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Pre-Markets Up on Rate Hike Speculation

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Tuesday, March 21st, 2023

Banks are still the main story in today’s stock market, as the continuing saga on First Republic Bank enters its second week. A jump of +26% on Treasury Secretary Janet Yellen’s words that the U.S. government could backstop more deposits at FRC and other regional banks have bolstered the near-term outlook. The Dow is currently +300 points at this hour, the S&P 500 is +30 and the Nasdaq is +80.

Not too shabby, considering tomorrow brings us a new Fed decision on interest rate policy, with still more than half of analysts expecting another 25 basis point (bps) hike to a range of 4.75%-5.00% — the first time we’ll have hit a “5-handle” on the Fed funds rate in 15 1/2 years. Still, it’s better than the 50 bps rate hike a majority of analysts were certain was coming, and markets sold off on that prospect.

There’s still a chance the Fed pauses tomorrow rather than follow its precise dot-plot, in order to get a better view of regional (and global) bank destabilization before turning the crank tighter. After all, it was partly the 450 bps in rate hikes — along with a half a billion dollars worth of assets expiring off the Fed’s balance sheet — over the past year that put the heat under banks like FRC. That said, we’re beginning to see the smoke clear on bank failures currently, and a wider-scale contagion does not look imminent. We’d say odds are good the Fed keeps with its dot-plot plan and raises 25 bps.

It’s important to consider history when we question whether or not this is a good move: back in the 1970s, the U.S. experienced a wide-scale energy crisis which led to higher prices amid a flat economy. In a word, “stagflation.” At that point, inflation proved so sticky in America that the Fed eventually cranked the interest rate wheel up near 20% — creating an economic recession in the first couple years of the Reagan administration. Fed Chair Powell and others remain conscious of this scenario, and wish to avoid it. That’s likely putting it mildly.

After today’s open, Existing Home Sales for February come out, expected to tick up from near 13-year lows to 4.2 million in the month. This metric is currently on a 12-month downward streak, seemingly plateauing here around 4.0 million from 6.3+ million as of the end of 2021. Recent multi-year highs came in higher than 6.5% directly after the worst months of the pandemic, on a major flight to larger homes out of big cities like New York.

Higher interest rates led to higher mortgage costs, climbing in the month of February from around 6% on a 30-year fixed mortgage to north of 6.5% by the end of the month. We tipped north of 7% briefly in late autumn of last year, and all of this activity has cooled the housing market over time.

The only time we’d seen a smaller level of existing home sales over the past 25 years was back in the wake of the Great Recession — 2010 or so, where we slid just south of 3.5 million sales per month. It doesn’t currently look like we’re on that trajectory, but a sub-4 million read might make some noise in the markets.

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