The attention of Wall Street today will likely again be on Capitol Hill, as Federal Reserve Chairman Jerome Powell concludes his two-day testimony before Congress. Yesterday, his remarks sparked a modest rally after Tuesday’s selloff (more below). However, before Chairman Powell resumes his testimony, we did get some news on the U.S. economy.
At 8:30 A.M. (EST), the Labor Department reported that unemployment claims for the week ending March 2nd totaled 217,000, which was the highest level since early February. Continuing claims rose above the 1.9 million mark, the highest level since November. In a separate report, the Department of Labor revised its reading on fourth-quarter 2023 productivity to 3.2%, slightly better than expected. On a positive note for the Fed in its battle to tame inflation, unit labor costs were up 0.4%, which was half the forecast of +0.8%. The equity futures, which were higher heading into the economic news, took another step up and are pointing to a positive start to the trading day stateside.
The big news on the economy came yesterday afternoon with the release of the Federal Reserve’s Beige Book summation of economic conditions. The report said that economic activity inched up slightly in January. However, consumer spending also fell in recent weeks, with a noted shift to expenditures on more essential items and goods. Overall, the growth outlook remains positive, with the lead bank noting signs of modest slackening in the labor market and disinflation in the prices of goods and services. Investors should note that tomorrow morning will bring data on February employment and unemployment.
As noted above, Chairman Powell testified yesterday on monetary policy before the House Financial Services Committee. Mr. Powell said that the central bank has done most of the heavy lifting on the monetary policy front, but still plans to stay the course and watch the upcoming inflation data. Chairman Powell also thinks that the potential problems in the commercial real estate market will not be systematic, but the central bank will need to work with some of the struggling smaller lenders to reduce their risks to the ailing sector and avoid a possible contagion in the regional banking system. Overall, his remarks had a touch of dovishness, as he said the bar to hurdle to begin cutting interest rates is not too high. This left the door open for a possible interest-rate cut at the June Federal Open Market Committee (FOMC) meeting.
The remarks from Chairman Powell and some news on struggling lender New York Community Bank (NYCB) put notable downward pressure on Treasury market yields. We think it was mostly the case of some “flight to safety” on the NYCB concerns. The falling rates, which are lower again this morning on the above noted Labor Department reports, gave a modest boost to stocks. Within the equity market, there was rotation into some of the more-defensive stocks and more selling among the Magnificent Seven names yesterday. This coincided with a continued broadening of buying beyond the technology and communication services sectors. Still, the technology stocks are in high demand, and are being led higher by the burgeoning artificial intelligence (AI) revolution. Shares of semiconductor giant NVIDIA (NVDA) took another step up yesterday, and are likely to start today’s session above the $900-a-share mark.
Shares of NYCB were on a roller-coaster ride yesterday, with trading halted several times during the session. The stock initially sold off sharply, falling another 40%, to below $2.00 a share, after the lender said that it will need to raise capital to weather the impact from the losses on its commercial real estate loan portfolio. However, it did not take long for news of potential candidates to emerge, as reports surfaced shortly thereafter that NYCB had agreed to terms of a capital infusion from a consortium of companies, as well as a significant change in its leadership and board of directors. The stock retraced the earlier losses and then some by the closing bell. This situation bears watching, as a contagion of regional banks facing liquidity risks would be troubling, especially with the restrictive monetary policies still in place.
Chairman Powell thinks that the NYCB situation is more the result of poor internal company controls than a systemic problem. Still, there are jitters about the stocks of the smaller regional lenders with high exposure to the commercial real estate market. This, along with any potential deterioration in the economy, could prompt the central bank to pivot on the monetary policy front earlier than Mr. Powell anticipates. Chairman Powell, though, did reiterate yesterday that a “soft landing” for the economy this year is plausible. – William G. Ferguson
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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