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Pre-Markets Flat as Investors Prepare for Fed

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Wednesday, March 22nd, 2023

Pre-market futures are flat this morning, palpably cautious about what’s to come from the latest Federal Open Market Committee (FOMC) meeting at 2pm ET this afternoon — especially after indices have grown between 1%-3.25% over the past five trading days. The Dow is currently +25 points while the Nasdaq is -15; the SD&P 500 at this moment is exactly unched.

A majority of analysts still believe the Fed will follow its dot-plot and raise another 25 basis points (bps) today, which would bring the Fed funds rate range to 4.75-5.00%, the first time we’ll have struck 5% since September 2007. Even as we see more West Coast regional banks experiencing financial difficulties as of this morning, the common wisdom is that a Fed pause here may cause market participants to smell smoke and assume there’s a fire somewhere.

The Fed, while not interested in seeing the stock market blast into outer space, also does not want to incite a panic. It’s strange that the specter of a Fed pause here in March of 2023 would create negative ripples throughout the market rather than the direct opposite, but the fact of the matter is: failure of enough financial institutions would prove something has “broken” in the economy, which may send our economy racing into a recession. And if the Fed is being proactive here, investors may take this as a severely negative cue.

To be clear, we’re not there yet, and we may not be. Even with some Silicon Valley-oriented regional banks going under — and the next bank in the spotlight this morning is Pacwest (PACW - Free Report) , down another -10% this morning and -50% over the past two weeks alone, which announced it’s “not prudent to move forward with another capital raise now” — large financial institutions look plenty capable of weathering this storm.

We also continue to see a healthy labor market (even if wage growth is not keeping up with inflation), and China’s economy steadily emerging from the pandemic shadows (although President Xi just yesterday met with Russia’s President Putin, who has a warrant for his arrest by the ICC). Existing Home Sales numbers climbed for the first time in a year last month, and the American consumer has yet to be hampered on a wide scale regarding retail spending.

In short, we still have a lot going for us economically. Have we managed to trim the fat of much speculative investment from the era of cheap money which moves further away in our rear view? Sure we have — this is part of what was happening with Silicon Valley Bank, Signature, Silvergate, etc. But as long as we’re not yet cutting into muscle, the Fed is likely to foresee a decent climate for landing the inflation plane without incident.

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