Markets speculate on how the Fed will respond to recent banking fears

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Published Date 3/17/2023

Concerns over bank issues slowed yesterday, some key Wall Street firms suggesting the run to safety in treasuries may have run its course. MBS prices began the day +14 bps, yesterday -22 bps. The more sensitive 2 year note this morning in early activity down 14 bps after yesterday’s 30 bp increase.

Yesterday stock indexes improved on relief after hard selling recently, this morning in futures trading the indexes, the DJIA -280.

The most recent bank that roiled markets, Credit Suisse, improved yesterday, but today selling reemerged as fear continues. The stock of First Republic, after getting a $30B lifeline from Wall Street big banks, declined 17% in pre-open trading this morning, down about 60% this week. Most other regional banks were lower prior to the 9:30 am ET open, with PacWest Bancorp falling 5.6% in premarket trading, Western Alliance Bancorp dropping 2.5% and KeyCorp down 1.5%. Meanwhile, the SPDR S&P Regional Banking ETF fell as much as 2.6%. Some banks turned to the Fed’s discount window yesterday, shoring up overnight reserves; borrowing at the window implies the situation in the banking system remains uncertain. Borrowing from the window is considered evidence of potential problems, it is the last place to go and usually puts bank examiners on high alert.

At 9:15 am Feb industrial production and capacity utilization, production thought to be +0.4%, cap utilization at 78.5% from 78.3%; production unchanged from Jan; capacity declined to 78.0%.

At 9:30 am the DJIA opened -120, NASDAQ -11, S&P -6. 10 year 3.47% -11 bps. 10 note 3.46% -12 bp. FNMA 5.5 30 year coupon at 9:30 am +31 bps from yesterday and -5 bps from 9:30 am yesterday.

At 10 am Feb leading economic indicators. Expected down 0.2%, declined 0.3%.

The FOMC next Wednesday and Jerome Powell’s press conference will be the focus now, adding to the uncertainty existing in the banking sector. Expect a 25 bp increase, like the ECB yesterday, continuing to march forward fighting inflation implies the central banks are not panicking. By next Wednesday much of the present uncertainty will have settled as more information on banks unfolds.

Source: TBWS

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