Even though the markets are pricing in the end of Fed rate hikes after next month’s 25 bp hike, the latest data have not given the FOMC the opportunity to pause, and that is adding to the threat of a slowing/contracting economy. There are also concerns over the strength of China’s recovery. Rate hikes from the FOMC, ECB, and BoE in May are universally expected. The major uncertainty now is whether these will be the last of the moves.
This week’s US Durables report and Consumer Confidence however were more weaker than expected and earning reports added to fears of a downturn in growth in 2H. Durables revealed a 3.2% March orders surge with a 0.3% ex-transportation gain and a 9.1% transportation pop. The equipment data beat estimates with aircraft but fell short without, inventories plunged due entirely to the aircraft sector, and shipments rose solidly, also led by transportation. All of the important series in the report were revised lower in February.
The Consumer Confidence drop to a 9-month low of 101.3 in April from 104.2 allowed the index to unwind some of the out-performance for this gauge relative to the other confidence measures since peaks in mid-2021. The consumer confidence drop joins a Michigan sentiment bounce to 63.5 from a 3-month low of 62.0 in March, versus a 13-month high of 67.0 in February and an all-time low of 50.0 last June. We’ve seen a modest confidence updraft since mid-2022, though all of the measures have deteriorated sharply from mid-2021 peaks. The Conference Board measure has remained fairly resilient, but Michigan sentiment and the IBD/TIPP are fluctuating around historically weak levels.
All the surveys face headwinds from elevated mortgage rates, tightening credit conditions, and ongoing recession fears.
Meanwhile, from a news perspective, First Republic Bank shares were halted on wire headlines that the FDIC could cut FRC’s ratings if a deal is not struck, which would limit its use of the Fed Discount Window and the new Bank Term Funding Program (BTFP). Shares hit a new record low on the news to $4.76 and are down -95% so far this year. Though they ‘re recovered back over $5, the overall jitters are weighing on the major indexes with them tumbling -0.75% on the day, with the S&P 500 down -0.45%. The NASDAQ’s gains have been pared and the index is now just 0.40% in the green. FRC announced it was looking to divest some $50 bln to $100 bln in assets, but so far there is reticence from the big banks to step in.
Fed rate hike expectations are being pared and more rate cuts are being priced in later in the year. First Republic Bank remains in the crosshairs and fears its problems will spread into a more pernicious credit tightening and exacerbate the bearish impacts on the economy from the FOMC’s rate hikes are back in the picture.
Implied Fed funds futures show a 25 bp increase on May 3 after which the Fed is seen stepping back and then cutting rates by about 80 bps by the end of 2023. The implied June rate has fallen to 5.037% from 5.120% last week. We still expect growth will be decent enough and inflation still too elevated over the coming months to keep the FOMC on its tightening path through June. And we believe FOMC members will continue to push back against market expectations for a reversal in policy and rate cuts this year.
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Andria Pichidi
Market Analyst
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