May 8, 2023


Weekly Market Commentary

Here’s a paradox. What happens when an immovable object runs into an irresistible force? In today’s investing world, the Federal Reserve has been that immovable object, jacking up interest rates in order to quell inflation.

Today’s rate-hike cycle is the fastest since 1980. The Fed has raised the fed funds rate by 500 basis points (bp, 1 bp = 0.01%), or 5 percentage points, since March 2022.

But the Fed’s war on inflation appears to be on a collision course with a banking crisis that flared up again last week. It’s creating a new headache for the Fed. Raising rates conflicts with the goal of easing pressure on banks. It has forced a more cautious outlook from the Fed.

What happened? With a helping hand from the FDIC, the deposits and most assets of First Republic Bank (FRB) were purchased last week by JPMorgan Chase (JPM). End of crisis? Not so fast. The market went after another next regional bank.

It’s not based on the economic fundamentals. Instead, it’s psychology and fear in play.

“The tension between poor market sentiment and strong liquidity at regional banks is difficult to reconcile as investors take a draconian view of banks’ capital and operating models,” Bloomberg Intelligence analyst Herman Chan said. Others are less sure.

What happened Wednesday? The Fed hiked its key lending rate, the fed funds rate, by 25 bp to 5.00 – 5.25%. Rhetorically, it kept up its tough talk on inflation. It left the door open to another rate increase in June. Unlike prior hikes, the tone was much less definitive.

Investors are currently trying to price in about three 25 bp rate cuts this year, according to the CME FedWatch tool. But Fed Chief Powell pushed back.

We “have a view that inflation is going to come down, but it’ll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates,” he said at his press conference.

That sparked Wednesday’s selloff, which continued into Thursday. It’s one more reason a well-diversified portfolio tailored to your long-term goals helps manage short-term volatility.

For now, the Fed is betting it can keep its attention on inflation while using other tools to support banks that are in need.

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An Annual Ritual at the Gas Pump

You’re right if you have this nagging feeling that gas prices rise in the spring. As the graphic illustrates, on average prices rise through Memorial Day, plateau over the summer, and slip in the fall. This year is no exception, as prices echo the seasonal pattern.

Rate Cuts Still on the Table, Timing Less Certain

We often discuss the Federal Reserve and interest rates because both greatly impact investors. For starters, changes in interest rates have a significant impact on stock prices and income earned on savings. Sharply higher rates in 2022 pushed equities into a bear market.

Just Do It

That ubiquitous phrase from one of America’s most extensive athletic footwear and apparel makers seems to have been adopted by most American shoppers. The U.S. Census Bureau reported last week that retail sales jumped 0.7% in March, following a strong 0.9% rise in February.

The Road to Lower Inflation Takes a Detour

The rate of inflation is accelerating. That’s not how we hoped to start this week’s Insights. Take a moment and review Figure 1. The 4-month moving average has broken out of its long-term downward trend (red-dashed lines). On a monthly basis, prices bottomed in June and began to gradually turn higher. The upward trajectory picked up in January.

No Matter How You Slice It and Dice It…

The latest employment numbers from the U.S. Bureau of Labor Statistics (BLS) point to a robust job market. On Friday, the U.S. BLS reported that nonfarm payrolls rose 303,000 in March, well ahead of expectations. It’s not simply March; growth has been above 250,000 for four months running.