Wentz Weekly Insights
Fed Suggests Credit Tightening From Banking Issues Means Less Rate Hikes
Recent Economic Data
- Similar to the housing starts report several days earlier, existing home sales surprised to the upside in February with the sales pace of existing homes rising by 14.5% in February compared to January, the first monthly increase in 12 months. The seasonally adjusted annualized pace of existing home sales was 4.580 million, while up in the month, is still down 22.6% from February 2022 (not as bad as the 12-month change of -37% in January). This is based on transactions closing, so the numbers reflect lower mortgage rates that we saw late 2022 and early 2023, before they rose again in February. The median price for an existing home fell slightly from February 2022, down 0.2% to $363,000, ending the longest streak on record – 131 consecutive months (11 years) of year-over-year increases. We do not expect prices to fall too much because inventories are still at very low levels. The level of existing homes on the market was unchanged from January at 980,000 units, and up 15% from a year ago. The NAR Chief Economist said “inventories are still at historic lows” and “multiple offers are returning on a good number of properties.
- The trend in new home sales was similar to existing home sales and housing starts, with sales of new single-family homes rising 1.1% from January to a seasonally adjusted annualized pace of 640,000, but 19% below February 2022 levels, and in line with expectations. This compares to the low of 543,000 back in July, but the best sales pace since April last year. New home sales are based on signed contracts of newly built homes, not closings, so it represents February signings after the small spike in mortgage rates after January’s declines. The median sales price was $438,200, up 2.7% in the month from a two year low in January, and up 2.5% from a year earlier. Inventory of new homes worsened, with just 427,000 units available, the lowest since last February, equaling 7.2 months supply at the current sales pace, down from 8.0 months in January.
- The weekly Freddie Mac mortgage survey shows the average prime 30-year mortgage rate fell to 6.42% last week for the first drop in six weeks, compared to 6.60% the week prior. Mortgage rates have not fallen as much as the 10-year treasury, which are typically pretty well correlated, because of the stress in the banking system.
- The number of unemployment claims filed the week ended March 18 was 191,000, relatively unchanged from the week prior, with the four-week average at 196,250, also relatively unchanged. The number of continuing claims was 1.694 million, up 14k from the prior week, with the four-week average at 1.684 million.
- Trucking company Knight-Swift Transportation said it has agreed to acquire U.S. Xpress in a $808 million deal, or $6.15 per share, which is a massive premium to the $1.50 shares of U.S. Xpress were trading at prior to the announcement.
- Ford said it will restructure its business and its reporting segments; Ford Blue (its legacy combustible vehicles), Ford Model e (its EVs), and Ford Pro (its commercial products/services). It said it lost $3 billion in electric vehicle business over the past two years, and it expects to lose a similar amount in 2023 (for comparison, its combustion unit (non-EV) generated $10 billion in profits). However, it expects the EV unit to be profitable by 2026. Ford reiterated its 2023 forecast.
- Homebuilder KB Homes beat most metrics against analysts expectations in its earnings release and said it saw a notable increase in sales through the quarter and is not seeing tightening lending standards yet.
- Shares of Block, formerly known as Square, were down significantly last week after Hindenburg Research, an activist focused on short selling (betting stocks will go down), published a report accusing the company of overstating its user counts and understating customer acquisition costs, after a two-year investigation into the company.
- Due to concerns about TikTok’s data privacy standards and its ties to the Chinese government, the U.S. has been pushing for an outright ban of the social media app. In 2020, President Trump attempted to ban the app, which was blocked by the courts, now President Biden is pushing for a ban, which is seeing support among Congress. Last week, TikTok CEO Shou Zi Chew appeared before Congress to testify in the company’s attempt to save the app in the U.S. and revive trust from U.S. officials. TikTok is used by over 150 million people in the U.S. and is owned by Beijing based ByteDance.
- This morning, First Citizens BancShares agreed to purchase Silicon Valley Bridge Bank (the failed Silicon Valley Bank’s deposits and loans) from the Federal Deposit Insurance Corporation (FDIC), while the $90 billion in securities and other assets will remain in receivership at the FDIC for disposition.
- The weekly report on the Fed’s balance sheet has been watched more closely over the past two weeks to get an idea of how much banks are borrowing from the Fed and looked at as a sign of any additional stress in banking system. Its latest report from last week showed the balance sheet rose $94 billion last week (lower than the $300 billion increase from the week prior), with a $42 billion increase in lending to banks through the new lending facility to $54 billion, and loans to bridge banks (created after the failure of the two banks) rose $37 billion to $180 billion.
- Many of the market’s moves last week were driven by messages from the Treasury and FDIC about FDIC insurance on deposits, where we saw mixed messages. During Powell’s Wednesday press conference, Janet Yellen said she was not considering blanket insurance coverage for all U.S. banking deposits without Congressional approval. This sent stocks lower on Wednesday. However, in Yellen’s testimony to Congress on Thursday, she said the Treasury is prepared to take additional actions if warranted, sending stocks higher.
- There were multiple other central bank meetings across the world last week. The Swiss National Bank raised its benchmark rates 50 basis points to 1.50%, in line with expectations, despite recent Swiss banking turmoil, particularly Credit Suisse. The Bank of England raised rates 25 bps, which was somewhat expected, with a 7-2 vote. The Norges Bank raised rates 25 bps to 3.00%. Central banks of Hong Kong, Philippines, and Taiwan all also raised their respective policy rates.
- St. Louis Federal Reserve President James Bullard said in an interview Friday, the first policymaker to speak since the FOMC meeting, that the Fed would likely need to raise rates further than he previously expected due to the stronger economy and inflation than previously thought. His peak rate expectation increased to 5.50% to 5.75%, indicating three more rate increases, up from the consensus among Fed officials of 5.00% to 5.25% as indicated in the latest Fed projections released after the FOMC meeting. Bullard acknowledged the banking issues and a downside scenario, calling the Silicon Valley Bank failure unique and different than every other bank, but put a 80% probability the issues abate.
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The Week Ahead
This week will be light on economic data and earning releases, with investors sure to be more focused on the banking sector and Federal Reserve policymaker’s comments instead. Following last week Fed’s meeting, there will be several Fed officials appearing in public speeches throughout the week where investors will look for additional signs on futures monetary policy and their thoughts on banking stability. Pertaining to the banking sector, Fed Vice Chair for Supervision Michael Barr and FDIC Chairman Martin Gruenberg will testify before Congress on the recent bank failures on Wednesday in which will shape the Federal regulatory response. The last week of the quarter has several earnings reports scheduled before a quiet week next week and first quarter earnings beginning the week after. Notable companies reporting include BioNTech, Carnival on Monday, Micron, Lululemon, Walgreens, McCormick on Tuesday, and Paychex on Wednesday. The highlight of the week on the economic calendar will be the monthly figures on personal income and consumer spending that will be released on Friday, where economists expect a 0.3% increase in income and 0.2% increase in spending for February, after an unusually strong January. Elsewhere, home prices via the Case Shiller home price index and the reading on consumer confidence for March will be released Tuesday, pending home sales on Wednesday, the final revision on fourth quarter GDP and jobless claims on Thursday, and the March read on consumer sentiment on Friday.