Fed Rate-Hike Odds Drop As Retail Sales Fall; Bank Stocks, S&P 500 Slide

The Fed has more reason not to hike its key interest rate next week, if the sudden banking crisis weren’t enough. Retail sales slipped a bit more than forecast and the producer price index unexpectedly fell in February. The reports casts some doubt on the notion that the economy and inflation have a full head of steam early in 2023. After the reports, the S&P 500 traded sharply lower on Wednesday morning as bank stocks remained under pressure.


Retail Sales Report Details

Overall retail sales fell 0.4% vs. expectations of a 0.3% decline. Excluding vehicles, sales dipped 0.1%, undershooting estimates of a 0.2% rise.

January sales surged 3.2% overall, revised up from the 3% reported last month. Excluding autos, January sales rose 2.4%, revised up from 2.3%.

Factoring out sales at gas stations, which fell 0.6%, as well as autos, retail sales were flat in February.

An 8.7% cost-of-living boost to Social Security checks likely helped fuel January’s outsized gain. Meanwhile, February sales faced greater headwinds as 30 million households lose an extra $95 per month in pandemic-era Supplemental Nutrition Assistance Program benefits.

Meanwhile, the producer price index fell 0.1% in February, as the annual inflation rate for wholesale prices eased to 4.6% from a downwardly revised 5.4% in January.

Also, the New York Fed’s Empire State manufacturing index tumbled to -24.6 in March from February’s -5.8. That’s vs. views for -7.7.

S&P 500 Sells Off, As Bank Stocks Weigh

After the retail sales report and other data, the S&P 500 slid 1.4% in late Wednesday morning stock market action. Big U.S.-based banks took a hit overnight amid a selloff in European bank stocks that saw Credit Suisse (CS) hit an all-time low, tumbling 17%.

JPMorgan Chase (JPM) lost 4.3%, Wells Fargo (WFC) 4.2% and Citigroup (C) 4.7%.

The S&P 500 rallied 1.65% on Tuesday, snapping a three-session losing streak sparked by the overnight collapse of SVB Financial Group..

As of Tuesday’s close, the S&P 500 remained 9.6% above its bear-market closing low on Oct. 12, but 18.3% below its all-time high at the start of 2022.

The 10-year Treasury yield, after jumping 12 basis points on Tuesday, fell 21 basis points to 3.43% on Wednesday.

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Fed Rate-Hike Odds Fall

After the retail sales and PPI reports, markets were pricing in 47% odds of no Fed rate hike on March 22, and 53% odds of a quarter-point move. On Tuesday, markets saw 30% odds that the Fed will stand pat.

Markets are now betting on a pause in May, with several Fed rate cuts in following meetings.

The sudden banking crisis, which led to the weekend bailout of all SVB and Signature Bank depositors — even those whose deposits weren’t guaranteed — has upended the Fed’s plan to keep on hiking its key interest rate. Previously, Fed officials said that the costs of hiking too little easily outweighed the costs of hiking too much. But with the sudden evidence of banking-sector fragility, the risks are now at least balanced or, more likely, tilted the other way.

Until late last week, the Fed figured it could always slash rates to resuscitate the economy if overtightening precipitated a downturn. But banking-sector woes now mean that the Fed needs to be as careful as possible to avoid causing a recession.

Why Fed Should Prioritize Banks Over Inflation

The Fed’s weekend launch of a fund that will loan money to banks carrying loads of depressed mortgage securities or other government-backed debt was a good start. Faced by deposit outflows, SVB was forced to sell, taking a big loss on bonds that it had planned to hold to maturity. That proved to be its undoing. Other banks won’t face the same problem.

But the banking sector’s problems still may get worse. On Tuesday, Moody’s downgraded its outlook for the whole U.S. banking sector. The ratings firm said it expects banks to raise their deposit interest rates to avoid outflows when customers can get 4%-plus market interest rates from safe government bonds. Smaller banks could also see deposits shift to bigger banks that are perceived to be safer.

Meanwhile, loan delinquencies are expected to rise as the economy weakens amid high interest rates. Banks also are expected to face losses on commercial real estate loans with office buildings already facing high vacancy rates because more work is being done from home.

One more problem: The bailout of even uninsured depositors will mean higher FDIC insurance costs for banks.

Even before SVB’s crash, the Fed’s loan survey revealed tighter lending conditions late in 2022. That should contribute to slower growth and lower inflation ahead.


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