Bank troubles roil markets and make Fed's decision next week more fraught

Published Fri, Mar 17 20233:35 PM EDTUpdated Fri, Mar 17 20234:10 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Dread that more trouble could be unearthed in the banking sector has created a cloud of worry around markets that will not easily be shaken. In the week ahead, the Federal Reserve has its chance to weigh in. Following its meeting Tuesday and Wednesday, the central bank could raise the fed funds rate by another quarter point. It will certainly release new quarterly projections for the economy, including forecasts for inflation and interest rates. The futures market Friday put odds for a quarter point rate hike from the central bank at about 70%. "It's a close call for next week because it really depends on what the markets are doing when the Fed meets. This is a fluid situation," said Ethan Harris, head of global economic research at Bank of America. BofA expects the Fed to hike rates by 25 basis points Wednesday, as does JP Morgan . But Goldman Sachs economists expect the Fed to pause. A basis point equals 0.01 of a percentage point. "If there are no bank failures, and we look at Monday and Tuesday and the banking stocks are more stable, then they can go, but it's going to be a super close call. Our house view is they are going to pause," said George Goncalves, head of U.S. macro strategy at MUFG. Since the surprising and swift failure of Silicon Valley Bank last Friday followed by Signature Bank, investors have gotten spooked about the health of other small and regional banks. The government last weekend agreed to backstop depositors in Silicon Valley Bank and Signature Bank, which was shut down over the weekend. First Republic Bank has been at the epicenter of selling in regionals. On Thursday, a consortium of banks stepped in to deposit $30 billion into First Republic, but its stock continued to be slammed along with other regional banks on Friday. "It's one of those things where it's great news the ambulance got to our house really quickly. The bad news is we needed an ambulance," said Art Hogan, chief market strategist at B. Riley Financial. "Everyone moved to shore up these banks, and the bad news is the banks needed to be shored up. ... We still have more questions than we have answers to." Some strategists expect stocks could stay very choppy and possibly test the October lows. .SPX 1Y line stx "It wouldn't surprise me if the market did not retest and blow through the October lows, but that's different than saying 'we are out of the woods, that was the bottom,'" said Liz Ann Sonders, Charles Schwab chief investment strategist. "I think it's still going to be fairly choppy. The good news from a valuation perspective is if the Fed is done or almost done." Even with Friday's sell-off, the S & P 500 and Nasdaq scored gains for the week. The S & P 500 rose 1.4%, compared to a tiny loss of 0.2% in the Dow . The Nasdaq was up 4.4% for the week, as big-cap tech, like Apple, Microsoft and Alphabet, drew in investors. Safety plays According to Todd Sohn of Strategas, the two largest stocks — Apple and Microsoft — were a record 13.5% of the S & P 500's market cap as of Friday morning. While other stocks sold off, Apple gained 4.4% for the week, and Microsoft and Alphabet were both 12.5% higher. AAPL MSFT 1Y line tec "They're being treated as safety right now," said Sohn. "It's rare to have any stock alone to have a weight of more than 6%." Schwab's Sonders said the buying in Big Tech was a flight-to-safety within the sector itself. "Big Tech a year ago looked pretty bad just because valuations were so stretched. There was carnage there. Valuations are more reasonable, but they're not cheap," she said. She said it's likely there is still fallout to come from Silicon Valley Bank, which had many startups and technology companies among both borrowers and depositors. "I think there was a capital flight to the well-capitalized tech stocks, playing the role of safe havens," she said. Peter Boockvar, chief investment officer at Bleakley Financial Group, said the run into tech names may be overdone. "Tech does well if their customers do well," he said. "If the U.S. economy is going into a recession, they're going to be buying less cloud service. They're going to be buying less software. People are buying these big cap tech names, and they're not thinking this through." Economists expect lending by banks, especially regionals, will tighten, and that in turn could help push the economy into a recession. "I just don't think people are appreciating the accidents that are occurring here. You lose the regional bank impetus to lend to the extent they were before. Regional banks make up nearly 40% of bank lending," he said. "The local restaurant that wants to open up two new locations is not going to go borrow from Goldman Sachs. What else to watch There is some data worth watching in the week ahead, particularly existing home sales Tuesday and new home sales Thursday. On Friday, durable goods for February is reported, and there are releases of flash S & P Global PMI data for services and manufacturing. Treasury Secretary Janet Yellen testifies before congressional committees Wednesday and Thursday on the fiscal 2024 budget, and she will be watched for any comments on the financial system. St. Louis Fed President James Bullard is the first Fed official scheduled to speak after Fed Chairman Jerome Powell's post-meeting briefing Wednesday afternoon. Bullard speaks Friday at 9:30 a.m. ET. Stock investors will also be paying close attention to the Treasury market, where yields were volatile and much lower on the week. The swings, however, were in both directions. The 2-year yield went from above 5% a week earlier, to below 4%. On Friday, it was at 3.82%. Yields move opposite bond prices. US2Y 1Y line note According to Bespoke, the yield on the 2-year note has moved 20 basis points or more for six straight days, the longest such streak since at least 1977. "The way the Treasury market was moving last week was so unhealthy, I wouldn't be surprised if it resulted in some losses as well," said MUFG's Goncalves. Market focus has been on the banking system and worries about recession. "With the Fed's program in place, hopefully cooler heads will prevail." Week ahead calendar Monday 10:00 a.m. Quarterly financial report Tuesday FOMC begins its meeting 10:00 a.m. Existing home sales Wednesday 2:00 p.m. FOMC statement and projections 2:30 p.m. Fed Chairman Jerome Powell briefing Thursday 8:30 a.m. Initial claims 10:00 a.m. New home sales Friday 8:30 a.m. Durable goods 9:30 a.m. St. Louis Fed President James Bullard 9:45 a.m. S & P Global Manufacturing PMI 9:45 a.m. S & P Global Services PMI