Plunging Banks Take the Market Down

Plunging Banks Take the Market Down
What Do Investors Do Now?

Weekly Market Outlook
By Keith Schneider and Donn Goodman

By now you are probably aware that the equity markets suffered brutal 4+% slides this past week, but the real story of last week was in the credit markets, where expectations of “inflation fighting” increased monetary tightening began the week rising quickly only to be abruptly reversed by an unexpected outgrowth of contagion from the smoldering crisis in the crypto markets.

In other words, the Fed’s cure for inflation may have begun what will soon be called “a banking crisis” that ignited last week in crypto-centric financial firms.

The contagious crypto crisis and lower bond prices (higher rates) are now undeniably infecting important regional banks. As a result, the coming week may reveal a catalyst that justifies a Fed pivot much sooner, for very different reasons, and leading to more uncertainty than any market has currently priced in.

The roller coaster of expectations and prices began earlier in the week (Tuesday) with testimony to Congress by the Chairman of the Federal Reserve, Jay Powell. Most analysts, economists, and reporters expected that the Fed would stay on the same path laid out over the past year. That path includes another 2 or 3 small Fed raises of 0.25%, which would put the target for short-term rates close to 5.0%.

Instead, he voiced a much more hawkish concern and, given some of the recent economic numbers, suggested that larger increases (0.50%) may be necessary at their upcoming FOMC meeting in two weeks.

Here is what the Fed Chairman said on March 7th to Congress:

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

In other words, the Fed’s war on inflation and the economy continues. The Fed is insinuating that they could raise interest rates higher and faster than it has already telegraphed. With this, the two-year Treasury rate climbed above 5% and created more than a 100 basis point 2/10 inversion.

After Chairman Powell spoke to Congress and suggested more rate hikes (not less) may be necessary, the probability that the Fed would raise rates by 0.50% went up dramatically to 80%. As you’ll read shortly, these probabilities have since declined.

However, this inversion implies with a great degree of certainty that we will see a recession in the next few months as this steep of an inversion has ALWAYS signaled a recession in the future.

Many economists and analysts believe the Fed is being way too aggressive in waging this battle. Most of these folks believe the Fed is trying to destroy demand instead of trying to fix supply, which would bring down inflation faster.

It appears that the Fed has resorted to aggressive interest rate rising actions that worked in the past (1970’s) while newer progressive thinking implies that they will destroy the economy (or already have). Here is what a few of these folks had to say:

Read more about the current banking crisis and how this might play out. We also address the following important subjects: