Key Takeaways
- Banking Crisis May Not Be Over
- Fed Expected To Raise Rates
- Apple Earnings Tomorrow
On Monday, I made the comment that I felt the Fed had largely contained the banking crisis. Perhaps I spoke a bit early. Following a rough day for stocks yesterday and regional banks in particular, investors are now focused on what the Fed will do when they conclude their meeting this afternoon on interest rate policy.
Tuesday, the S&P 500 and Nasdaq Composite both dropped by over 1%. Regional banks were especially hard hit with the S&P 500 Regional Banking ETF falling 7%. The sector was led lower by PacWest Bancorp
PACW
whose stock is down nearly 40% for the week. The weakness in regional banks creates a bit of a conundrum for Fed policy makers.
The fallout in the banking sector will likely take months before the full effects on the economy and subsequent credit tightening are understood. In the meantime, we’ve heard a lot of talk lately about the Fed perhaps pausing in raising rates. I find that particularly interesting because Fed Chair Powell has not changed his tune in any public statements. Heading into trading on Wednesday, there is a better than 90% probability the Fed will raise rates another quarter point. After that, it’s largely expected the Fed will be done with this rate tightening cycle and there is some economic evidence suggesting the Fed has achieved its objective. Therefore, the more important part of today’s Fed meeting will likely be the press conference following the announcement and what Powell has to say about future policy.
On Tuesday, the latest job openings report (JOLTs) was released. Economists were forecasting nearly 9.8 million job openings. However, the number came in at a weaker than expected 9.6 million. That is the lowest reading in two years. On Friday, we’ll get a look at April employment. Currently, it is expected that 179 thousand new jobs were created with an unemployment rate of 3.6%. While that level of unemployment probably isn’t causing anyone to start stealing hotel linens just yet, I wouldn’t be surprised to see the unemployment rate come in slightly higher in light of the large scale layoffs we’ve seen in the last year.
There are some other anecdotal signs the economy may be slowing as well. After trading above $84/barrel last month, oil prices have since come crashing down. It’s common to see oil prices fall if there are concerns of an economic slowdown or recession. In the premarket, crude oil is down nearly 3% and trading below $69.
Another sign the economy may be cooling is in bond yields. In March, yields on the benchmark ten-year note were well above 4%. Since then, yields have trended lower and currently sit at 3.4%. Two year notes, which tend to be the most sensitive to changes in the economy, are currently yielding 3.95%, well off their March highs of over 5%.
In individual stock news, shares of Starbucks
SBUX
are down 5% in premarket. The company actually beat on revenues, profits and same store sales. In a call with analysts last night, Starbucks reaffirmed their full year outlook, perhaps disappointing some who were hoping for an more optimistic forecast.
Finally, the volatility we began seeing yesterday could continue for the remainder of the week. Following this afternoon’s Fed meeting, we have Apple
AAPL
earnings Thursday after the close and Friday’s employment number. The VIX is currently under 18; however, that is up 10% from Monday’s close. The uptick in volatility comes on the heels of the market again trying, but failing to break through that 4200 level in the S&P 500 on Monday. As always, I would stick with your investing plan and long term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
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