Countdown to the
: 00
: 00
Access our Derby insights

Morning Seeds

Tomorrow's News, Today.
Morning Seeds • 03/22/2023 - 9:16 AM EST

Mapping a Hike

The Fed makes its decision on the rate hike today at 2 pm, in which it will weigh the tricky balance between its fight against inflation and the stability of the banking system. The latest inflation prints and jobs data argue for further tightening, while the fallout from SVB and the risk of contagion due to the rapid shift in rates argue for a pause. We believe there is some read-across from Lagarde’s comments that the ECB did not entertain tradeoffs from its primary objective of fighting inflation, signaling that any bank instability is merely a byproduct of the fight against inflation (and that there are distinct tools for distinct problems). If the Fed does not hike, market turmoil could ensue as it might be taken as a signal that the Fed knows something market participants don’t, and we think it is very unlikely they will hike 50bps. In addition to unchanged dots, the market is currently pricing in a 21bps hike, thus, we believe a 25bps hike seems reasonable.  

Equities Extending

Stocks continued their rally yesterday with a strong day. The SPX closed near the highs of the day with strength driven by the economically sensitive sectors, including energy, consumer discretionary, materials, and industrials. Even the financial sector recovered, where strength was led by the troubled First Republic Bank, which closed up 29% for the day. The SPX is now up 2.2% for the week, heading into the FOMC decision this afternoon. In spite of the recent bank runs and large losses for some hedge funds, the SPX is up 4% YTD and has made back 70% of the fall from the SVB events. Further, the Nasdaq is up over 13%.  

Recession Shapes and Sizes

Two-year rates continued their rise off the lows and have retraced about 38% of the decline this month. More importantly, rates vol came down as the markets appeared to be settling. Commodities have yet to have found their footing as investors build in a higher likelihood of a recession. We believe rising stocks and falling commodities evidence market participants’ comfort with a mild recession. Further, credit card data from Citibank has started to show a significant drop in consumer spending while capital continues to flow into money markets.  

European Inflation Still High

The UK CPI came in at 10.4% which is reasonably high compared to a sub 10% expectation, with core coming in at 6.2%. This inflation number keeps the pressure on the BOE tomorrow, making it more difficult for the BOE to pause and instead, more likely to see a tightening of 25bps. Further, Lagarde and others continue to make hawkish comments about the need to fight inflation in Europe despite banking concerns. Broader inflationary pressures appear intact in European labor markets, most notably in France in the form of substantial protests and strikes over Macron's government pushing through a raise in the retirement age.