Although it was a relatively quiet week, there was a flurry of news items of some consequence. Finland, a country that borders Russia, officially joined NATO on April 4, drawing a threat from Moscow of “countermeasures.” Days earlier, in what could be a connected event, a Wall Street Journal reporter, Evan Gershkovich, was arrested and accused of espionage by Russia’s Federal Security Bureau.
The CEO of JP Morgan Chase & Co. (JPM – $128.42), Jamie Dimon, wrote in an annual letter to shareholders that “the current banking crisis is ongoing, and its impact will last for years.” In Dimon’s 43-page document, he also stated that he feels the odds of a recession have increased. At the company’s annual meeting in Zurich, the Chairman of Credit Suisse Group AG (CSGN – $0.81), Axel Lehmann, apologized to shareholders for taking the company to the brink of bankruptcy which required a government-sponsored rescue by UBS Group AG (UBS – $21.00).
Virgin Orbit Holdings Inc. (VORB – $0.15), founded by billionaire Richard Branson, filed for bankruptcy on April 4 after struggling to secure long-term funding after a failed launch.
NASA named the first woman and the first African American as part of the four-member team chosen to fly on the first crewed voyage around the moon in more than 50 years. Last, but far from least, Manhattan District Attorney Alvin Bragg led a team of prosecutors that charged former president Donald Trump for falsifying business records in order to conceal a violation of election laws during his successful 2016 campaign. It was a controversial legal move, but one that would make Donald Trump the first sitting or former US president to face criminal charges.
On the economic front, this week’s surprising cuts to the OPEC+ group’s output targets, plus an extension of Russia’s output cuts from June to the end of the year, sparked a rally in crude oil futures (CLc1 – $80.71). Analysts indicated that oil prices could reach $100 a barrel later this year, given the existing tightness in the market. If so, it would complicate the Fed’s fight against inflation which is already compromised by the turmoil in the banking industry. The run-up in oil prices added fuel to a rally in gold (GCc1 – $2022.20) where the technical chart looks poised to break out of a three-year trading range. The top of the range for the gold future is currently at $2030. See page 8.
Job openings in February fell by 632,000 to 9.9 million, their lowest level in nearly two years. This survey was taken prior to the recent financial crisis, which means the next report may show a further decline. If so, it could be a positive for the Fed, and a sign that tight labor market conditions may finally be easing. The March job report from the Bureau of Labor Statistics will be released on Friday and it should also show a slowdown. If not, it may disappoint investors.
The ISM manufacturing index fell from 47.7 in January to 46.3 in February, recording its fifth consecutive month below 50, i.e., the breakeven level. All components of the manufacturing survey were below 50 and order backlogs fell from 45.1 to 43.9. It was a report that signaled a deceleration in an already weak manufacturing sector. The ISM non-manufacturing survey will be reported later this week and it has been the strongest and steadiest segment of the economy over the last decade. The service sector typically represents over 43% of domestic GDP and it is on the Fed’s radar since it also represents the area of inflation where prices are yet to show a deceleration. See page 3.
The Conference Board’s consumer confidence index for March rose 0.8 points to 104.2, offsetting some of January’s hefty decline of 2.6 points. Conversely, the University of Michigan’s sentiment index fell from 67 to 62, offsetting some of the gains seen in January. The University of Michigan survey indicated that expectations dropped from 64.7 to 59.2 in the early days of March. In both surveys, consumer sentiment regarding present conditions fell during the month. This could deteriorate further if credit conditions continue to tighten, and energy prices rise. See page 4.
Federal Reserve News
As we noted last week, the default of three regional banks resulted in a reversal in the Fed’s quantitative tightening policy. To settle the nervousness in the banking system the central bank is providing liquidity to the banking system in the form of primary loans and the newly established Bank Term Funding Program. Loans and credit lines on the Fed’s balance sheet increased from the $350 billion reported last week to more than $390 billion dollars this week. It has all been done since March 8 as an emergency measure to calm the global banking system and we believe this added liquidity could be a boost to stock prices in the near term. In fact, the positive correlation between an increase in the Fed’s balance sheet and equity gains is stronger than the negative impact on equities from rising interest rates. This makes us optimistic about the near-term outlook, but it comes with a caveat. This new quantitative easing is only temporary and could last for a period of weeks not months. See page 5.
In the intermediate term we expect the Fed to get back into tightening mode. Even after last week’s Fed rate hike of 25 basis points and the deceleration in February’s CPI to 6% YOY, the real funds rate narrowed to negative 100 basis points. But note, this spread is still negative. Historically, a Fed tightening cycle has ended with a fed funds rate averaging a positive 400 basis points. Statistically, this implies that if inflation were to fall to 3% this year (unlikely), the fed funds rate could rise to 7% by year end! This 7% fed funds rate may not appear in the current cycle, but overall, it points out that rates could go higher than any economist is currently expecting in 2023. See page 6.
Last week the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite index, all rebounded from support created by the convergence of the 50, 100, and 200-day moving averages. This creates a positive technical chart pattern for the near term. However, the Russell 2000 index remains the best guide for investors in coming months. In our view, the market is and will continue to be in a wide trading range and this is most clearly seen in the Russell 2000 between support at 1650 and resistance at 2000. See page 9. The 25-day up/down volume oscillator is at negative 0.15 this week and in neutral territory after being in the oversold zone for 12 consecutive trading days in March. This oversold reading followed an eleven-day overbought reading that ended February 8. The February overbought reading represented a shift from a bearish to a positive trend, or at least from bearish to neutral. But this recent return to oversold territory clearly defines the current market as being neither bullish, nor bearish, but in a long-term sideways trading range. Trading ranges tend to include many short-term shifts in leadership. Note that the OPEC+ production cut appears to have shifted leadership from technology back to energy and staples.
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.