News

These are our two preferred scenarios for the Fed’s big March meeting next week

Published

6 months ago

March 18, 2023

Two things will capture all the market’s attention in the coming week: The Federal Reserve’s March meeting and the government’s ongoing attempt to quell worries about the banking system. The market is currently pricing in a slightly higher likelihood that the Fed hikes interest rates by 25 basis points on Wednesday, versus keeping leaving them unchanged (about 60/40 split as of Friday’s close). However, with inflation cooling, there is an argument to be made for a “hawkish pause,” to raising rates. This would buy the FOMC some time to digest the collapse of SVB’s impact on the banking sector and gather more inflation data as the February core PCE price index — the Fed’s preferred measure of inflation — is out March 31. SVB officially filed for bankruptcy on Friday. As a result of SVB’s meltdown, banks are increasing their deposit rates in order to better compete with Treasury yields, which have proven a better alternative to keeping cash in savings and checking accounts. They have also begun to tighten lending requirements. These two moves should do at least some of the Fed’s tightening work for it. As discussed on Friday, the government must figure out how to once again instill confidence in the US banking system and assure depositors that their money is safe without causing any or at the very least minimizing the risk of moral hazard. Rate hike or not, we will closely watch Fed Chair Jerome Powell’s post-announcement press conference for clues about future policy. The Fed chair needs to balance the committee’s rate decision with the counterweight of his commentary. Put another way, we are looking for a “hawkish pause,” or — given the probabilities indicated by the CME FedWatch Tool for a hike — a “dovish raise.” A strong argument for the latter (dovish raise) is that it would show the market the Fed doesn’t see the SVB event as something indicative of a wider problem. At the same time, it would also make clear the central bank is going to proceed with a heightened level of caution. If it raises, Powell should speak softly; no raise and Powell should strongly remind the market that the work isn’t done. What we don’t want to see is a “dovish pause” or a “hawkish raise.” The first will raise concerns that Powell has taken his eye off the ball, while the latter may spark fears that Powell is on a path to hike us into a hard landing recession. No portfolio companies will be reporting next week. Here are some other earnings reports and economic numbers to watch in the week ahead: Monday, March 20 Before the bell: DouYu (DOYU), Foot Locker (FL), Pinduoduo (PDD), Niu Tech (NIU) After the bell: ProFrac (ACDC) Tuesday, March 21 Before the bell: Canadian Solar (CSIQ), Tencent Music (TME), HUYA (HUYA) After the bell: GameStop (GME), Nike (NKE), Array Tech (ARRY), AAR Corp (AIR) 10:00 a.m. ET: Existing Home Sales Wednesday, March 22 Before the bell: Petco Health (WOOF), Winnebago (WGO), Shoe Carnival (SCVL), Ollie’s Bargain (OLLI), iMedia Brands (IMBI), Baozun (BZUN) After the bell: Chewy (CHWY), KB Home (KBH), Worthington Industries (WOR), Steelcase (SCS), MillerKnoll (MLKN) 2:00 p.m. ET: FOMC Meeting Thursday, March 23 Before the bell: Accenture (ACN), BRP (DOOO), Commercial Metals (CMC), Darden Restaurants (DRI), FacSet (FDS), General Mills (GIS), Movado Group (MOV) After the bell: Vasta Platform Limited (VSTA), Quest Resource (QRHC) 8:30 a.m. ET: Initial Claims 10:00 a.m. ET: New Home Sales Friday, March 24 Before the bell: Express (EXPR) 8:30 a.m. ET: Durable Goods Orders Looking back The big macroeconomic event this week — aside from the SVB fallout — was the February consumer price index release on Tuesday, which matched analysts’ expectations. Most importantly, it showed a deceleration in the annual rate of inflation, both at the headline level and also with food and energy stripped out, known as the core index. Jitters about the stability of the global banking system, spurred by struggles at First Republic (FRC), led to sell-off Friday. Still, for the week, U.S. stocks fared better, with the S & P 500 rising 1.5% and the Nasdaq gaining 4.5%. Only the Dow lost ground, down 0.1%. While some may normally think of a move into tech as a “risk on” trade, there is the view that what we actually saw was a flight to safety following the blow up at Silicon Valley Bank (SVB) and increased fears that a recession is on the horizon. In addition to a decline in Treasury yields – when bond prices go up (due to increased buying), yields decline – energy stocks fell. Both moves are signs of recession fears. Weakening economic activity will drag down demand for energy, so the thinking goes. Instead, we saw a move into those high-quality names that are not only core to global productivity but also have the ability to cut some fat to protect profit margins and sport some of the strongest balance sheets in the world. On Wednesday, the February producer price index came in weaker than expected, with a month-over-month decline versus expectations of an increase. February retail sales, also released Wednesday, matched expectations. On Thursday, initial jobless claims for the week ended March 11 came in at 192,000, a decrease of 20,000 from the prior week and below the expected 205,000. Also Thursday, we learned that housing starts for February increased 9.8% over January, and a decrease of 18.4% from a year earlier. Building permits increased 13.8% monthly (-17.9% annually), both above expectations. Lastly, on Friday, industrial production was unchanged in February from January. Capacity utilization also held steady at 78%, in line with January’s reading. Under the hood, the communication services sector led to the upside, followed by technology and utilities, while energy led to the downside, followed by financials and materials. Meanwhile, the U.S. dollar index is hovering just below 104. Gold is trading in the upper-$1,900s per ounce. WTI Crude prices have pulled back to around $66 per barrel, while the yield on the 10-year Treasury eased back to around 3.4%. No portfolio companies reported earnings this week. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the Federal Reserve, July 27, 2022 in Washington, DC.

Drew Angerer | Getty Images

Two things will capture all the market’s attention in the coming week: The Federal Reserve’s March meeting and the government’s ongoing attempt to quell worries about the banking system.

Source: CNBC

Follow us on Google News to get the latest Updates