1. Moving the markets

As expected, the Fed raised their interest rate by 0.25%, but traders were more interested in the accompanying statement, and that’s where the disappointment came in.

The statement was a hawkish pause, which signaled that “some additional policy firming may be appropriate,” as opposed to what traders had hoped for, namely “some additional policy easing may be appropriate.”

For a while, confusion reigned, as Wall Street came to grips with what was said, and how it could be interpreted, with the major indexes chopping up and down (see chart above), before the bears stepped in and took the upper hand.

Former chair Richard Clarida summed up best the tight spot the Fed finds itself in:

The chair will have his work cut out for him because when the chair will say ‘pause,’ the markets may hear ‘done.’ And if he says it again, they may hear ‘rate cuts.’

And that’s exactly how the market has reacted over the past year, in that Powell’s words were ignored in favor of what the markets wanted to hear.

In the meantime, the banking crisis goes on, and it remains to be seen how many of the 4,000 banks will follow the same downward path. You may not think that the 3 banks that failed so far are a big deal, but they are when compared to the events of 2008.

All three had more assets ($549 billion) than all 25 banks ($374 billion) that collapsed in 2008. That is a sobering statistic, and should the domino effect continue, which I believe it will, equities will be severely affected.

The Regional banks took another hit, after Powell announced that the banking system was sound and resilient. Huh? Bond yields tumbled, with the 2-year again losing its 4% level.  

The US Dollar tanked and reached 2-week lows, which was a benefit for Gold, as the precious metal solidified its position above the $2k level.

1. Moving the markets

After a flat session yesterday, gravity set in and pulled the major indexes into a deep hole, with the Dow being down over 500 points early on. A slow recovery helped lessen the pain, but in the end, losses exceeded 1% with the S&P 500 faring the worst.

Right after the opening bell, the bears took control of the market direction, supported by a host of issues—and south we went.

Contagion in the regional banking sector returned, as the stability of smaller regional institutions was on traders’ minds. The regional bank index KRE got hammered, as some of its members imitated their best bungee jump—without much bungee.  

Even some of the big banks participated in this contest, followed by the majors, as a short squeeze was nowhere in sight to save equities. Bond yields collapsed, with the 10-year dropping 14 basis points to close at 3.43%, thereby pulling rate hike expectations off their lofty levels.

The Fed’s 2-day meeting contributed to this chaotic session, even though it is widely expected that they will increase rates again by 0.25% tomorrow at 11 am. The big question is whether they will give any clues as to a potential pause, or if their resolve to fight inflation outweighs recessionary fears.

Adding to today’s turmoil was the unexpected announcement by the Central Bank of Australia to hike their benchmark rate. Then it was Treasury Secretary Yellen’s turn to add more fuel to the fire, which she did by announcing that the country may hit its debt ceiling much sooner than expected, namely a month from now. Ouch!

The US Dollar dipped, and Gold ripped with the precious metal reclaiming its $2k level and scoring a 3-week high.

Who knows what tomorrow will bring, but I am pleased that on this volatile day, our portfolios managed to eke out a moderate gain. Once the Fed’s decision is published, we could see markets pump or dump some 1.5-2%.

1. Moving the markets

Despite positive earnings from Microsoft and Google after the close yesterday, the troubles of First Republic Bank (FRC) continued today and overshadowed all news with the stock sliding another 30% on top of yesterday’s 50% dump.

As I have repeatedly pointed out, there is never just one cockroach, a theory which appears to be correct again, as concerns about the banking system were moved to the front burner once more. If FRC gets downgraded by regulators, that would impair their ability to borrow from the Fed, which then would pretty much assure its demise.

In the end, the markets closed in the red for the second day, except for the Nasdaq, which eked out a gain thanks to Microsoft and Google.

Looking at the big picture, we saw surprisingly better than expected Durable Goods orders, which surged 3.2% MoM, but when looking under the hood, it was not as great as the headline number indicated. Offsetting that was the banking system debacle and the debt ceiling anxiety, all of which combined to sink 2 of the 3 major indexes.

Bond yields were mixed today but rebounded off yesterday’s lows, yet the 2-year was unable to reclaim its much fought-over 4% level.  

The US Dollar dropped and popped but closed lower, while gold followed suit but was unable to hang on to its mid-day gains.

As we are nearing the end of April, volatility has picked up considerably, which today pulled our Domestic TTI back below its long-term trend line—but only by a small margin. Please see section 3 below for more details.