Morning Roundup

By Mark Masterson on May 3, 2023

Good morning,

Below are the news items moving markets today:

Executive Summary:

Today is another Fed meeting day.  It will be a big one.

The rate hike of 25 bp is almost a certainty given the Fed funds futures showing an 80% probability.

Its what comes after that during Powell’s press conference that matters.

Will Powell signal a pause?

Will Powell specifically say they are pausing here?

What if Powell does not raise rates at all?

Will Powell stay the course and be “data dependent?”

The honest answer….I don’t know.

Let’s watch, wait, and see.

• Fed expected to raise interest rates today and may signal a pause in its 14-month tightening cycle (FT, Reuters, Bloomberg)
• Democrat lawmakers call on Fed to halt rate hikes to avoid risking damaging the economy (CNBC)
• White House economist says Fed rate hikes having negative effect on banks (Reuters)

Here is the latest on the debt ceiling impasse:

• Washington Post noted potential for “two-track” negotiation procedure where debt ceiling is raised, and two sides agree to initiate separate process to discuss spending.
• However, unclear whether leaders could sell this to their base.
• Bloomberg said tight deadline for talks raises potential for short-term fix where debt limit is punted to later in 2023. However, would require House Republicans breaking threat to vote against clear raise, or Democrats agreeing to spending concessions that set precedent ahead of main talks.
• More extreme options include White House unilaterally issuing new debt based on Constitution’s 14th amendment, but that would almost certainly invite legal challenges (NY Times).
• House Democrats could prepare “discharge petition” to bring bipartisan debt-ceiling legislation directly to the floor (NY Times). That is also considered a longshot given it would require support from at least five Republicans.
• Additionally, measure may not clear Congress until after 1-Jun deadline.
• White House open to framing debt ceiling deal in a way that could allow both parties to claim victory (Washington Post)
• White House considering constitutional challenge to the debt limit (NY Times)
• Tight deadline before debt ceiling X-date raises likelihood of a short-term fix (Bloomberg, Reuters)
• House Democrats prepping a “discharge petition” to help bring bipartisan debt-ceiling legislation directly to the floor (Washington Post, NY Times)

A quick note on investor sentiment…..

I see almost daily how bearish everyone is on equities.

Cash is high, etc.

Yet, the latest Investors Intelligence survey came in and it shows bears at 23.6%.

That is the lowest level of bearish sentiment since January 2022.

It’s safe to say that sentiment is very confusing today.

Helene Meisler 5 3 23

A few interesting charts below…..

Articles of Interest:

• Markets:
  • Fed worries, selloff in US regional banking sector raises fears about financial stability (Bloomberg, Reuters)
  • Short interest in regional banks surged last week, potentially exacerbating declines in shares (Bloomberg)
  • US investor interest in China stocks cools amid heightening political tensions between the countries (FT)
• Energy:
  • New York may be first US state to pass statewide ban on natural gas in new buildings (CNBC)
• Geopolitics:
  • US sending Ukraine about $300M in additional military aid ahead of planned spring offensive against Russian forces (AP)

Charts of the day:

I created this chart yesterday because I was very confused why no one on financial media was talking about the regional banking bloodbath that was still under way.

The below chart shows the S&P 500 in black, and the Regional banking ETF in blue.

Notice that the market and the banking sector do tend to trade together and in the same direction.  (although there are disconnects – that tend to re-connect in due time)

There is a massive gap today between the two as smaller banks keep falling and the broad market floats higher.

How will this end?

Will the S&P 500 connect lower, or will  the regional banks rally sharply?

Does the banking sector matter – or do a handful of large tech stocks make up the entire market?

Another good chart that illustrates one of my main themes and core thesis for the coming decade….

That commodities and real assets will outperform the market…

‘In recent years, commodity prices have reached a 50-year low relative to overall equity markets. Historically, lows in the ratio have corresponded with the beginning of new commodity supercycles.’ https://visualcapitalist.com/charted-commodities-vs-equity-valuations-1970-2023/… by

@VisualCap

ElementsVisualCapitalist.com  5/2/23

Quote of the day:

If you cant feed a hundred people, then feed just one

Mother Teresa