Closing Bell - Closing Bell: Fed Raises Rates 25 Basis Points 3/22/23

Episode Date: March 22, 2023

Ritholtz Wealth Management’s Josh Brown gives his instant reaction and analysis to Powell’s press conference – and the major market reaction. Plus, Schwab’s Liz Ann Sonders’ gives her forecast for where we could be headed from here. And, David Chiaverini of Wedbush breaks down the regional banks reaction.

You're listening to Closing Bell in Progress. You were just listening to Federal Reserve Chairman Jay Powell after the Fed raised interest rates by a quarter point as expected. And the market saw enough in there for both bulls and bears to grab on to rally initially. And then we backed off significantly. Jay Powell essentially granting that the credit crunch that they might anticipate from the banking instability could have an effect of drawing down inflation in their favor. On the other hand, refusal to commit to rate cuts later in the year as the market is now pricing in. And he also said it's hard to see how recent events have made a soft economic landing more likely, even if, in fact, he still hopes there is a path to that soft landing.

See, the S&P 500, it topped out about 40-40. There was a decent little rally, mostly in the Nasdaq. Nasdaq 100 up 1% at one point in reaction. Of course, the market often seesaws back and forth in reaction to what the Fed does. The dollar index, very interesting moves. It really plunged at the beginning of the press conference. It was taken as very dovish that that the chair was essentially granting that, again, inflation might become a little more friendly, but refusing really to say

that the job is done. You see when the dollar index bounce, that's when it was taken as perhaps a little less dovish. And that's when the stock market backed off. You are watching Closing Bell. I'm Mike Santoli in for Scott Wapner. We're live from Post 9 at the New York Stock Exchange. We have a big show ahead. Charles Schwab's Lizanne Saunders with us for her first reaction to the Fed decision. She's going to be joining us shortly. And with me here at Post 9, Josh Brown, CNBC contributor, Ritholtz Wealth Management CEO and co-founder. Josh, good to see you. Good to have you. What's your quick take? I didn't think they were going to do it. So we'll start. We'll start. Well, he also acknowledged that they considered a pause in response to a question. Yeah. This would be these were the two big standouts for me. And we were looking at this tick by tick because why not? It's a big day. He starts off with we don't know the extent of him. Sorry. He starts off with a comment about the banks and the market likes that. You hit the HOD, the high of the day, around 242.

Right around that point in time, I think, is when you're getting the most dovish comments and the best of that knee-jerk hire. And then from there, you watch the two-year yield essentially crash back down to 4%. Not the biggest move we've seen the last week or so, but a decent-sized move. And I think that tells you everything you need to know. The dollar has now been smashed down. And I think the market is basically saying, OK, we'll take this hike and you will take it back from us soon enough. And that's where I think we kind of land right now. Still got another 45 minutes left until the close. Most of the commentary I've been reading is saying non-event, non-event.

One minor change in the statement. They added something about resilience to the banks. But really, there wasn't that much here that changes over. May and will. I know that was one of the. Yeah. All right. But, I mean, we're doing surgery on the wings of a gnat at this point. And it was clear there's only so much and so far

that he would go in terms of being specific about the banking crisis. He did say deposit outflows had stabilized in the last week or so. That might have been a little bit of news in a small way. And so it seems as if we're left with, OK, this is sort of part of the plan, an extension of what the Fed's been doing and what they've said they are going to continue to do. Right. Which is, look, we still think we're way above our target on inflation. We have more to go. Probably. They do have the summary of economic projections that was updated in March. And essentially they're saying, well, GDP might be a little weaker than we thought it was going to be in December. But then again, the economy's been running much hotter than they anticipated.

Six months into the six minutes into his remarks when you first started to turn lower, quote, process of getting inflation back down has a long way to go. It will be bumpy. Exactly. Market didn't like that. They also didn't like, quote, that's not our baseline expectation. When asked about the potential for rate cuts. Exactly. So that's, you know, again, as you say, we're trading, you know, vocabulary words here is what's going on. And that is always the way it does go. And there's a rethink and then another rethink and then somebody fades the second one. But it is worth keeping in mind that even by the end of this year or I guess as a general average for this year, they're expecting PCE inflation to be 3.3 percent.

So above target still. Yeah. And so when they say there's a long way to go and we're probably going to need employment to soften up more and and the economy to grow below trend for longer in order to get there. You know, that's take your medicine. We've been taking that medicine for a year right now. Seems as if, though, at this point, the market's holding on to this little mini rally we've had in the last few days. And maybe it doesn't seem as if it wasn't a complete kind of disturbance of the assumptions we had. Can we put up gold very quickly before we we we get to the next commenter commentator front month gold holding on to the rally. Gold is clearly benefiting from just this idea that inflation is still elevated. And now we've got an added set of hurdles in the financial system in the form of instability. And gold likes both of those things. And I'm not surprised to see this as the best asset class on the day, even more so than short-term bonds.

True, although it did poke above $2,000 earlier this week, right? So we're still seeing if we can get there. Let's bring in CNBC Senior Economics Correspondent Steve Leisman, fresh out of Powell's press conference. Steve, what are your top-line thoughts? Well, look, there was only one question going in, how he was going to handle the tension between inflation still being high, still being a need for the Fed to address it, and the issue of what's happened in the banking system over the last two weeks.

And I think he probably got out of it handling it reasonably well. And I think maybe you can hear how he responded. It's preserving flexibility in his policy, not committing to a policy down the road as a result. And his answer to my question here. These events will turn out to be very modest effects on the economy, in which case inflation will continue to be strong, in which case the path might look different. It's also possible that this potential tightening will contribute

significant tightening in credit conditions over time. And in principle, if that means that monetary policy may have less work to do, we simply don't know. Okay, so how well did he do? Let's look at the probabilities for May, which are 50-50 for a quarter point hike. And then pretty much after that, they're 50-50 for another quarter point hike through June. So he really was able, I think, to steer it in the middle here, preserve that flexibility. He deflected the question about what went wrong and the Fed's culpability to that to the bar investigation that's going on, to the bar inquiry that's going on, and will come out May 1st. And he suggested that the banking system remains relatively sound. So, look, you can't say in the

next couple of days there won't be another banking issue or banking problem. But if things remain status quo, I think the Fed chair kind of navigated this very tricky obstacle course that events have created here. For sure, Stephen, you know, we were talking during the press conference where when Powell explicitly said the actual and expected effects of that credit tightening that people around the table at the meeting would anticipate is somewhat noteworthy, because if you're talking about anticipating the potential impact of things, look, this Fed has spent a year telling us we're not going to anticipate inflation getting better. We need to see it in the numbers. So there's a bit of a conveyance of flexibility, which maybe is just mandated by this moment that we're in.

I mean, a lot has been written. There's a lot of economic literature. There's going to be like probably eight guys, eight economists at the Fed who got their Ph.D. in the inflationary or growth effects of credit tightening. It's a thing that they study a lot. So there's going to be plenty of inputs to their models. They're going to look at this and watch this, see what happens to the regional banks and the smaller banks, which provide quite a bit of lending to businesses in this country. They were already pulling back somewhat, and they're going to pull pull back some more and the Fed's going to monitor this. And as he said during the press conference, this could be something akin to, for example, another tightening. He didn't go on or accept

the notion in my question there, which is, can you have additional firming without a hike? But I think you can, right? Which is that if inflation falls and the Fed remains the same, the real rate will actually go up. So I think there's a debate about another quarter from there. The Fed may be done after that. But then there's another fight to come, which is this idea of the market having priced in substantial rate cuts from here. And Powell's saying several times we don't see rate cuts. That's right. There's no doubt that he wasn't interested in bridging that gap verbally today. On the other hand, Steve, you know, it's the end of March. You know, the official projection from the committee in terms of the consensus of where rates will be next year does imply cuts. So as we go through time, I mean, it's not necessarily like the Gulf is going to grow if, in fact, that's the way it remains.

Did want to get your thoughts on his comments regarding the balance sheet and quantitative tightening and how he tried to essentially draw some nuance there. Yeah, I mean, I pretty much accept what he said about that. The things the Fed has done are not necessarily quantitative easing here. They've gone the other way and reversed here. There's a $140 billion loan to the FDIC to back up the banks and receivership. That'll go away at some point. There's lending over a course of a year to banks that are trying to shore up their liquidity. That's not going to be the source of additional funding or pressure downward on interest rates, or at least it shouldn't be. And that could also go away relatively quickly.

So I don't have a problem buying the idea that what the Fed is doing to shore up the banking system is not quantitative easing, even opposed to QT. And I also, Michael, was pretty sure that of all the things that the Fed might do today, halting the roll-off of the balance sheet was really low on the list. The Fed does not want to do that. They would sooner cut rates instead of stop the roll-off of the balance sheet. Yeah, and arguably that would be the thing that would convey a little bit of panic about liquidity conditions or something else that was good point in the plumbing of the financial system and Josh you know it's almost as if the events of the last couple of weeks have actually kind of thrown us back in time a little bit to when we thought the Fed might be heading for maybe around five plus or minus to on the Fed funds rate and maybe the market could live with that and this notion that we've been able to stay supported in stocks because maybe the cost wasn't that great of of getting a slightly more dovish or less hawkish Fed earlier than we might have expected, if in fact the damage to the banking system is only what we know about right now.

Yeah. And what's really interesting is we're going to get into Q1 earnings soon enough. It's like rolling around right, rolling around right in front of us. And even that might not really give us a picture of what the extent of the credit tightening we're now going to see in the banking system has wrought. Like if you're really waiting for data, you might have to wait a minute because a lot of this is going to happen quietly and slowly as most things do.

So we shouldn't expect even in those reports to get some sense of whether or not the Fed has already gone too far. One thing I want to point out about today, it's actually very much a muted response, given what we've seen in this tightening cycle. If you go back to January 22, we've had nine of these interest rate decisions. In four of them, when they were negative, you had an average loss of 2% for the S&P. Average. That's a big, volatile day, and we had four of those. The five positive reactions saw a plus 2% day.

Today, seems almost like nothing happened. So that in and of itself is interesting. The volatility of reaction to these FOMC meetings seems to be tamped down, even with the backdrop of whatever we've been through in the last two weeks. Well, there's, you know, 37 and a half minutes left. We'll see. 32 and a half minutes left, whatever it is. Close it now. We'll see how it goes. Steve, you know, one thing he also did say in response to a question about the inflation outlook and whether, you know, disinflation is still underway. He said that story remains intact, but intact meaning it's working in some areas, but not in others.

Yeah, what's that song? Two out of three ain't bad. That's what he's got. He's got two things working his way and a third one that accounts for a large percentage of the index not working his way. I did want to comment on Josh's saying this is a non-event. I think Josh Powell's good in this kind of situation. We've seen him in a couple crises and he seems to do well here. Maybe he has a little more trouble with the normal sort of everyday type policy and communications. But when things are down and he sat there, this is a chairman under an awful lot of pressure who spent the last several weekends, I'm sure, on the telephone, probably with his counterparts in Switzerland over the weekend, with his other Fed members as well,

with the Treasury Secretary. And to get up there and act pretty cool and maintain confidence in the banking system, I think it's worth, you know, chipping your hat to how Powell performed here. But he has to be right. And that's not entirely clear, right? Has to be right to the issue of raising rates was okay here amid concern about what's happening in the banking system. So, and as you said, Josh, we're going to get a feel for that. We're going to watch things like the H8 and the H41 coming out from the Fed's balance sheet that will give us some insight into what's happening in the banking system. We'll have the senior loan officer survey that tells us what's happening with credit conditions out there. Those are the ways we're going to measure it.

And we're going to hear probably from companies and small businesses. If they can't get those loans, that's going to mean fewer businesses, less hiring, and of course it should bring down inflation over time. You're right, It will unfold slowly, but we'll have to watch it carefully. And, you know, Josh, part of the relatively measured response to this point is also maybe where we are in a sense of, OK, we were jacking rates up and we were saying six points. Six was the new five last year. And now you're kind of just around the edges. So you do a quarter point and maybe we get another quarter in six or seven weeks. It just feels like there's enough room to navigate.

Not that you should downplay the possibility that at any moment they could be seen as going too far and the economy could show some cracks. But at this point, I think the process is moving slowly enough that it's not going to jar anybody as much. Well, I think your point about just we're kind of set back a little bit. It was like, oh, my God, I can't believe they're really going to go to 5. 5 is the new terminal rate. And then sometime, let's say, late February, early March, 6 became the new 5. People were getting comfortable saying the word 6 out loud. And now we're not there anymore and

i think that overall is a win uh for equities i mean just look look look yeah look at the nasdaq you had 41 of the nasdaq uh stocks advancing for three plus consecutive days going into this that should tell you all you need to know about the idea that a step back from six to five is good enough for today. We don't need rate cuts. Yeah. And Steve, I mean, obviously, the the projections of where the committee expects unemployment to trend to, there's a ways to go if they really think you need to get to, you know, the mid fours on the unemployment rate in order for their inflation forecast to to come to be. Is that something that we just sort of set aside and not pay much attention to, or does that end up being a target?

It's a good question. It's not an end. It's a means to an end, Mike, I think is the way to think about it. They don't necessarily desire unemployment to rise, but they feel that it has to rise in order to loosen the labor market reduce wage gains and ultimately reduce inflation in that core service sector that is the one of the three areas not cooperating guys if you have that January 24 Fed funds contract in the back there I want to just illustrate for you, show you exactly what Josh is talking about, because you have had essentially substantial easing imparted into the market right now. And I just want to go through that because it's over 100 basis points of easing compared to

where the market had previously been priced to where it's priced right now. So you got you had you were up at 550. That was Josh saying, you know, everybody was rounding 550 up to six. Now we're down at what 420 440 was 422 now. So that's a lot of easing in the system. And then you mechanically lost a quarter point. Because remember, Powell talking last week or so was saying, hey, we're probably going to do 50 here the market price for that. So that's gone gone and plus the year-end rate which everybody thought was going up to 537 remain the same so there's a lot of easing and that's i think what equities have reacted to and the question is can they count on it right uh and would equities welcome the circumstances under which we got that much easing is also the secondary question how Yeah, how we got there is important.

Exactly. It wouldn't be a great one. So, Steve, thanks very much. Pleasure. Great stuff. Appreciate it. Let's now bring in Lizanne Saunders, Chief Investment Strategist at Charles Schwab, for more reaction to the Fed decision.

Lizanne, what are your first thoughts on the implications from an investment perspective? So, you know, when I was penning the note that we just put into the publishing queue a few minutes ago, I started with the thinking that we could describe this as a as a dovish hike. But as you got further into the press conference, that seemed to be a little bit less the case. I wouldn't say that Powell was very hawkish, but certainly more so than what the statement read on its own. And really interesting was the somewhat simultaneous release from Yellen saying that there was not they're not looking at a blanket increase in FDIC insurance above the 250, which wasn't in contrast with what Powell said. But when asked that question, he tried to sort of calm nerves and said we basically have the tool. So I think there's going to be a lot of dissecting of that piece of it. For sure. Yeah, it is worth noting, as you did there, that Secretary Yellen was speaking at the same time

at the press conference and made some remarks about no real plans to broadly guarantee all deposits, which is a reiteration. But it seemed like, you know, the market doesn't necessarily always want to hear those sorts of things. So I guess where does that leave us? Right. Because he'll on the one hand, you can say as an investor or if you're a trader, well, it looks like maybe they're getting close to being done at the Fed and maybe they won't have to tighten too much more because of the uncertainty introduced by this banking credit contraction that they anticipate. But then what you have is the uncertainty based on the credit contraction that we're anticipating. And what does that mean for the economy then? Well, I think it's maybe not as much about uncertainty. I think what the Fed understands is that to the extent this morphs into a credit crunch, which it certainly appears more likely to be the case and was the case a couple of weeks ago, that is inherently disinflationary.

They know that, whether they view this as sort of just one last pop in the interest of not going against market expectations, which had an 83% likelihood of 25 heading into the meeting. But I think they understand that the credit crunch is disinflationary and probably why he was at least indirectly leaning into this could be it, even though based on what the dots plot show, it suggests one more hike. But he certainly left the door open for a pause and not a hike next time. For sure. And now I know, Lizanne, you've been sort of thinking in a framework of sort of a rolling recession, different parts of the economy having downturns and recovering, kind of nothing all at once necessarily, at least not yet. Where are we, do you think, in that process? For example,

things like housing and manufacturing have been, you know, in downturn for a while. Have they bottomed yet? Are they in the process of bottoming? And what's next? Well, we are starting to see some stability in the housing data and that it may be purely a short-term reflection of lower mortgage rates. But given the carnage that predated the current environment, that might be a sign that we're seeing some stabilization in an area that clearly has been in recession territory. But we're also starting to see some cracks on the services side of things. You're seeing some signs of disinflation. You're seeing less wage pressure on the services side. We know that smaller companies tend to have

sort of more exposure to smaller and regional banks in terms of not only where their deposit base is, but where they go for borrowing needs. So I think that the potential credit crunch here is likely to have a greater impact kind of down the size spectrum. And I think that's part of why you're seeing the changing nature of leadership in the market with the drubbing that an index like the Russell 2000 has taken, whereas there's been more resilient up the cap spectrum. So I think there's been a quick shift in, let's look for where there's strong capital cushions, where there's strong balance sheet, where there's interest coverage. So I think even though the indexes have have behaved fairly well, the under the surface leadership changes, I think,

are telling an important story about what's next for the economy. Hey, Lizanne, it's Josh Brown. Thank you so much for joining us today. Were you surprised to hear about inflows or outflows stabilizing that it seemed like a tossed off remark. None of the reporters really followed up on it substantially. That seemed to me to be very good news that the market didn't really give you that much a reaction to. What are your thoughts on that? You mean in terms of balance sheet and reserves? The stabilization comments. Yeah, I mean, he was talking about savings deposits, savings deposits. Well, we you know, we have seen a bit of stabilization.

It's still a little bit of whack a mole with additional institutions that are announced that might be either in trouble or facing trouble. But I think the real tell, not just this week, but an ongoing basis as we come out of this environment where we're all obsessed over every inflation print. And that's what captures the headlines. I think the new piece of information that we're all going to kind of hang on waiting to get will come Thursday, as it did last Thursday, which is what is the take up in at the discount window and the use of these new funding facilities and what that means for the balance sheet. So I think that is going to be the direct way we can get a sense of whether this pressure is starting to calm down. That's the new CPI every week.

And so, Lizanne, in terms of how the market has digested a lot of this so far, I mean, are we simply just feeding off of some pretty depressed sentiment and, you know, the worst did not come to pass in terms of an immediate crumbling of more banks or anything like that? Or do you think that the market's looking through this period to something a little better economically, or maybe earnings might not be down as much as some fear? Well, you know, as I said, yeah, it could be the market looking through. But let's also remember that what predated this potential asset, I mean, credit crunch has been an asset crunch and assets have gotten absolutely hammered. You know, at the worst point, the spec areas, whether it was SPACs or crypto or NFTs or non-profitable tech or heavily shorted stocks, whatever, you're talking 70, 80, 90% drawdowns, less so for the broad indexes. But I think it's the leadership shifts under the surface that are more important. It may be the case that the credit crunch, assuming it comes,

might have more of an impact on the economy. That's kind of a duh. But maybe doesn't have to have as much of an impact on asset markets, on equities, because a lot of that pain has already sort of worked through the system. When we went through the initial surge in rates, that hit high-valued segments of the market. Now, if you see a calming there, that's not to suggest nothing to see here I'm not worried about the market I think there's going to be ongoing volatility but I

think there's some interesting more subtle messages that you pick up. When you look at some of these- leadership shifts- under the surface. And then at this point what- are your preferred ways of. Kind of navigating that expected

volatility in terms of. You know that the characteristics of kind of navigating that expected volatility in terms of, you know, the characteristics of stocks that you might want to emphasize? We're saying still stay up in quality, shorter in duration. And I'm applying that to the equity side of things. And that would mean look for companies that have cash flows and earnings in the here and now, not far out into the future. Strength of balance sheet, high cash, low debt, really important, a factor that historically has done really well through most cycles, but particularly when you're at an inflection point in the economy or in some sort of downturn, is interest coverage, especially when you're in as rapidly rising interest rate environment as we've been in the

past week. So I think the January rally down the quality spectrum, high beta, that to me didn't make sense yet in this part of the cycle. So still lean into quality, lower duration, strong cash flow and interest coverage. And just to go a little finer on that, would quality but lower duration exclude or reduce your exposure to things like the very large tech stocks that have rallied here? For now, I think it's inclusive of the large tech stocks. But I'd also say be really careful about monolithic decision making and investing. Even among large tech, you're going to see differences in terms of all of those factors. So I still think you want to take a factor screening approach and not make a monolithic sector approach.

I think there's still danger in that. Right. And so, you know, I know we talked about the rolling recession idea, but with the way that the yield curve is inverted and all the other things people are pointing to that leave a lot of conviction out there among people who feel like, look, a real declared recession is going to be hard to avert. Are you on board with that idea or are you waiting to see? No, I think recession is is highly likely, you know, the pathway to a soft landing, as Powell mentioned. I think that's a pretty narrow pathway in light of what you mentioned, the inversion of the yield curve, the 11 months of declines in the LEI. We've never seen that happen other than in a recession. The fact that pockets of the economy are already in recession, as we talked about before, and the possibility of a credit crunch, I just don't see

how that doesn't point the needle more toward eventually a formally declared recession, keeping in mind that the NBR, when they declare it, they then predate it. There's often a pretty wide span in terms of how far they go back to dating the start. Oh, for sure. Lizanne, always great to talk to you. Appreciate you coming on with us today. Two year now sub 4 percent. And the KRE, very notably, just went negative on the day. It had been drifting lower. And this is not how you want to end the day. But here we are. Well, you did. You did jinx us about 15 minutes ago.

So there you go. We do have about 18 minutes left until the closing bell. Let's just take a look in general where we stand right here. We are backing off a bit down 222. You have the S&P 500 off by half a percent and the Nasdaq composite modestly lower. Russell 2000 underperforming. We're very much in the two or three day range we've been in for a while, however, even if off the highs of the afternoon. Let's get back to Christina Parts and Evelis for a look at the key stocks to watch right now. Christina.

Yeah, let's start with the Lululemon. Higher right now after Wells Fargo and J.P. Morgan. Both reiterated overweight ratings on the stock. You can see shares are up almost 3%. J.P. Morgan cut its target on the stock, but only to $430 a share, which is well above the $3.07 it's currently trading at. Both firms believe Lulu's inventory levels have improved, and we'll see for ourselves when the company's earnings come out next Tuesday. And woof, that's the ticker.

Look at shares of Petco, hitting their lowest levels since the company returned to public markets in early 2021. The pet retailer missed estimates in its previous quarter, and its full year outlook came in below expectations. Shares down 16.5%. Turning to Carvana, which is trading a little higher today as it expects a smaller loss this quarter. The company also hopes to restructure some of its debt, though Bloomberg reports that its largest bondholders will oppose that plan. Shares lost some steam on the news, but still firmly higher, I should say, so now up 9%. And we'll end on Manchester United as the latest bids for the club push it towards becoming the most expensive sports deal ever. The FT report said British billionaire Jim Ratcliffe's

bid would have valued the company over £5 billion. Those bids are all due by 5 p.m. Eastern tonight. All right. Christina, thanks very much. Appreciate it. For the record, when Petco came public under Wolf, I did go make the call and said there's going to be a quarter where they blow it and people are going to talk a lot about that ticker symbol. Let's get the results now of our Twitter question. We ask, is this the end of the fed's hiking cycle well the majority 64 saying no which uh the market for now tends to agree with and we are now in the closing bell market zone josh brown sticking with us to break down these crucial moments moments of the trading day jp morgan's mira pandit here to give her reaction to the fed decision plus wed bush's David Ciaverini on

how the latest move could impact the regional banks. Welcome all. Mira, we'd love your thoughts on what the Fed did, what the Fed didn't do, and what Powell had to say about it, and I guess how it goes from here in terms of Fed policy and the economy. Not totally surprised about what the Fed did do in terms of hiking 25 basis points, really trying to thread the needle here between wanting to instill confidence that what they've done to preserve the banking system is going to work and they feel good about the resiliency of the banking system, also wanting to be attentive to higher inflation risks. I think in trying to balance which they were more concerned about, financial stability versus inflation risks.

To me, what came across is that they're still pretty concerned about inflation. I thought what was interesting about the dot plot is that, yes, that median rate in terms of the terminal rate for this year is still at 5.1 percent. But now you only have one person thinking the current stance of monetary policy is appropriate in terms of a pause. You have 10 people thinking, OK, one more rate hike, whether that comes in May or later on is up for debate. But you still had seven people, same as December, thinking that you have to go higher than 5.1. And in fact, you saw a couple

people even move higher in their dots versus December. So this is probably still a Fed that has a bias towards hiking, wants to hike. I'm just not sure that's actually necessary given some of the data that we've seen. I was going to ask you about that if you think it's necessary because we also are likely in the coming months to see a little bit of a statistical pull lower on the reported inflation numbers, right? We're going to be on the annual numbers.

And you just wonder if that's something that can kick in that maybe is going to make them a little bit less concerned about inflation. For a period of time, you're going to see that tick lower than actually in the back half of the year, start to the comps will become less favorable once more. But I think the reality is, if you look at the different data that we've gotten over the last couple of weeks, CPI, 70 percent of that increase came from shelter, which the Fed has acknowledged is lagging. It's not their biggest area of concern. When you look at wage growth, it did roll over. And moreover, you've seen that inflation has continued to erode wages for 23 months in

a row. So it's not that consumers have this massive firepower in terms of consumption. And when you look at inflation expectations, if you look at the Fed survey, if you look at University of Michigan, on both counts, you're seeing that expectations for one year ahead inflation is the lowest since spring of 2021. Now you fold in financial conditions, which have tightened more sharply in the last week or two. And that has the recipes there for a Fed pause, you know, again, irrespective of some of the banking issues that we've seen. Yeah, a lot of focus on what Powell had to say about the anticipated effects of this credit tightening. How impactful do you think it's going to be?

He said maybe it has been worth or will be worth one tightening move. Potentially. What's the speed of it, if you don't mind? Like how fast how fast does something like what we've just been through over the last two weeks and the aftermath work its way through the system to where we see it in the data? Let's recognize the fact that credit conditions have already been tightening when you look at lending standards. So the recent lending standard survey that came out showed a pretty dramatic amount of tightening, and that was before a lot of these banking issues. So I do think that that can feed in

potentially faster than we think. I don't think that the Fed should wait to see that that has gone a little bit too far. So it's the financial conditions, it's the tightening of lending standards that we've already seen from existing rate hikes that I think is already starting to work its way into the system and will continue to do so. What does that mean for you as an investor? I mean, essentially, do you feel as if we're kind of narrowing onto this path to a recession? I mean, essentially, it seems to be building in that direction. If you bring the lending standards tightening into this, as well as what the yield curve has been saying, the fixed income volatility and all the rest. We've been of the opinion that we're headed towards a mild recession. What we've seen over the last two weeks heightens that risk and potentially pulls that timeline a

little bit forward. Because when you see that tightening in credit conditions, that's going to mean that's going to have a knock-on impact to consumers and businesses seeing a little bit less loans, seeing a little bit less spending. So I would say that the recession risks are still present. We've seen that really hot data in January give way to much softer data in February. We would have been talking about that a lot more had other things not happened over the last two weeks. So as an investor, I think we want to make sure we're bridging that underweight that we've had for years in bonds. Even though yields have come down a little bit over the last couple of weeks, they're still at very attractive entry points for income and protection from a potential recession. Still want to gear high quality

and I think in this environment security selection is more important than sector or style you know when it comes to the equity market so I would certainly say that bond market is the place to be right now when we think about some of the

benefits there potentially the big technology stocks that have. Been the best performing stocks in the market year to date. They seem to have that combination that you're looking for they have the quality. big technology stocks that have been the best performing stocks in the market year to date. They seem to have that combination that you're looking for. They have the quality, at least the biggest ones do. And then they also seem to have a little bit of secular growth that maybe doesn't get affected as quickly by what the Fed is doing. Is that still the right

place? I don't want to use the term hideout. Is that still the right place for people to be looking with fresh cash? What tech stocks right now don't have is the right valuations. If we standardize some of these valuations versus their own histories, even versus other asset classes, this is still one of the more extended areas of the market. Yes, technology has been more defensive, at least in the last recession. And when we have less economic growth, people look for growth in their portfolios. so what i would encourage people to do is if you want to wade into some of the growthier areas of the market especially if the fed is not terribly far away from pausing think about the areas that have good valuations as opposed to other areas that still appear stretched we have uh gone to the loads of the day. Worth noting, the S&P 500 down about eight tenths of one percent, actually below yesterday's low as well.

So having a little bit of that more typical pattern of a bit of a sell off following the J. Powell presser, although the next morning you never know which way it's going to swing. Let's get to Wedbush's David Cherovini on the regional banks. And David, what has been your sense out there as to whether, in fact, this has been a storm that's passed most of the institutions out there, or they're just going to still be mired in this doubt about exactly the stability of their balance sheets? Yeah, I think we still have another six to 12 months to go with this instability, and it really boils down to deposits. And deposit competition- what we're seeing right now with

higher. You know interest rates that's going to put pressure on the deposit costs and then. Really this big trend of seeing deposits leaving mid sized banks leaving regional banks. Going to the money center banks that's just going to exacerbate

the competition that we've already seen and. Mine I really think that this is going to lead to this credit contraction that everyone seems to be talking about now because it's real. As balance sheets shrink, it's going to impact how much loans go out the door. And then this is also going to impact net interest margins because banks, given this flight of of deposits they're taking on more liquidity they're borrowing that much more and that's getting that much more expensive by the day so net interest margins are going to come under pressure and i'm fully expecting in this april earnings season to see net interest income guidance to be coming down across the board for the banking industry yeah obviously just about every bank is going to have an incentive to say we're calling in risk, we're getting more liquid, we're, you know, kind of

hoarding cash, essentially, which is certainly contractionary. What do you do as an investor, though, in terms of figuring out which regionals might be punished too much, which ones still are vulnerable? Yes. So the key here is defensive you look at the ones that have. A good level of tangible book value when you fair value both loans and the securities you look for the ones that have more insured

deposits. Versus uninsured deposits and then you look to see how much it is priced in as well as from a credit quality perspective more and more investors are concerned about. Commercial real estate and what a contracting economy does on credit quality so we've run

some screens looking back to the financial crisis fifteen years ago. And we would highlight the ones that have formed well through various cycles so. Defensive really is the key theme here. And maybe a couple of names that that do

hold up under that analysis at this point? Yeah, M&T Bancorp really performed well through the financial crisis. Comerica performed very well through the financial crisis. But there's many factors to keep in mind. I mean, First Republic performed exceptionally well through the financial crisis, and we see what's going on with them today. So there's several factors to keep in mind, but those are some of the names that performed well through the financial crisis and we see what's going on with them today. So there's several factors to keep in mind but those are some of the names of performed well through the financial crisis. Appreciate

that I think thanks very much for coming on. Thank you. So we are at the lows of the day down about four twenty seven- Josh where do you feel we are tactically at this point I mentioned that sentiment looks pretty depressed at this point with regard to stocks.

But we have had this rally. It's been kind of narrow. Everybody got excited about just the breath push that we got in January. That's mostly dissipated. Yeah, but I do think that a lot of the issues that we're wrestling with do get alleviated with falling yields. And today was a continuation of what we've kind of been going through for the last couple of weeks. And the lower yields fall, the less people are worried about balance sheet issues as they relate to at least treasuries. So that's an

interesting thing here where certain areas of the banking market, I wouldn't go so far as to say commercial real estate or fintechs, but certain areas of the banks start to get way too oversold, maybe the brokers. So I think that that's something that maybe tactically you could do, but strategically, everything is pointing in the same direction, which is a slowdown and a late Fed and maybe a Fed who's done too much to make up for being late. Today doesn't change that narrative. That's really what the bottom line is. Yeah, and that's been the story for 10 months while we've been in this range.

Mira, with regard to fixed income, you did mention that you want to kind of rebuild exposure there. What about on the credit side of things? Are we kind of bracing for accidents there, or do you think that there's value? We should brace for some accidents on the credit side, especially when we think about high yields specifically. We've actually seen spreads moderate a little bit in recent days, and they're still not near their non-recessionary peaks, let alone recessionary peaks. So we have to be cognizant that while some areas of the public high yield market do look better than they had perhaps in prior eras, at the same time, the pricing is not there. We tend to see spreads blow out when we do

embark upon a recession. And I don't see why that would necessarily be different this time. So gearing towards much higher quality. In response to a question, Powell did point, and this is just standard conventional wisdom, that recessions tend to be kind of nonlinear. And I know you're saying we expect a moderate recession. I think they're mostly always considered that they're going to be moderate going into them. So what are we at least going to be on alert for that it could be worse, Mira? I think the good news is that we've seen some issues within the banking sector. A lot of them have been very contained to specific companies.

But the Fed, the government, has stepped in to protect the system. That is a good thing. We are attentive to the risks in the labor market as well. We have seen a labor market that's held up pretty well, but I would say despite the structural labor shortage that we are experiencing, that doesn't mean we're not still going to have some of these cyclical patterns of unemployment. So we do have to be cognizant that we could see potentially negative job growth by the end of the year. Sure. Josh, if I could just throw out, you know, the sort of bull case is, listen, we've been kind of pulling forward the the impact of what we're expecting for over a year now. In other words, you're supposed to rally when the Fed starts to tighten. We started to fall apart in the stock market well before that.

We went down 27 percent when earnings were still at their peak. Bottom in October, you get this rebound and now we're in this sort of better seasonal period and we priced in something, maybe not everything. So how do you kind of navigate that type of a thesis? The Fed is talking about seeing unemployment rising to four and a half percent by the end of the year. Right. That is a full percentage point above where we are right now. And then they talk about 2024, which gigantic grain of salt. How quickly can I can I dissolve that?

They just took GDP growth forecast from one point six down to one point two. So if you're in the stock market, the question is not what is the impact going to be this summer? Because you already braced for that. All the sentiment surveys, all the positioning. We know nobody's bullish. So what you're really thinking about is how soon can we get to twenty twenty four and not on a calendar basis, but how soon can we start thinking about twenty twenty four? That's really what I think the equity investor is going to start being able to do this summer. So now it's this awkward phase. We have to get from here to the official last rate hike to whatever the credit crunch goes to next and then get to that moment. We're not there.

It's going to take six, eight weeks. We'll be talking about 24 soon enough. Yeah, for sure. Right around mid-year, it seems as if that's when all of a sudden you can sort of revamp your models. We did a pretty big reversal. By the way, Mira, thank you very much. Appreciate you joining us. And Josh as well. Pretty big reversal from a 1% gain in the NASDAQ 100 intraday, now looking at a 1% decline. So a little bit of an all bets are off. After that Fed meeting, it seemed like while there was a dovish interpretation, largely at the beginning of the of the press conference, much of that has dissipated. The U.S. dollar index actually cracked pretty hard, went down to about one oh two at the lows today. And that is also

bound. So obviously indecision because of the great uncertainty of the outlook, given the effect of the banking crisis on overall economic growth is out there. Market breath actually pretty sloppy. It was strong to start the day, not so much right now. Would point out the S&P 500, 3950-ish, has been about the midway point of this range we've been in since October. We were at 3800 and change at a Monday low of last week after the Silicon Valley bank buckling. And not only that, we were at $39.92 the day before that happened. So essentially, very much range bound, but giving back any bullish interpretation of what happened at the beginning of that press conference.

Taking a look at Treasuries, the two-year note yield has gone back below 4%. The market has been resolutely pricing in much more easing than the Fed has been willing to acknowledge it is anticipating right now. And that is now also below where the two year note yield was in October of last year when the stock market bottomed, also well below the 5% peak. That is going to do it for the closing bell on this Fed Day. We're going to send it over to overtime. Morgan Brennan and John Ford.