Power Lunch - Countdown to The Fed 3/21/23

Episode Date: March 21, 2023

We’re just 24 hours away from the latest Fed decision. And this time, it truly is one of the most important meetings in recent memory.Will they raise, or will they pause? We’ll discuss what they might do, the impact it will have on markets, and how you should be investing ahead of the decision. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to Power Lunch alongside Kelly Evans. I'm Tyler Matheson. Glad you could join us. Coming up, we are 24 hours away, exactly 24 hours away from the Fed's big decision on interest rates. And this time, it really, really is one of the most important meetings in recent memory. So will the Fed raise or will they pause in light of all the turmoil in the banking system? And coming up over the next hour, we'll discuss that. What will the Fed do? What impact will it have on the markets? How should you be investing ahead of it? Should you be? But first, let's get a check on those markets with stocks rising for the second straight day, though off the best levels. In fact, the Dowell trying to hang on to 100 point gain. We're up more than 300 at the highs. The Russell 2000s once again leading the way. All righty for more, are we going to go to Dom Chu or not? Let's go to Dom Chu at the New York Stock Exchange. Yes, we are. There he is standing by. Take us through it, Dom.

All right, so Tyler Kelly, stop me if you've heard this before. First Republic Bank is one of the biggest movement. of the day, this time, far and away the best performing stock in the S&P 500. Again, you can see there of just around 45 or so percent off the section highs as speculation continues about what is next for the regional bank, seen as the most direct victim of the regional bank fallout tied to Silicon Valley Bank's failure. Now, speaking of those regional banks, they are collectively some of the best performers in the entire market today. Just check out some of the other names we're talking about, like Pac-West. They've taken bigger hits over the last couple of weeks. Look at Pack West, Western Alliance, even broker-dealer and bank holding company

Charles Schwab is up 5.5% today. It got caught up in that in that mess. It's up nicely today. And by the way, more positivity from the analyst community driving New York Community Bank shares, NYCB, up by 7%. This time it's DA Davidson upgrading that stock, NYCB, to a buy rating on the heels of that deal to take over deposits and loans from now failed signature bank. And we're going to end with a check on the autos, specifically a focus on the electric vehicle makers. Tesla's up big, helped along by a credit ratings upgrade from Moody's to BAA3, which now makes it investment grade in their eyes. No longer characterized as high yield. You might recall that S&P did something similar back last fall with its rating up to triple B.

Also investment grade. Other EV makers, by the way, check out General Motors, Lucid, Rivian, Ford, all of these guys up on the day as well, Ty. I'll send things back over to you. All right, Dom, thank you very much. We begin with the Fed, as we are less than 24 hours away from one of the biggest Fed decisions in years. So is another rate hike on the table, or will the collapse of Silicon Valley Bank and problems at other banks cause the Fed to pause and wait things out just a bit? Here now with some insight, Frederick Michigan, former Federal Reserve Board Governor and economics professor at Columbia University. Professor Michigan, welcome. Good to have you with us. What do you think the Fed will do tomorrow? What do you think they should do?

Well, let me tell you where I stand on this. You know, I've been quite hawkish. In fact, I've have been taking the view that last time they should have done 50, and in fact, I was pleased that Jay was talking about 50, and I think the Fed really had been a little bit behind the curve and it has to keep on moving and moving rapidly. But I have to tell you, my views have changed right now. We're dealing with an issue which is bigly referred to as financial dominance, which is that if, in fact, the financial sector becomes very unstable, then, in fact, the Fed raising interest rates will just make the instability worse. And so, in a sense, central bank gets put between a rock and a hard place.

And that's really the situation the fed's in currently. I think that actually this situation is going to resolve. I think there's steps the Fed can take to resolve it. I can mention a few. But I think that right now wants to basically just let the markets calm down. But it needs to make a very strong commitment to say that we think that this is going to be under control. I'll talk about some of the things I think they can do to do that. And when we see that it's under control, then we actually have to get back to our business of really tightening monetary policy and tightening quite a bit.

And really start moving back to bigger changes, 50 base point moves until we get to where we need to get to, which I think is probably in the range of 5.5% to 6%. So what does the Fed need to do? The Fed really needs to actually go into the banks and actually do stress tests right now on their interest rate risk. In fact, there really has been a failure of regulation on this. I have a little bit surprised by it because the Fed is supposed to monitor risk management in these firms. And the interest rate risk is actually one of the easiest kind of risk to calculate. This is not rocket scientists. It's banking 101.

I have it in my textbook of money and banking, which is used by undergraduates and also business students. It's basically very, very straightforward stuff to do. It hasn't been done. It now needs to be done. And in fact, the Fed has to let the public know that, in fact, if a bank doesn't have, has too much risk, they need to be dealing with it or to borrow or we would recapitalize. But in fact, I suspect that most banks will be okay. So the Fed really needs to say we're going to get on top of this. And when we get on top of this, then we've got to get back to business.

So implicit in what you're saying, Professor. We haven't really led to a full-scale banking prices in 1990s. And the Fed was able to tighten and keep inflation under control. So they've got to basically express that. know that very strongly right now, but I actually would pause right now to let the market settle down. Not a crazy thing if they do at 25 basis points and indicate that they're watching carefully, but I might be a little bit more conservative and being, having been traditionally quite hawkish recently, I actually now moving a little bit to the conservative side, but to indicate

that the Fed really needs to do its business as soon as we get this straightened out. So, so let me just summarize what I think I heard you say. One is that the Fed has considerable unfinished business to do with respect to restraining and bringing down inflation. Whether they do that business tomorrow or they pause a little bit is to be seen. But also implicit in what you, I think you said there, is a criticism of the Fed for not monitoring the levels of risk, specifically interest rate risk in the portfolios of some of these banks. Are you critical of the Fed for the job it did or did not do. Yes, I'm not, you know, I don't know any of the details, but, but this is a very surprising thing.

This is, interest rate risk is very easy to measure. And in fact, firms in their asset liability committees, they actually are supposed to be looking at exactly this. And somehow, SVB and some of these other banks dropped the ball. And regulators are supposed to spot that. So I think that, that one is we need to relook at how regulation is done. For example, the, that allowing banks to, to hold to maturity in terms of assets that may have gone down to value and value it that way

and not mark to market, I think is a huge mistake. So there needs to be a look at this. You know, I don't know if people remember the I Love Lucy show, one of my favorite shows, but Ricky Ricardo would say, Lucy, you have a lot of explaining to do. Well, I think that in this case, the Fed has to talk about exactly that. You know, mistakes are made, but then you fix them. Indeed, the Fed, I think, made some serious mistakes in terms of letting inflation get out of control. But to their credit, they actually realized that they made mistakes and actually turn the supertank around very quickly and change their policy.

So I don't think this is that hard to do. They need to do it. We need to actually look into our regulatory process to make sure that this interest rate risk, which should have been easy to deal with, doesn't happen again. What are they going to do with the – Doing that will actually restore confidence in the markets. Rick, what are they going to do with the dots? Because they have a problem here. They conceptually, because they ignore things like, you know, break-evens and they don't talk about leading indicator.

They have no conceptual framework to lower the dots, but we all know they're going down. And so if they put out the dots tomorrow, what are they going to do? Stick with their high projections. And it sounds like they're going to, if they come out and actually raise a quarter point tomorrow and leave the dots where they are, I don't know what the term would be to describe that. But I don't know what else they can do. On what basis could they bring them significantly down? Well, it's not pretty much they should bring them significantly down. But they have to describe the uncertainty here.

The bottom line is they've got to get to make sure, which I think is not going to be that difficult to do. I think the banking system in general is healthy. The biggest banks seem to be fine. But they've got to basically restore confidence that this interest rate risk problem is not going to bring down a lot of benefits. banks. And if there are problems in banks, the banks need to do something about it. They need to put it into risk controls. They need to recapitalize. That's what stress tests are all about.

So I think that the issue here is make sure you get the financial things okay. And then you can do your business property. And by the there are many instances of the Fed having done this. The 1987 stock market crash, the Fed did a big intervention, that once things calm down, which they did very quickly within two months, the Fed was back in business. The LTCM example is when we're in 1998 and Russia, the Fed actually lowered interest rates a lot immediately, but actually then made a mistake of once things calm down, which they did very quickly, and it was clear that the Fed had control of the situation, they needed to raise rates quite a bit. That's the kind of mistake we don't want to see happen in this case.

Yeah. The Fed basically, I think, can provide the information to the markets as to whether the banks are in good shape or if they need to be fixed and fix them. And then back to business. And as soon as you do that, the more the Fed will policy be back in control. If it, in fact, does not do fix the – provide the information to the markets and get the banks to be solidified. then, in fact, they're going to get behind the curve. And eventually, inflation is going to get more out of control and have to raise rates even further. All right.

So in a sense, I'm talking about doing a little bit of a one-two step. First step is get the financial dominance out of the way. Fix that problem. I think it can be done quickly. It's not rocket science to deal with interest rate risk. It's to be a little remarkable that this is the problem. This is much, much less complicated than we saw in either COVID or the global financial crisis. So fix that.

make it convinced markets that you're going to fix it, which the Fed has done. They did stress tests in 2009, which were very successful in that regard. Right. They need to do something like that. They need to do it quickly. And then basically, they need to be very tough on raising rates and controlling inflation, but make sure that raising rates is not going to bring down banks. And I don't think that that is going to be a problem, but they need to fix it.

They need to talk about this. And they need to fess up a little bit about things of just didn't quite work out. We all make mistakes. The key of being really successful is not that, you know, don't make the state failures actually learn from, it's then not keeping on digging the hole, fill in the hole, fix the problem, and then you, your business right. And I think the Fed can very much do that. I have confidence that they can do that, but they need to get on the stick on this. And I think they need to signal exactly that. That's really the most important thing they need

to do at this particular meeting. All right. Professor Michigan, thank you very much. We appreciate your time today, as always. My pleasure. Thank you. For more now on what to expect from the Fed at tomorrow's meeting and the impact. on stocks. Let's bring in Victoria Green, Chief Investment Officer with G-squared private wealth and Kevin Monch, President and Chief Investment Officer at Henyon and Walsh Asset Management. Welcome to you both. All right, Victoria, what's the setup here? How would you describe it to people? Well, I think we have to realize they have to go another 25 basis points, especially on the heels of what the ECB did. But they are in a tough spot

because I look at this as Maslow's hierarchy of needs. They need to put out the fire first before they can start rebuilding the house. And right now, the banking system, it hasn't really been And, well, there's been a lot of forceful response from the Fed, both from what Yellen said today, and they're trying to do FDIC insurance. But I think we're all going to be looking at what does Powell say, what is the trajectory going forward? Are we going to see cuts like being priced in now? We saw these dramatic shifts in the bond yield curve, as well as future projections on where we go now. So I think it's not less about the 25 basis points. I think it's more about what he says on the trajectory going forward. And is he finally going to back off that hawkishness that he had been, you know, beating the table about.

Do you, Victoria, do you think the stock has been, the stock market overall has been somewhat resilient in the wake of everything that's happened here? I mean, look, we're already talking about it year to date. I just checked Tesla. It's still up, I think, 58% this year. Teflon stock. That is definitely the Teflon stock in the index. But, yeah, if you look at what has happened in the last 10 days and you look at the Dow, the Nazac and S&P, you would think that no banks failed and everything was fine. And so, yes, I think maybe a little bit it's that the dog meme where he's drinking coffee and everything's on fire.

and he's saying everything is fine. A little bit, that's what the market's been doing. But I think it's also looking past some of the crisis. It's saying we have government intervention. There won't be any other failures. And the Fed's about to tum off the gas pedal. So a little bit, you are seeing risk on. So, Kevin, talk to us about what you see the Fed doing and what it will mean for equities throughout the remainder of the year. It feels as though the conventional wisdom is dictating that we are close to the end of this rate hiking cycle. way or another. It may be a pause tomorrow. It may be all over tomorrow. It may be 25 basis points now and in May again. But talk to me about the impact that potentially the end of the

rate height cycle is close. Sure, Tyler. And since March of last year, the Fed's primary focus has been on fighting inflation, essentially telling the markets that they were going to continue to raise rates and reduce their balance sheet until something. broke. Well, now something has broken. And if there's any silver line to this banking crisis, it's that it's going to prevent the Fed for being as aggressive as they want to help curb record-setting levels of inflation. So if we expand our investment horizon, Tyler, out over the next two years, when rates should be lower, when yield should be lower, when inflation should be lower, and when markets should ultimately be higher, well, there's some very attractive opportunities in the stock

market, particularly in sectors that were beaten up in 2022 and should help lead the recovery out of this economic slowdown, which may ultimately lead into a recession. Those areas, of course, are technology, consumer discretionary, and the biotech area of health care. We like three names in those areas, Tyler, here at Smart Trust. On the technology front, we like Broadcom. On the consumer discretionary front, we like Dick's sporting goods. And finally, on the health carrier, we like a large-cap pharmaceutical name, name Regeneron. I think those are the opportunities investors should be. Quickly, is it too early to start a cumulative, if I buy your thesis, is it too early to start accumulating positions in these kinds of shares? Or put another way, are you going to

have a better price opportunity a few months from now? Tyler, as you know, trying to time the market is often an exercise in futility. Historically, the stock market generally, recovers around 9 to 12 months prior to the economy recovering. That may very well be right now, and these opportunities are trading at attractive multiples, had been beaten up over the course of the last year, year and a half, and I believe will help lead us out of this particular economic slowdown. But now may very well be the right time to consider adding them to your portfolios. All right. We'll have a press for time today. We've got a pack show. Victoria Green, Kevin Mon. Thanks very much. We appreciate it. My pleasure.

Still ahead, we'll reveal the winner of Morningstar's Outstanding Portfolio Manager Award, and we'll ask him what he's expecting from the Fed tomorrow. I think you'll want to hear. Plus, energy, the best performing sector in the S&P 500 today. Every stock in the group is higher. APA up 7 percent, marathon up 5X on up 4. Clean energy on the rise as well. We've got some big moves in the solar names.

We'll dive into that coming up on Power Lunch. Welcome back to Power Lunch, everybody. Morningstar out with its 2023 awards for investing. Excellent. And our next guest is the winner of the Outstanding Portfolio Manager Award. Rick Reeder, Chief Investment Officer of Global Fixed Income at BlackRock, also runs the BlackRock Strategic Income Opportunities Fund and the BlackRock Total Return Fund. And who better to talk about fixed income and more on this day before the big Fed decision. Rick, welcome. Good to have you with us.

Thanks for having me. Why don't we start where we must, and that is what you expect the Fed to do and say tomorrow, because they have quite a needle to thread. Yeah, you know, Taylor, I think it's, you know, there's a lot of focus on, you know, 25 or not going 25. You know, I don't think that is a critical issue as, like you say, how are they going to describe the condition of where we are today and where they going from here? Listen, I think the terminal funds rate is probably five and a quarter, five and a half.

You know, I think that would have been a bit higher, save the, this epic set of events we've had in the financial world. So I think they're going to state we're going to get there. If they go 25, my sense is they're going to say something in the effect of they're going to provide liquidity. The system, they've grown their balance sheet an extraordinary amount since March 1. I think it's up $300 billion. So pretty incredible. How would they describe that, how they describe the liquidity they'll provide, I think is really important. If they pause, then I think they're going to say, listen, we are taking a breather to see where things are and then probably still get to the same place. So from an asset valuation point of view, certainly over the

over the intermediate term. I'm not sure that 25 or not makes a huge difference, but I think the communication, like you say, and how they interpret financial environment today, the economic environment today is I think it's going to be critical to listen to. And if I'm hearing you correctly, what you're saying is that whether they do something or do nothing tomorrow, the terminal rate is likely to be in that five, five and a quarter, and they may get there quicker or they may pause and get there later. Let me turn a little bit and talk about what we've been seeing. in fixed income products over the past month or so. Specifically, the fixed income products of banks or bank-like entities like synchrony or ally.

I don't ask you to comment specifically on those securities, but the yields have blown out. The prices have come down. A great deal there. What does that tell you about what's going on in the regional banking subsystem? and what does it tell you, if anything, about those banks' willingness or ability to make the kinds of small business, personal auto mortgage loans that they're famous for? Is there going to be a credit tightening? I don't know. I don't know how much time we have, Tyler. That is a complex set of questions. Listen, I think the key is, by the way, to summarize on your last question, I do think the Fed's going to go 25.

Right. And but I think like I say, I'm not sure the import of it. However, to get to your question, listen, the Fed's moved and the terminal rate is going to, like I say, five and a quarter five and a half, I think. What's happened in the banking system is you've shocked the system and particularly the interest sensitive parts of the economy that have created some real stress. The epicenter of that being commercial real estate and how that's impacted the regional banks. You've had a dynamic where commercial real estate's come under pressure, which is a big portion of a lot of the balance sheets simultaneous on insured deposits being high at some of those institutions. Where do we go from here? Listen, I think it's pretty important in terms of what the policy makers

have done around quasi-insuring deposits or semi-insuring deposits. That's important. Listen, I think it's going to be really important going forward to think about how do they ask that, you know, there's going to be regulation in the industry, how do they think about capital going forward? How do you duration match your portfolies? I think that's going to be critical. I think you have to assume there's some contraction of lending from here going forward. And certainly for this year, and part of an economy that I would argue has been operating pretty well, do you see some pullback in the economy? I'm not, by the way, I'm not convinced we're going to a deep recession. But I think you have to assume the velocity in the system. I think you have to assume the banking

system is going to at least marginally pull back as I try and interpret, you know, how is their bank, how is the bank going to be regulated? How is their capital going to be going to be, going to be, or how much capital they're going to have to run going forward. And all those are big questions we're going to learn over the next few weeks. Rick, looking at, you know, the awards that you've just received, the funds that you run. So strategic income, total return. Maybe, maybe on both of those counts for people at home, why do you think you got this award? What were the decisions over the past year in what's been an unbelievable year? And how are you positioning now in a way that might benefit those who are trying to figure out what to do in this

environment. Thanks. Thanks for saying that. So I say a couple things. One, we are incredibly, and I think Morningstar said this, but I think they call me a border collie in terms of pursuing data and analysis and regime identification. I mean, the big thing for us is trying to identify the regime you're operating in. And if you can identify the regime, and we use tons of data, artificial intelligence,

risk systems, et cetera, trying to think about where's your convexity of return, you're upside downside relative to that regime. But you've got to get regime right. And I think one of the things that we did, know, we did a pretty good job with, was figuring out last year, the Fed was behind. And they had to move quickly. And so you reduce your interest rate exposure, you reduce a lot of your beta in your portfolio, a lot of your risk assets. So anyway, that was last year. I think this year is a different framework. I think today, the biggest thing that you think about is, and I think for every asset,

debt, equity, real estate, is the risk-free rate. You can sit in Treasury bills. You can sit in commercial paper. I've been buying six to nine-month commercial paper at five a quarter five and a half that changes the whole paradigm of how do you think about equities how do you think about mez financing boy if i can sit in the risk-free rate or quasi-risk-free rate that's the big deal today more cash more of the yielding assets you can be patient clip five and a quarter and then there's some tactical things around credit to take advantage of and then uh and you know by the way some of the quality income you can get in the markets and mortgages and invest in great credit get you some pretty good yield at these rates today very

Interesting. Rick, thanks for opening the notebook a little bit and talking to us today. It's great to see you again. Thanks for having. I appreciate it. Rick Reeder with BlackRock. Still ahead. Talk some energy. The sector posting its largest week of inflows since 2008. We'll tell you where investors are buying with the sector in the green today when Power Ludge returns. Welcome back, everybody, to Power Lunge. Stocks hire once again today. A nice little rally heading into the Fed decision tomorrow. So NASDAQ, the leader here, up more than 1%. Bobazzani's at the New York Stock Exchange. Hi, Bob. Hey, hello, Tyler.

So we are reversing everything that happened last week. So remember the big story last week. Treasury yields dropped dramatically. So yield plays all rallied. And the yield play, the classic one, utilities. Utilities had a big week last week. We see some of the big names like Con Ed, for example, moved about 6% in four or five days. Well, guess what's happening?

Treasury yields are going back up and all of the utilities. These are among the worst performers on the S&P 500. There's ConEd. Remember, these play 3.5% somewhere around there. Some will get as high as 4%. But they compete for the Treasury bonds in terms of yield. So there's a day when we're moving to the downside. We also had other yield plays also did really well.

So I'll give an example, like Real Estate Investment Trust, American Tower. This is a reed. They sell communication sites to cell phone providers. And they're a re-play, they're a yield play, three, four percent on the yield that varies. But the bottom line is that had a great week. Last week, it moved up rather significantly. And you see it's all down today because, again, the rate plays are down because the treasury yields are moving to the upside. Opposite case with the banks, of course, we're having a Titanic Day in some of the banks today.

But you want to focus on the regional banks. We had volumes we've never seen in history on some of these regional banks. U.S. Bank Corp normally does 13, 14 million shares a day down here right behind me at the New York Stock Exchange. On Friday, 206 million shares traded hands. We're talking 15, 16 times normal volume. This has come down again now. Now it's only two or three times normal volume. But you get the idea.

We've never seen this kind of volume here at the New York Stock Exchange on some of these numbers. Finally, I just want to show you the S&P 500. What a reversal this has been. Of course, remember, we were at, what, 3850, just five or six trading days ago. We're about to crack 4,000 here. In fact, we were just standing right at the door of 4,000 just earlier in the day, just off of those highs. It's all going to depend on the Federal Reserve tomorrow. Kelly, back to you. 3986 for now. Bob, thank you. Let's turn to oil, which is jumping today. Energy stocks with some big gains as well. Pippa Stevens, what's going on here? Yeah, well, WTI is marching back towards that $70 level, currently at $69.50.

Energy stocks up more than 3% in the top S&P group today. I did want to take a look at this data from Bank of America, which actually shows that last week that we saw the biggest inflows into the energy sector going back to 2008. So on the face of this, this seems like a very bullish indicator, but we do have to look a little bit deeper because the sector was actually down 7% last week, and we saw outflow from some of the largest funds, including the exit. in the ex-op. So that begs the question of where are investors putting their money? And it's much more going to individual stocks rather than energy-focused ETFs. But one area of ETFs where they are putting their money is into high dividend funds like the VYM. And that, of course, includes a number of energy stocks.

Still, I'm shocked that it's higher than when we had oil at 1.30 last year. And it tells you just how big that demand must have been. But, but thanks, Pippa Stevens. Let's get to Sima Modi now for the CNBC News Update. Seema. Good afternoon, Kelly, here's what's on our radar. A strong 6.5 magnitude earthquake was felt widely across Pakistan, including Islamabad, the capital, about 90 minutes ago. An NBC producer reporting it was strong enough to prompt many people to leave their homes in case they collapsed. With some women and children crying in panic, there is an early report of a girl

dying after a wall fell on her. Los Angeles, school workers are picketing in the rain today as they begin a three-day strike for higher pay and better working conditions. Teachers have also walked out in solidarity. The country's second largest public school system is shut down, canceling classes for 420,000 students as they look for higher pay. Enough of the disrespect. We refuse to be invisible. We refuse to be silenced. We are ready to fight. And we are proud to be joined by teachers who are striking in solidarity with us. United, we will win. And thousands of signatures were delivered to the Louisiana governor's office today, but there weren't enough of them to trigger a recall election in New Orleans.

Opponents of Democratic Mayor Latoya Cantrell needed 49,000 signatures and submitted 67,000, but officials say only 27,000 on them were valid. Kelly and Tyler back to you. All right, Tima, thank you very much. And ahead on power launch, some signs of life for the housing market, existing home sales on the rise, despite those higher rates and low supply. Why buyers are warming up to the competitive market. Spring is here, folks. That's next. Welcome back. The saying goes, go bigger, go home. So we're going all out for tomorrow's very important Fed decision. We've got full-fed coverage on the exchange and power lunch. It begins right here at 1 p.m. Eastern time. So much at stake for the economy, markets, bonds,

banks. And speaking of bonds, let's get to Rick Santelli. He's live at the Sebo. Rick. Hey, Tyler. I have a special guest today. Pimco, Manji Director of anything short term? Here he is, Jerome Schneider. Jerome, thank you for being here. Let's get right to it. Listen, many believe that the Federal Reserve was one of those types of agencies

that rarely made mistakes, but it seems like 2022 and 2023 are really hurting their record. As deposits left the system and emigrated, we see that there was a vacuum there that's created an issue. Is the Fed going to raise a quarter point tomorrow like the markets want?

And if they do, will it really make a big difference with regard to the nervousness in the banking sector? And honestly, it's probably a coin flip. You have a potential for a doveish hike or a hawkish pause at this point in time. And the reality is that the Federal Reserve is going to continue to manage the evolving situation between growth, clearly between financial conditions, which they responded to the immediate need for financial conditions. How do they respond exactly to financial conditions tightening up? They basically will, in the immediate term, look to safeguard deposits along with the FDIC. and that sort of took a little bit of the strain off the system, at least for the near term.

Obviously, there's still concerns about how the economy evolves. There's still concerns about the higher interest rates and how it evolves within the economy and the financial ecosystem. And from an investor point of view, we should all be rationalizing that this takes time in this sequencing. Well, it does take time, and that's the whole point, wrong and variable lags. And I guess so many traders on this floor have expressed to me the notion that how could the Fed have missed the point that regional banks are holding all these losses at a time where interest rates have been raised in a very quick velocity. Why didn't they anticipate this? It really has put a Minsky moment here, even though the markets have dealt with it. Yeah, the markets have dealt

with it, and obviously the Minsky moment has been pushed off, if at all, at this point in time. From the asset liability management point of view, there is, I think for all investors is a lesson to be learned here. Simply understand that assets have a duration to them and liabilities have a to them. As a cash practitioner, the one thing that we've learned from this issue is that cash management simply isn't a passive situation, a passive process. Whether you're a depositor at institutions. And it's counterintuitive. Exactly. Because now moving your money into a short-term instrument is actually causing more volatility and more risk to emanate in the marketplace. Well, actually, this is the first time in a generation, Rick, that we see a situation where

reducing your risk profile, moving to the front of the yield curve, offers you more returns rather than moving out the curve and taking more risk. What about funding now? How is this all going to affect funding? Isn't that the key issue here? This is the key issue. At PIMCO, we are simply watching the funding mechanisms work. They're adapting. We're not seeing stresses in the repo markets. The foreign basis and currency markets are operational. Corporate security is a hot topic. Quickly, let's talk investment grade in junk. What's the prognosis here? Well, here we are pretty defensive in terms of where we think the corporate spreads are going to be simply because of the economic outlook that we see. We see the recession probabilities brought forward probably later this year at Pemco.

And at the same time, the headwinds that we've encountered over the past few days are simply bringing GDP lower by. In one year, when we come back and discuss the post-mortem on this, is tomorrow's quarter point going to be the last in the cycle? Yes or no, in your opinion? It's probably going to be close to the end. But I think more importantly, and this is the more important thing, is investors need to recognize that the horizon for the Fed to be on hold with the neutral rate is probably at least a little bit longer than people suspect. So that timing is going to be important. And the Counteract financial conditions with the growth outlook is going to be the key to successful investing over the near term. And make sure they keep the regulatory eyes on the ball.

Kelly, back to you. Rick and Jerome, thank you both very much. A sharp turnaround in the housing market. Let's get to Diana Oleg with the details. Diana. Well, Kelly, existing home sales in February jumped a whopping 14.5% month to month. That is the first monthly increase in a year. And the largest jump since July of 2020, which was that surge at the start of the pandemic,

I'll tell you, home sales don't usually change this much month to month. Sales were still down, though, 22% from the year before. Now, this jump is a clear sign of just how sensitive today's buyers are to mortgage rates. Take a look why. The sales count is based on closing. So that's contracts likely signed in December and January when mortgage rates drop to the low 6% range, down from the 7% range where they were in the fall. Boom, a slew of buyers.

Unfortunately, inventory is still historically low as sellers are just not stepping up and neither are the home builders. Even with that low supply, though, prices went. It's every for you and never. All right. Looks like we're having a little trouble there with Diana's, Diana's microphone. I think we got the message loud and clear from those falling prices. Coming up, Nvidia's iPhone moment, the chip giant revealing a bold push into AI. its developer conference.

Get this, the shares are on pace for their best quarter and nearly 20 years, and they're up almost 1% today. We've got all the details right after this. Welcome back, everybody. Time for today's tech check, and we've got a ton of Nvidia headlines. Let's get right to Dear Jabosa out west. Hi, Deirdre. Not just Invidia, Kelly, another day, another slew of AI announcements.

These weren't the AI light or gimmicky ones, like using AI to write your earnings remarks or adding a chatbot to your messaging app. Today, they came from the biggest players in tech, Invidia, Google, and Adobe. Jensen Wong, summing it up best. Chat GPT, the AI heard around the world. A new computing platform has been invented. The iPhone moment of AI has started.

Accelerated computing and AI have arrived. As Christina Parts-Novellas just put it, NVIDIA further entrenched itself into the chip supply chain. In other words, Invidio wants to power the revolution, and most analysts and the market, by the way, sees the company as best positioned to do so. In terms of the top-down, Google finally opened up its chat bought Bard to the public, intensifying its battle against Microsoft to own the window to generative AI.

Senator Pichai warning that things will go wrong and feedback is critical. He's not ready yet to cannibalize his cash cow, by the way, search. So he stopped short of integrating Bard into the flagship search engine, painting it as a complement to that. And lastly, guys, in terms of significant AI announcements today, there was Adobe. Let's call it AI for creatives. Its tool is called Firefly, and it will integrate it into its existing suite of products, including Photoshop, Illustrator, and Express.

And, guys, the day, at least here in San Francisco, it's not even half over. I got invited. You know, I don't want to brag, but as a Google one, you know, whatever, paying customer, dear Joe, I guess I was invited and I'm on the wait list now. And how is it going to work when I get access to this bar? You're going to be able to ask it questions like many others, and I hope you're going to be posting all of the quirky, accurate and accurate responses. They're already coming. I'm not interested anymore.

I finally got access to Bing and I used it for like three seconds. I couldn't get an answer on my kid's snow day and so I just lost interest. Because you're not trained to use it yet. I mean, think about how we use search. It was kind of this learning curve. I know I'm still telling, you know, people like my mother how to properly search for stuff and sort through all the garbage that sometimes. comes up, but I think it's going to require sort of new tools, new savviness to figure out how to best use these new generative chatbots. I have one that gives me access to a bunch of different

ones, and so I kind of compare them. We can't ask the right questions. You don't always think about it right away. It's true. And now that's like the whole new industry is people. The phrasing is critical. Oh, multi-I already, there's people who put programs on top of it with these prompts that are themselves like an entire web page. You've got to have special, more special pronouns? No. Wait a Just special prompts. And they go on and they go on and they go on. You know what I'm talking about, Deirdre? I know what you're talking about.

I got you, Callie. Yeah, all right. Dear Tobosa, don't miss InVity's CEO, Jensen Wong, by the way, and a Mad Money exclusive tonight at 6 p.m. Eastern on CNBC. All right, coming up, we got you covered no matter what the Fed does tomorrow. Three different ways to position for success in three-stock lunch. Power lunch is back in two minutes. All right, time for today's three-stock.

launched a little twist on the theme here. Today, it is a Fed theme. We've got an investment for three scenarios. One, if the Fed pauses tomorrow, we have the S&P Home Builders Index. Second, J.P. Morgan, if the Fed hikes. And third, NVIDIA, we've been talking a little bit about that, if the Fed hikes, but the statement hints at a pause in the future. To handle this incredibly complex assignment, we've invited in Boris Schlossberg, BK Asset Management, Managing Director of FX Strategy. and a CNBC. No one could get his head around this complexity. It sounds like Mission Impossible. I'm ready to be like Tom Cruise and MI7 here.

All right, here we go. Let's go number one. The Fed pauses and you raise the idea of XHB, the Home Builders Index. Yes, because I think obviously, you know, the Home Builders Index, very, very sensitive to interest rates. That gives it a lot of tailwind behind it. As the story, as Diana just reported on the story, housing is rising up, you know, rising up. Because even though affordability has really, really gotten much worse, inventory is just not there.

Demand is still very, very strong for housing. And if you can just ease affordability a little bit, I think it's just going to create like a ball underwater. It's going to really pop it. Also, all the builders are seeing much, much better supply chain issues now. So that really also provides them with much better incentives to go forward. So I think you don't need to be a hero just by the index. I think it'll do it very well in a pause scenario.

I like this is a clever three-second lunch. So if the Fed hikes, Boris, then you turn to J.P. Morgan? Yes. So if the Fed hikes and sort of stays the course, which is the most hawkish scenario evolved, in other words, J. Powell gives no corner here and he basically says we're going to focus on inflation. That basically suggests a couple of things. One, we're obviously going to have contraction, you know, in the economy. The yield curve probably should tighten at this point because he's clearly concerned that inflationary pressures are going forward. And that creates a very defensive situation. There's no better defense than J.P. Morgan Chase.

It's a 3.5% yield. It's the stellar bank. Everybody is putting their money into it now because as a way of safety. And of course, as a result of it, they're going to make more money on trading at services. It's just sort of, you know, money goes to the best. So to me, J.P. Morgan Chase is a great defensive play. I love this dog. And scenario number three. Fed hikes like a fledgling hawk, but talks like a little dove.

Like a dove, right. In other words, where he hikes and he sort of makes it pretty clear that this could be very close to terminal rate, which is probably the most likely scenario. I think that, of course, yes, it's very positive for all tech because tech is obviously starved. Every time interest rates go up, tech just goes down because of valuation. Now, Nvidia, to me, is a very interesting story on tech because it's sky high valuation. But if he does pretty much bring the rates to a terminal rate, that means valuation concerns are going to come down. And as you guys reported, they are really at the forefront of AI. right now. Now, the negative story on

Nvidia is that there's other people getting into the AI space, but I think people utterly underestimate first mover advantage. They really have the first mover advantage in this space. If we all believe that AI could be an iPhone moment, then you have to bet on Nvidia going forward. That's what the CEO said just a few minutes

ago on our air. You probably heard. Boris, great to see you, my friend. Thank you. Thank you, guys. You bet. Still ahead, the outlook for emerging markets. It's darkening as the world watches bank, turmoil, and the Fed. reveal the location's best and worst position when Power Lunch returns. Welcome back to Power Lunch. We are 23 hours away from the Fed's decision on rates,

markets on pins and needles, and just recovering from the nervousness caused by the collapse of Silicon Valley Bank. Now that's hit the U.S. and Europe. It's having a trickle-down effect as well on emerging markets. Sima Modi is here now with their side of the story, Sima. Well, Kelly, the narrative around emerging markets has certainly changed since the start of the year when there was so much optimism surrounding China's reopening, but with the collapse of Silicon, Silicon Valley Bank, Credit Suisse, we've seen accelerated emerging market outflows over the past two weeks. Asian investors are among those that do have exposure to Credit Suisse's Tier 1 bonds. But the bigger concern is that foreign banks will start to tighten their lending standards.

That puts extreme pressure on countries that have large current account deficits. So they're importing more than they export countries like Turkey, Chile, and Colombia. Worth noting, central banks, including the ones of these countries, have implemented new risk management tools, a greater financial crisis, but there are smaller countries, right? So they have less of a buffer than developed economies like the United States. So those are the countries to watch or potentially at risk if we see some type of contagion effect. Looking ahead, though, to the Fed decision, I mean, if we do see a smaller than expected interest rate high, Goldman Sachs points out, that is good news, right, for the emerging markets that are sitting on high dollar denominated debt. They want lower

weights and they want a weaker dollar, which, by the way, we've now seen four consecutive days of losses. So that sort of tells you how the market is positioned going into tomorrow. That trend continues. That is very good news for emerging markets. Gomez acts actually sharing with us, they actually think tomorrow because they're suggesting there's a hold, that that would be an inflection point for this EM trade. Wow. That's what I was thinking is knowing that the dollar's been a little bit weak lately. Are they, they should suffer from the macro, but at the same time be helped by the FI. It all kind of depends on whether this crisis, banking crisis gets any worse, I guess, unless they're already going to struggle from the tightening that we could see by some of these major banks.

Although you could also argue Latin America, India, countries like Brazil, they've already started their rate hiking cycle well before the Federal Reserve. So that actually positions them to outperform. That's what Goldman Sachs shared with us as well. China is its own little ballgame tomorrow. In addition to a Fed meeting, we have a state council meeting inside China where the new premier is expected to unveil some type of stimulus measures. If you recall three weeks ago at that National People's Congress, we didn't get that stimulus announcement. Chinese stocks sold off. Tomorrow, if we get that announcement, we'll see if that changes the story there.

Great points. We've got China to watch, the Fed to watch these bank CEOs. Watch this is a lot going on right now. It's all coming to ahead. Seema, thanks very much. Before we go, be sure to tune in right here at 1 p.m. tomorrow. The exchange and powerless. We're going to merge like UBS and CS.

We've got that full coverage leading up to. Oh, there I'm supposed to look right there. There you go. up to and through Jerome Powell's press conference, it's the words that are really going to matter. Thanks very much for watching, Power Lunch, everybody. Join us tomorrow. Closing bell starts right now.