Hello, this is Tom Jalics, Chief Investment Strategist at Fifth Third Bank
US equities were mixed in a week dominated by a flurry of headlines around banking uncertainties. For the week, the Dow Jones Industrial Average fell 0.1%, the S&P 500 was up 1.5%, and the Nasdaq Composite ended the week 4.4% higher. U.S. Treasuries yields moved sharply lower last week with the 10-year U.S. Treasury ending the week at 3.43% and the 2-year U.S. Treasury note ending the week at 3.84%. The 2-year/10-year U.S. Treasury yield curve remained inverted, but narrowed considerably last week, ending the week 41 basis points inverted. On March 8th this yield curve was nearly 109 basis points inverted. The U.S. dollar index was down 0.7% versus a basket of global currencies. Gold was up 5.7% for the week ending the week at $1,949.25/ounce, its best weekly performance since April 2020. West Texas Intermediate (WTI) crude oil was down 13.0% for the week, ending the week at $67.80/barrel, as the market considered the possible impacts a slowing global economy would have on demand.
We’ve had quite a week: two of the three largest bank failures in American history, images of lines of depositors at these institutions waiting to withdraw their savings, and emergency weekend meetings of Washington’s key financial regulators. The risks taken by these institutions are not representative of the banking industry. The decisive policy response of the past week also draws a contrast with the deliberations of 2008-09. The Treasury Department, the Federal Reserve, and the FDIC announced that the FDIC would guarantee all the deposits at both failed banks (i.e., even funds above the deposit insurance limits), sending a strong signal and precedent to prevent contagion in the banking system. The regulators also created a new facility for banks to ensure that banks could create sufficient liquidity to meet any potential "bank runs." In another contrast to the response of 15 years ago, deposits may have been protected, but shareholders and certain unsecured debtholders of these failed institutions would NOT be protected, and senior management would lose their jobs.
While we believe that the U.S. is not facing another Great Financial Crisis, the failure of these institutions will have consequences. The events of the past week will likely accelerate the transmission of restrictive monetary policy into the economy; consumer scrutiny of deposits is likely to increase the costs of gathering those funds while any potential regulatory response may also add to costs at some banks. Traditionally, institutions facing a profit squeeze become more selective in their lending. The bank stress may also impact the direction of monetary policy. It is often said that when our central bankers are trying to restrict the economy, "The Fed will keep tightening until something breaks." It’s fair to say that something broke. With inflation still above the 2.0% target, the battle against inflation has not been won, but Fed governors have a greater justification to pause (which we would favor) or, if they do vote to raise rates at this week’s meeting, they may signal a greater willingness to pause. The events of the past ten days will have consequences for the economy and are likely to take form in slower prospective growth.
This week’s major event will be the March FOMC meeting, with a statement to be released at 2:00pm Eastern on Wednesday, March 22nd. A press conference from Fed Chair Powell will begin at 2:30pm and will be scrutinized by investors. According to Fed Funds futures markets, there is a roughly a 60% probability of a twenty-five-basis point rate hike. Investors will also be analyzing a new Summary of Economic Projections (SEP) from the Fed as well as on any guidance on the Fed's balance-sheet policy. Economic reports will be light this week, beginning with February existing-home sales on Tuesday. February new-home sales and initial jobless claims will be reported on Thursday and preliminary February durable-goods orders on Friday. The earnings calendar is light with only five S&P 500 constituents reporting.
As always, we will be watching and reporting to you next week. Thank you.
