Weekly Market Commentary
Reassurance from the Fed
Posted on March 27, 2023
Market Commentary by Larson COO Mitchell Wood
|The Major Markets sprung to life last week with gains across all five indices, despite the seemingly ever-present volatility related to banking confidence.
The week began with the news that UBS completed the acquisition of the troubled Credit Suisse through a deal constructed by the Swiss government. This $3.2B deal saw the roughly $1.1T institution take over the $531B Credit Suisse, shoring up the European banking sector and expanding the size of the “Too Big to Fail” giant.
However, this newly constructed entity immediately ran into concerns of Swiss citizens who, when polled, reportedly wanted to see legislation passed to split up this deal.
Back stateside, depositors also carried concerns about the state of the American banking system as smaller banks still struggled with depositor confidence. However, the S&P 500 saw the index trade back up to the 4000 level Tuesday as anxiety subsided ahead Treasury Secretary Janet Yellen’s comments to the American Bankers Association, as well as Fed Chairman Jerome Powell’s Press Conference following the FOMC Meeting Wednesday.
On Tuesday Janet Yellen said, “Let me be clear: the government’s recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe,” and, “The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
|This reassurance stimulated the market as the index closed just off the highs for the day.
|On Wednesday, it was Jerome Powell’s turn to offer reassurance. Following his prepared comments during the FOMC Post Meeting Press Conference, complete with another 25-basis point increase in the Fed Funds rate, Powell was asked, “You’ve been very consistent in saying that the Fed would be raising interest rates and then holding them there for quite some time. Following today’s decision, the markets have now priced in one more increase in May and then every meeting the rest of this year, they’re pricing in rate cuts. Are they getting this totally wrong from the Fed or is there something different about the way you’re looking at it, given that you’re now thinking that moves might be appropriate as opposed to ongoing?”
To which he responded, “In that most likely case, if that happens, participants don’t see rate cuts this year. They just don’t. I would just say, as always, the path of the economy is uncertain and policy is going to reflect what actually happens rather than what we write down in the SEP. But that’s not our baseline expectation.”
This news, along with a clarification by Yellen in front of the Senate banking committee in which she said, “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits.”
In the end, the S&P 500 traded down to the intra-week lows Friday before recovering midday to contain the entirety of the final weekly gains within that day of trading.
Market participants still remained suspicious of the Fed’s ability to keep interest rates at an elevated level for the remainder of the year. According to the CME Group’s Fed Watch tool, participants have continued to project the greater likelihood of interest rates a percentage point lower at this time next year.
Furthermore, the bond market continued to keep the yield curve inverted, well below the Fed Funds Rate, and much of the curve 50 to 100-basis points lower than the end of February.
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