Stock market futures are pointing to a negative open to today’s trading, given lingering worries about the financial sector. As traders prepare for action, the Federal Reserve is set to release February data on industrial production and capacity utilization. A moderately soft showing is likely for the production index, probably just under 103, versus the high of 104.6 hit last October. Economists anticipate the capacity utilization gauge will come in at 78.3%, compared to the peak of 80.2% in April 2022. Levels below 80% are not especially encouraging, in terms of economic expansion. Also, this morning, the Conference Board will unveil its latest leading economic indicators measure for last month, which may well display a slackening of activity. Additionally, the University of Michigan will announce the results of its consumer sentiment survey for this month, expected to be a rather tepid 67.0.
Share prices visibly firmed yesterday, and the major U.S. market indexes appear poised for gains this week, with the tech-heavy NASDAQ Composite in the lead, followed, in order, by the broader Standard & Poor’s 500 and the Dow Jones Industrial Average. Earlier this week, both the Consumer Price Index and the Producer Price Index indicated a further, albeit incremental, decline in the rate of inflation during February. It’s also worth noting that momentum in the retail sector eased last month, and there were some lackluster manufacturing data for the current month. Countering the negatives were a stronger Homebuilders Survey, higher housing starts, and better building permit numbers. On balance, it appears that the Federal Reserve’s inflation-fighting regimen is having an impact, gradually slowing economic expansion. The recent bank failures suggest that the Fed will not be as aggressive in raising short-term interest rates as many on Wall Street had been expecting.
The central bank is meeting on March 21st and March 22nd to determine its next rate move. Until last week, a majority of market pundits had expected a rate hike of one-half of a percentage point, to 5.00%-5.25%, possibly followed by other increases to the ultimate level of about 5.75% by this summer. Then, California bank SVB Financial Group (SIVB), the parent of Silicon Valley Bank failed, followed, not long after, by the demise of New York-based Signature Bank (SBNY). SVB concentrated on venture-capital and technology industries financing and Signature had exposure to the cryptocurrency market. The banks ran into liquidity problems due to reduced valuations in their bond portfolios, a result of higher interest rates. They were unable to secure new funding, and depositors left in droves, prompting the Federal Deposit Insurance Corp. to seize the banks. Yesterday, a group of the 11 largest domestic banks committed to making $30 billion in deposits to First Republic Bank (FRC), headquartered in San Francisco, to shore up that entity’s financial position. Uncertainty in the banking sector suggests the Fed will hike interest rates by one-quarter point, or not at all, this month and, then, perhaps take an extended pause. There is beginning to be guessing about when in the future a cycle of rate cuts might possibly begin.
Considering that the Fed may become less aggressive with its current rate policy, many investors have decided to take on more risk, moving into technology issues, as is evidenced by the NASDAQ’s reinvigorated performance this week. That said, there also are a fair number of investors who have shifted funds more toward safer U.S. Treasury’s and money-market funds. Market watchers have pointed to the fact that the two-year Treasury note yield is now below the federal funds rate range, indicating a view that rate cuts are not far off. Regardless, it’s likely that banks now will become more conservative about lending, given liquidity concerns; this ought to contribute to a slowing of economic growth.
Investors would do well to remain cautious, staying with high-quality equities. We note that, this past week, among the better performers have been the strong cash-flow generators Alphabet (GOOG), Apple (AAPL), Amazon.com (AMZN), and Microsoft (MSFT). – David M. Reimer
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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