In his Daily Market Notes report to investors, Louis Navellier wrote:
Fed Doublespeak
The Fed doesn’t blink; an increase with no official pause.
The Fed is sticking to their guns and still wants 2% inflation sooner rather than later. The banking crisis is “contained” and further increases will be data-dependent. Despite the bond market forecasting rate cuts later in the year, Jay Powell said that the rate-setting committee has “a view that inflation is going to come down not so quickly.
It will 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”. Stock futures tanked right after that statement. Nonetheless, Powell’s comments like “sufficiently restrictive” are dovish and imply that the Fed is done raising key interest rates, in my opinion.
Interestingly, bond yields dropped too. Despite “higher for longer,” the US 2-year yield is now 3.83%, far below the new 5% Fed funds rate.
Recession fears are rising; after the first hour of trading the S&P is back to the April closing low, the Dow below that, and the NASDAQ holding up better, and the QQQ better still. The Russell 2000 is doing the worst, as restrictive lending expected will hit those names the hardest.
The VIX is up 16% to 21.3. Crude oil is also down, WTI is hitting year lows at $67.66/bbl not helped as the Biden administration has apparently balked on their promise to refill the strategic petroleum reserve at these levels. Gold is at an all-time high of $2,063.
Pressure On Regional Banks
Regional banks are down again as the pressure of higher money market fund rates can only put more pressure on bank deposits leaving, and expectations for heightened FDIC scrutiny on loan portfolios. The KRE regional banking ETF is down another 8.5% today, down +17% in a month.
On the jobs front, Initial Jobless claims were slightly higher than expected, while Continuing Jobless Claims were slightly lower. A worrying sign was that 1Q23 Nonfarm Productivity was much lower than expected and Unit Labor Costs jumped 6.6%.
No Earnings Meltdown
While many commentators feel the Fed has already gone too far raising rates, after waiting too long to start raising, the fact remains that earnings overall remain strong, as do 2H23 forecasts. Earning season is far from over and Apple (NASDSAQ:AAPL) reports tonight.
Perhaps the Fed’s willingness to stay the course reflects confidence that the economy can handle mid-single digit interest rates and the banking sector will survive and if so is oversold.
Powell said he still thinks a recession can be avoided or will be modest at most. The wall of worry has been raised yet again, and may rise further as the debt limit showdown becomes the focus, but we are far from an earnings meltdown.
Stocks with strong balance sheets, solid cash flows, and pricing power remain good investments.
Coffee Beans: Hustle and Bustle
The busiest air routes in the world are all domestic flights. The route connecting Seoul and South Korea’s Jeju Island is the world’s busiest. Next is the route between Tokyo and Japan’s Northern island of Hokkaido. In the U.S., flights between Las Vegas and Los Angeles as well as between Hawaiian islands are the busiest. Source: Statista. See the full story here.
