Stock indexes are poised for a positive open today, based on the futures market. Investors had been anxiously awaiting the release of Personal Consumption Expenditures (PCE) index figures for the month of February. The just-reported core PCE reading, excluding volatile food and energy prices, showed 0.3% month-to-month inflation and year-over-year expansion of 4.6%, versus 0.6% and 4.7% in January. Nominal personal income and spending last month increased 0.3% and 0.2%, respectively, both posting weaker successive-month momentum. Inflation is easing, but remains too high for the Federal Reserve’s comfort.
The core PCE index is closely monitored by the Fed in setting its rate policy. Shortly, the University of Michigan will unveil its consumer sentiment survey for March, which is expected to hold at a quite modest level (about 63.0). Later today, several Fed officials (Williams, Cook, and Waller) will discuss the economy and the central bank’s rate strategy. Share prices surely will react to the additional data and the officials’ remarks.
Share prices visibly moved higher on Wednesday and Thursday of this week. It appears that investors are taking solace in that there has not been any further meltdown in the global banking sector. Larger industry players have stepped in to buy the assets of the failed banks SVB Financial Group, Signature Bank, and Credit Suisse Group. Lately, there’s been talk on Wall Street of more consolidation in the financial sector, in light of the weakened profiles of regional banks. The sector might not yet be out of the woods. The tech-heavy NASDAQ Composite, broader Standard & Poor’s 500, and the Dow Jones Industrial Average might all gain in the 1%-2% range this week. Impressively, the NASDAQ appears headed for a 20% gain, year to date.
We note that the Federal Reserve seems ready to lift short-term interest rates by another one-quarter percentage point, to 5.00%-5.25%, in early May. If wages and consumer spending remain resilient, and inflation persistent, Chairman Jerome Powell could well push the federal funds rate range even higher before summer. Rising rates have prompted savers to move cash from low or no yield deposits to higher-rate money market and other similar accounts. The loss of such low-cost loan funding will pressure bank operating results.
Economists worry about commercial real estate loans on banks’ balance sheets, which are backed by now marked down fixed-income securities holdings. Substantial amounts of these loans will need to be refinanced over the next two years, likely at higher rates, stressing debtors. Fortunately, the appearance of stability in the bank sector over the past few days has helped to shore-up the values of bank investment portfolios. A concern, though, is that increasing interest rates could tip the economy into recession, leading to reduced loan originations and renewed pressure on bank capital structures.
The ongoing uncertainty has resulted in investors seeking safety. They have put more cash on the sidelines, opened money market accounts, bought gold, and bid up the shares of high-quality technology stocks (e.g., Apple, Inc., ticker AAPL). Such a strategy appears prudent for the time being. – 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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