2023-03-16 12:39:14 ET
Summary
- The banking turmoil is another item on a long list of headwinds for this market.
- It overshadowed a huge drop in the Producer Price Index and another resilient retail sales report.
- The Fed is likely to raise another 25 basis points in what should be its last hike for this cycle.
- The market's uptrend from October remains intact as rates of change in the economic data points continue to suggest a soft landing is still possible.
Stocks open sharply lower yesterday on news that Europe could be having its own Silicon Valley Bank (SIVB) debacle, but in Switzerland. Credit Suisse Group AG (CS) was a $75 stock prior to the global financial crisis, but it has been in decline ever since, starting the year around $3. It fell 14% on news that it had identified "material weaknesses" in prior years reporting of financial results.
The timing could not have been worse, as investors nerves were already frayed by the recent bank failures in the U.S. The difference is that this is a systemically important financial institution with tentacles that spread worldwide, as well as a primary dealer with the Federal Reserve. Its announcement spurred another round of selling in banks and brokers on a global basis, but this situation is far from a bank failure. It is suffering more from a crisis of confidence during a long-term turnaround that has not beared fruit. That's why the Swiss National Bank acknowledged it would provide the bank with liquidity, if needed, in the same manner the Fed is supporting the U.S. banking system.
What is amazing about our stock market is how well it has held up in the face of one blow after another, as though it were Rocky Balboa in any one of the movies from Sylvester Stallone's classic series. While it keeps getting knocked down over and over again, it keeps getting back up. We have an ongoing war in Ukraine, record inflation, rapidly rising interest rates, speculative bubbles bursting everywhere, bank failures, a profits recession, the fear of an economic recession on the horizon, and yet the S&P 500 (SP500) continues its uptrend from last October. Why?
I have been asserting for some time that this is due to improving rates of change for many of the headwinds I just mentioned. Yesterday's Producer Price Index and retail sales reports for February were two more steps in the right direction. If not for the ongoing banking issues, these reports would have been the focal point for markets and extremely positive news. There was a huge decrease in producer prices last month, which on its own should convince the Fed to stick with a 25-basis-point rate increase next week. The PPI fell 0.1% in February compared to expectations for a 0.3% increase, while January's increase of 0.7% was revised down to just 0.3%. The annual rate of increase fell from 5.7% to 4.6%. The core rate, excluding food and energy, fell from 5% to 4.4%. Digging deeper into the pipeline, the index for processed goods for intermediate demand declined 0.4% last month, while unprocessed goods fell 3.8%. That confirms the disinflationary trend is gaining steam.
Retail sales fell more than expected in February, declining 0.4% compared to expectations for an increase of 0.2%, while the annual growth rate fell to 5.4%. I indicated last month that investors should expect a big short fall this month to balance the blowout January numbers that were clearly an anomaly due to weather and one-time seasonal adjustments. We got it.
Regardless, the same cohort that said January's figures were too hot and would fuel inflation now say that February's numbers are a warning that consumers are struggling to keep up. The only number that is important to me is inflation-adjusted retail sales growth over the past year. That number came in at -0.6% in February, as we subtract the 6% increase in the CPI from the 5.4% increase in retail sales. Recessions have not occurred until real retail sales decline between 1-3%.
My expectation has been that the rate of inflation would fall more rapidly than the rate of consumer spending growth, avoiding a recessionary decline in real retail sales growth. So far, so good. A soft landing is still in sight. Additionally, these two reports affirm for me that the Fed's next 25-basis-point rate increase will be its last.
For further details see:
This Market Is Like Rocky Balboa - It Won't Go Down