Fed And Treasury Not On The Same Page
Markets were somewhat resilient last week, given the disaster that was the Treasury Secretary’s speech before Congress.
Things were going well last week as the market had settled into the idea that the Fed would hike rates by another 25 basis points. Even during Chairman Powell’s speech on Wednesday following the FOMC’s rate announcement, the market was positive. The statement from the FOMC took a slightly dovish tone that seemed to comfort markets. Equities sold off, however, shortly after Treasury Secretary Yellen spoke before Congress and told the country the Treasury is “not considering a broad increase in deposit insurance” with regard to the banking situation. I’m no word-smith, but this comment could have been phrased more carefully, perhaps leading to an even better ending result for equities last week. In fact, it's evident that Yellen realized her mistake, because in day two of her testimony before lawmakers she adjusted her language regarding deposit insurance by stating, "Certainly, we would be prepared to take additional actions if warranted."
Meanwhile, on the economic front, the labor market remains on solid footing as Initial Claims once again fell below expectations for the 10th time over the last 12 weeks.
Existing Home Sales and Building Permits were higher than expected in February and higher than January. The market has taken Powell’s comments that a rate hike pause is on the way. Right now, the market is pricing in an 83% probability that the Fed won’t raise rates at their May meeting—that is if Janet Yellen can keep things together. There is some easing of fears in the banking sector as First Citizens BancShares agreed to buy most of Silicon Valley’s loan book and securities - and assume all of its deposits. The financial sector saw its first positive week in the market in 4 weeks and we just passed the first weekend in almost a month without some banking revelation. While we do not believe we are out of the woods just yet, it does appear, for now, that fears are easing.
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