All Eyes Are Now On Credit Suisse

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In his podcast addressing the markets today, Louis Navellier offered the following commentary.

If you wish to listen to this commentary, please click here.

ECB Pause

The big central bank news this week was that the European Central Bank (ECB) announced a 50 basis point key interest rate hike on Thursday, so its key deposit rate is now 3%, up from 2.5%. The ECB had been signaling this 50 basis point key interest rate hike for weeks.

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However, in the ECB statement, the statement to keep “raising interest rates significantly at a steady pace” was removed, so it is possible that the ECB is nearing the end of the rate hiking cycle.

All Eyes Are On Credit Suisse

The banking contagion risk has spread to Europe and all eyes are now on Credit Suisse Group AG (NYSE:CS) after its auditor, PWC identified “material weakness” in its financial reporting for 2022 and 2021. The Saudi National Bank holds a 10% stake in Credit Suisse.

In an interview, the Chairman of the Saudi National Bank said that no financial assistance would be provided to Credit Suisse since it would incur more regulatory oversight above a 10% stake.

BNP Paribas, Societe Generale, ING, Monte deo Paschi, UniCredit, Commerzbank, and Deutsche Bank were also weak, so it will be interesting if the European Central Bank (ECB) stops raising key interest rates and provides any special assistance as the contagion risk spreads in the eurozone.

The Swiss National Bank on Wednesday announced that they were willing to provide a 50 billion Swiss franc ($54 billion) “liquidity backstop” for Credit Suisse. On Thursday, Credit Suisse said it decided “to pre-emptively strengthen its liquidity” by borrowing from the Swiss National Bank.

The Bank of England and the Fed meet next week and it will be interesting if they telegraph when they will stop raising key interest rates. Many strategists are forecasting key interest rate cuts later this year, but that seems very premature to me at this time.

I would have appreciated a joint statement from the Treasury Department, the ECB and the Swiss National Bank to calm down the panic that has enveloped the banking industry, but apparently, the ECB did not think that was appropriate despite the fact that several eurozone banks have been under intense selling pressure.

In the U.S., the yield curve has been inverted since July, so it is no surprise that Silicon Valley Bank ran into problems. The next big bank to fall is First Republic Bank, which just got $70 billion in emergency liquidity from the Fed and J.P. Morgan.

In Palm Beach, there is a run on First Republic Bank (NYSE:FRC)’s deposits and some folks are incurring early withdrawal penalties on certificates of deposits (CDs). Naturally, the folks in Palm Beach are skittish after the Madoff disaster as well and many losing money in leverage municipal bond products sold by Citibank and other financial institutions back in 2008.

As long as the yield curve remains inverted, there is a risk of contagion that other banks may fail the Fed’s capital requirements. The good news is the Fed has opened their discount window for a year (up from 90 days) to any troubled banks.

No Rate Cuts

A joint statement by the Treasury Department, the Federal Reserve and the FDIC said they are taking actions that “fully protects all dispositors” in Silicon Valley Bank as well as Signature Bank (a state-chartered New York bank) helped to calm financial markets.

Plunging Treasury yields are also calming financial markets. In fact, Goldman Sachs now expects that the Fed may not raise key interest rates at its Federal Open Market Committee (FOMC) meeting on March 22nd.

Clearly, the Fed has a lot on its plate suddenly, especially if First Republic Bank and other financial institutions come to the Fed for emergency liquidity. The problem, of course, is the yield curve is still inverted, so the Fed has to un-invert the yield curve it if wants to remove the contagion risk from the U.S. banking system.

Look Out for Dovish Statement

There's no doubt that these bank problems hurt the velocity of money. It causes people to postpone purchases or businesses to hesitate. What we need when the Fed meets next Wednesday is not so much whether they don't raise rates or they raise rates a quarter percent. What we need is a dovish statement. As soon as we get that, the market will have an incredible relief rally.

The Energy Information Administration is having are harder time measuring crude oil inventories due to crude oil blending to a sweeter crude oil grade for export. The U.S. is now exporting about 5.63 million barrels of crude oil, which represents 45% of U.S. daily crude oil production.

Increasingly, the price of crude oil is tied to the decline of Russia's crude oil production and rising demand in the spring. Although crude oil and other commodities were impacted by fears of a U.S. banking contagion, I do expect crude oil prices to naturally firm up as the weather improves.

Currently, U.S. demand remains seasonally low, due partially to the fact the California flooding is impeding traffic. This flood risk is expected to persist, due to the risk of a fast snow melt in the Sierra, which has a record snowpack.

The Labor Department on Thursday reported that unemployment claims in the latest week declined to 192,000 down from a revised 212,000 in the latest week. This was the largest weekly decline since July and was apparently distorted by failing claims in New York after school workers filed for unemployment in the previous week due to Spring break.

 

Continuing unemployment claims in the latest week declined to 1.684 million, down from a revised 1.713 million. The four-week moving averages of unemployment and continuing claims both declined, so the labor market will not be influencing Fed policy at this time.

The Commerce Department on Wednesday announced that retail sales declined -0.4% in February, which was in line with economists’ consensus estimate. January’s retail sales were also revised to 3.2%, up from 3% previously reported.

Vehicle sales declined 1.8% in February, so excluding auto sales, retail sales declined -0.1%. Sales at online retailers rose 1.6%, but otherwise, February retail sales were lackluster. Spending at bars and restaurants declined 2.2% in February which is indicative that discretionary consumer spending may be waning.

However, in the wake of the February retail sales report and January revision, the Atlanta Fed increased its first quarter GDP estimate to a 3.2% annual pace, up from its previous estimate of a 2.6% annual pace.

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