the number 1,722 in mind on any future pullbacks. That’s where it bottomed intraday on Monday’s retreat, basically equaling the December 28 low at exactly that level. It hasn’t traded below 1,722 since late October. If the RUT can stay on its feet and spend time rebuilding toward its 200-day moving average (MA) near 1,827, it might solidify ideas of technical strength.

TNX Daily Chart

CHART OF THE DAY: RIGHT DOWN THE MIDDLE. Following some of the most neck-straining three-day fluctuations in the history of the financial markets, the 10-year Treasury yield (TNX—candlesticks) delivered ended up in the center of the fairway Tuesday, closing very near its 50-day moving average (blue line). Data source: Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Pivot crowd revives: Earlier this year, markets didn’t behave as though the Fed would stay truly hawkish. Despite the Fed’s December projection for a terminal, or peak rate, of between 5% and 5.25%, markets priced in rates stopping well short of that level and then coming down by the end of 2023. Only in February, after a host of sizzling data, did the market come around to the Fed’s “higher rates for longer” narrative. This week, the earlier “Fed pivot” narrative returned amid volatility in the financial system that some blamed on high rates. Though market participants as of early Wednesday still priced in slight chances (around 20%) of 50 basis points of hikes by May, futures trading seems to anticipate the Fed will then cut rates twice—basically erasing any hikes—starting as early as June, and then take rates down to between 3.75% and 4% by the end of the year, 75 basis points below where they are now. That’s contrary to every indication the Fed’s given but suggesting that market participants don’t believe the Fed can tighten the screws much more. It’ll be interesting to hear what Fed Chairman Jerome Powell says next week, because time after time he’s used public appearances to burst the hopes of Wall Street’s “pivot crowd.” Will he still sound resolute after the financial system got rattled? If so, will the market have to adjust, potentially sending Treasury yields and the dollar higher once again?

Behind the CPI curtain: Markets behaved Tuesday as if February’s CPI data were a treat, but the report had its share of tricks, too. While CPI’s overall climb of 0.4% was as expected month-over-month, shelter prices continued to raise eyebrows, rising a hefty 0.8% month-over-month—up from 0.7% growth in January—and more than 8% from a year ago. Transportation services, which includes categories like cab and plane fares, rose an astonishing 14.6% year-over-year. Weakness again centered on things we don’t typically buy every month, like used cars. In other words, the report appears to be another sign that the Fed’s rate hikes are hitting goods, not services. Inflation in the services arena rose more than 7% from a year ago, versus 6% for overall CPI. On the positive side, egg prices fell 6.7% in February, a relief for omelet lovers after months of sharp increases.

At your services: Does continued growth in services inflation mean the Fed’s doing something wrong? Or that its policies simply can’t address the price of services like shelter and meals out (the cost of which is up 8.4% over the last year)? The Fed might argue that its policies are starting to affect services if you look at certain areas. For instance, if you subtract food, shelter, and energy costs out of services, prices rose 3.7% year-over-year, down from 4% in January. Additionally, the price of medical care fell. The Fed might also say that goods inflation came down faster because the supply chain—heavily damaged during the pandemic—is in better shape, allowing producers to pass along savings to customers. The services sector, on the other hand, is still surging despite having a shortage of workers as people return in full steam to pre-pandemic activities like travel and dining. Services also don’t tend to be rate-sensitive, so they may not be as easy for the Fed to affect. You don’t typically take out a loan for a restaurant meal (though you might be tempted to at some big-city restaurants).

Calendar

March 16: February Housing Starts and Building Permits and expected earnings from Dollar General (DG) and FedEx (FDX).

March 17: February Industrial Production, February Leading Indicators, and March Preliminary University of Michigan Consumer Sentiment.

March 20: No major data or earnings.

March 21: February Existing Home Sales and start of 2-day FOMC meeting.

March 22: FOMC rate decision.

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.