Live Markets: Banks, no slam dunk but still in the game
05/04/2022 18:06
* Nasdaq down >1.8%, S&P 500 down ~0.7%, DJI off ~0.3%
* Fed Govnr Brainard sparks worries about aggressive
tightening
* Tech weakest major S&P sector; utilities leads gainers
* Dollar, crude up; gold, bitcoin fall
* U.S. 10-Year Treasury yield rises to ~2.55%
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BANKS, NO SLAM DUNK BUT STILL IN THE GAME (1303 EDT/1703
GMT)
Between yield curve inversion, economic concerns,
geopolitics and Fed tightening uncertainties, banks have had a
wobbly start to 2022. But while KBW managing director
Christopher McGratty says KBW's bullish September "buy the
banks" call is less of a slam dunk now, he's still hopeful.
"We still think the revenue development will be very good
over the next several quarters. And we think valuations are
inexpensive, but the challenge is that the macro factors are
really just dominating headlines and that's leading to low
levels of conviction from investors," McGratty said adding that
"there are more risks in the market today than there were three
months ago."
KBW's bias is for small and mid-cap banks over bigger banks,
but still McGratty is eyeing a bounce in bigger bank stocks.
McGratty sees smaller bank valuations below trough multiples
from 2015-2018. He also prefers shorter-term lenders levered to
the front-end of the yield curve and those with meaningful
excess cash to mitigate risks of elevated deposit costs.
However, KBW is not recommending bank stocks with "outsized
unsecured consumer credit is downgrading Citizens Financial
group CFG.N to market perform from outperform, and not
recommending banks with "buy now, pay later" loan exposure so it
sees Truist Financial TFC.N and Regions Financial RF.N
underperforming.
McGratty also points to risks, given that sharp moves higher
in rates drive large negative swings in accumulated other
comprehensive income (AOCI) such as the reduction of the value
of bonds on bank balance sheets, thus reducing tangible book
value (TBV/shr by a median of 4%.
Investors are now more focused on price/earnings ratios than
TBV, but McGratty is still wary of banks with higher AOCI risk,
higher trading premiums and less excess cash to reinvest -
Glacier Bancorp GBCI.N , Flushing Finanical Corp FFIC.O , and
Truist.
He's forecasting a challenging Q1 2022 with a 36%
year-over-year decline in investment banking and an 18% drop in
trading revenue for bigger banks. But the group's recent decline
to a multiple of 10.23 x his 2023 earnings estimate "provides a
good set up for a relief bounce" after earnings reports. He
prefers JPMorgan JPM.N , due to underperformance on commodity
concerns and expectations for an improved net interest income
(NII) outlook. But he is most cautious on Citigroup's C.N
Russia exposure and buyback uncertainty. Besides JPM and C,
McGratty's preference order is Bank of America BAC.N , then
Morgan Stanley MS.N and then Goldman Sachs GS.N .
Ahead of earnings season, which kicks off next week he
recommends overweight positions in Wintrust Financial WTFC.O ,
FNB Corp FNB.N , Pinnacle Financial PNFP.O , Metropolitan Bank
MCB.N , Peapack-Gladstone Financial PGC.O , and an underweight
positions in US Bancorp USB.N , Bank of New York Mellon BK.N ,
CFG, and BOK Financial BOKF.O .
Trading in the S&P 500 banks index .SPXBK has been
volatile, last down 0.9% on the day and off ~10% year-to-date.
In comparison the KBW Regional bank index .KRX , down 0.3% on
the day, is down ~4% YTD.
(Sinéad Carew)
*****
DOES TREASURY YIELD CURVE SIGNAL A RECESSION? NOT IN REAL
RATES (1208 EDT/1608 GMT)
The yield curve in inflation-linked U.S. Treasury debt does
not signal an impending recession, even as handwringing
increases that inversions in nominal Treasuries make an economic
downturn likely, according to Barclays.
The closely watched yield curve between two-year and 10-year
notes US2US10=RR inverted last week, which is seen as a
reliable signal that a recession may follow in one-to-two years.
However, “notwithstanding the question of whether curves are
accurate predictors of recessions, we believe a simple
dissection of nominal rates into forward real and breakeven
inflation rates from TIPS (Treasury Inflation-Protected
Securities) does not support a view that markets are signaling a
recession in the coming few years,” Barclays analysts Michael
Pond and Jonathan Hill said in a report.
If the market were pricing for an upcoming recession the
real curve, which reflects yields after expected inflation,
should invert as markets price in a need for monetary policy to
be stimulative, Barclays said.
This was the case in August 2019, which was also the last
time that the two-year, 10-year Treasury curve inverted, just
before the Fed began its last easing cycle, which was amplified
by the pandemic, the analysts said.
“Instead, the current market is priced for real policy rates
to return to about neutral within the next year or so, and stay
there for the next four years,” they said.
The neutral rate is seen as the level that neither speeds up
or slows down the economy, which the Fed estimates is 2.4%.
Meanwhile, the forward one-year real yield curve is inverted
beyond the five-year point, which “may be pointing to the
eventual need for accommodative policy, but it also is likely
reflecting uncertainty in the long-term outlook for growth and
the neutral policy rate,” Barclays said.
Barclays concludes that the inversion in the nominal yield
curve is coming predominately from the curve of breakeven rates,
which indicate expected inflation. And rather than pointing to a
recession, real rates are pointing to a return to neutral, while
forward one-year breakevens are consistent with a normalization
of inflation back to the Fed’s 2% PCE (Personal Consumption
Expenditures) target, from currently elevated levels, rather
than a persistent undershoot, as was the case in August 2019,
they said.
(Karen Brettell)
*****
SMALL CAPS AND INVERSIONS (1131 EDT/1531 GMT)
As equities have struggled to start the year, small caps as
measured by the Russell 2000 .RUT have lagged their larger cap
brethren, and the recent yield-curve inversions represent a new
risk, according to Bank of America Merrill Lynch equity and
quant strategist Jill Carey Hall.
According to Hall, small caps typically outperform during
bear flatteners, when shorter-term rates are rising faster than
longer-term ones, but an inverted curve presents a risk.
Hall notes that while small caps are generally higher in the
three months after an inversion of the 2-year U.S. Treasury
yield and the 10-year U.S. Treasury yield US2US10=RR , which
happened on March 29. urn:newsml:reuters.com:*:nL2N2VW227
However, returns are usually negative after six months as
well as over the full period of inversion, with small caps
trailing large caps 70% of the time during the inversion, said
Hall.
While the inversion has led Hall to stay favorable on small
caps in the near-term versus large caps, thanks to tailwinds
from domestically-exposed stocks, services recovery
beneficiaries and capex beneficiaries, as well as better pricing
power, Hall believes a more cautious stance could be needed "in
future months if more indicators roll."
Hall notes that not all yield curves have inverted yet to
flash a recession signal, while the yield curve may be a less
reliable signal today thanks to ultra-low yields outside the
U.S. and supply chain issues that have distorted the slope given
expectations for high inflation near-term.
In addition, small cap valuations have been pricing in more
risks compared to prior inversions, with the relative PE of
small caps to large caps cheaper than any other inversion and by
20% on average.
(Chuck Mikolajczak)
*****
THE SERVICES TRADE: PMI, TRADE BALANCE (1105 EDT/1505 GMT)
The customer-facing services sector, which accounts for
about three-quarters of total U.S. employment and trades at a
surplus with our overseas peers, is enjoying the continued
relaxation of measures to combat COVID-19.
To begin with, the services sector's expansion accelerated
last month.
The Institute for Supply Management's (ISM)
non-manufacturing purchasing managers' index (PMI) USNPMI=ECI
rose 1.8 points to 58.3, landing just a rounding error below
analyst expectations. urn:newsml:reuters.com:*:nN9N2TD019
A PMI print above 50 signifies monthly expansion.
The good news: employment bounced back from contraction and
new orders jumped a robust 4 points. The bad news: the prices
paid component rose further into the stratosphere, rising to
83.8 from 83.1, implying that the rude guest, inflation, isn't
going anywhere soon and cementing expectations for aggressive
Fed tightening.
But despite the headline number's uptick, "respondents have
indicated that they continue to be impacted by capacity
constraints, logistical challenges and inflation," writes
Anthony Nieves, Chair of ISM's Services Business Survey
Committee, who adds that "geopolitical concerns — particularly
the Russia/Ukraine war, which has impacted material costs, most
notably fuel and chemical prices — have created uncertainty for
many businesses."
These sentiments are echoed by the survey's respondents.
"Supply chain challenges continue," and "labor and inflation
continue to push costs higher across the board," and "pricing
pressures are stronger than ever" were common refrains.
Below is a comparison of ISM's services and manufacturing
PMI indexes, both of which have been expanding since June 2020:
Global financial information firm IHS Markit also released
its take on services PMI USMPSF=ECI , showing a 1.5 point
uptick to 58 March, lower than the 58.9 reading in its initial
"flash" take on the data.
"Business activity in the vast service sector enjoyed a
boost from the relaxation of virus-fighting restrictions in
March," says Chris Williamson, Chief Business Economist at S&P
Global. "The downside is further upward pressure on prices as
demand exceeds supply ...Consumer price inflation therefore
looks likely to accelerate further as we head into the spring."
Markit and ISM PMIs differ in the weight they apply to their
various components (new orders, employment, etc). The graphic
below shows the extent to which the two indexes agree (or not):
The gap between the value of goods and services imported to,
versus exported from, the United States USTBAL=ECI narrowed a
bit in February to $89.2 billion, hovering close to January's
record high. urn:newsml:reuters.com:*:nL2N2W30TV
Consensus called for the Commerce Department's report to
show a more significant deficit reduction, to $88.5 billion.
International trade has been a net drag on the U.S. economy
for a year-and-a-half, a trend that this data suggests is likely
to continue.
A silver lining can be detected in the fact that while both
exports and imports increased, exports saw the bigger spurt -
1.8% versus the 1.3% growth in imports - suggesting overseas
demand recovery could be starting to catch up with the United
States, which is particularly heartening considering the steady
increase in the dollar's value since the beginning of the year.
Harkening back to ISM, while U.S. services have long traded
at a surplus, that surplus inched down to $18.3 billion,
5.6%smaller than the previous month.
The closely watched goods trade deficit with China dropped
by 15.7% to $30.7 billion. urn:newsml:reuters.com:*:nW1N2W3001
"Looking ahead, trade flows are likely to be disrupted by
the war in Ukraine and lockdowns in China," says Rubeela
Farooqi, chief U.S. economist at High Frequency Economics.
"There is also additional downside risk from a potential
softening in demand in Europe and China."
Investors were in a selling mood in late morning trading,
with all three major U.S. stock indexes loitering in negative
territory.
FAANGS weighed heaviest, and sentiment skewed away from
growth .IGX .
(Stephen Culp)
*****
WILL THE FED KILL THE ECONOMY? INVERSIONS SAY 'YES' (1028
EDT/1428 GMT)
The Fed may be paving the way for deflation by quickly
hiking interest rates in the battle to curb inflation, says
Steven Ricchiuto, U.S. chief economist at Mizuho Securities.
Put another way, the yield curve inversions show markets are
assuming the Fed will be successful at killing the economy in
order to keep inflation from becoming persistent, he says.
The aggressive approach to demand management poses a risk if
the constraints on aggregate supply prove to be less
long-lasting than the Fed assumes, Ricchiuto says in a note on
Tuesday.
"Today's inflation pressures could quickly be replaced by
deflation pressures," he says.
"Ignoring this risk while commodity constraints are clearly
depressing global economic activity and overseas investors
continue to grab yield in the dollar markets could be big
problem for the world's largest net debtor nation," he says.
Household savings rose and debt was paid down with the aid
of Covid-19 related transfer payments, he says. But these
positives are being eroded by higher inflation, increased
financing costs and companies controlling compensation cost by
reducing their contribution to employee benefits, he says.
The rise in mortgage, auto and consumer financing rates
clearly suggests policy already is significantly affecting the
U.S. economy and ensures a hard landing later this year even as
many other economists call for a recession in 2023, he says.
"Although there is no visible evidence that a credit-induced
recession is in the cards, a hard landing would feel like a
recession for all but upper-income households," Ricchiuto says.
(Herbert Lash)
*****
WITH A DEFENSIVE TILT, U.S. STOCKS LEAN HEAVY (1007 EDT/1407
GMT)
Wall Street's main indexes started out mixed, but have
turned heavy in early trade as the prospect of fresh sanctions
on Russia is keeping investors on edge, while megacap growth
stocks retreat after strong gains a day earlier. .N
Indeed, after handily outperforming on Monday with a more
than 4% rally, the NYSE FANG+TM Index .NYFANG , is among
Tuesday's laggards, giving back around 2%. Chips .SOX are even
weaker, down over 3%.
With this, the S&P 500 growth index .IGX /S&P 500 value
index .IVX is turning down from the more than two-month high
hit Monday as value shares and defensive groups show some
resilience.
Here is where markets stand early in Tuesday's regular
session:
(Terence Gabriel)
*****
NASDAQ COMPOSITE: 100-DMA THROWS ITS WEIGHT AROUND (0900
EDT/1300 GMT)
With a 17% surge off its March 14 intraday low into its
March 29 high, the Nasdaq Composite .IXIC staged an impressive
snap back over just 11 trading days.
So far, however, the tech-laden index's recovery has hit a
wall in the form of the descending 100-day moving average (DMA):
Since breaking below the 100-DMA on January 6, the Composite
has now registered 62-straight closes below this closely-watched
moving average. That's its longest such streak since an 80-day
run of closes below the 100-DMA in late 2018.
Of note, in the wake of the early-January break, a sharp
two-day rally of around 5%, stalled as the IXIC then battled the
100-DMA. A resumption of weakness then carried the index to
fresh lows.
Since coming within two points of the 100-DMA last Tuesday,
the Composite stumbled again. Monday's strength brought the
index to a level just shy of the moving average which ended at
14,585. But with 100-DMA pressing down, and CME e-mini Nasdaq
100 futures NQcv1 quoted down slightly in premarket trade on
Tuesday, the Composite appears poised to once again back off
from the 100-DMA at the open. urn:newsml:reuters.com:*:nL2N2VY0Y0
In any event, the Composite now has support at Friday's low
of 14,131. A more important level resides at the March 3 high at
13,837. This is also backed up by the now rising 30-DMA, which
ended Monday around 13,650.
The 30-DMA also acted as an important resistance hurdle in
mid-February and again in early-March, so since it has been
reclaimed, traders will now want to see it act as support.
Meanwhile, additional hurdles on the upside are the 200-DMA,
which ended Monday around 14,735, and the resistance line from
the November peak, now around 15,075. urn:newsml:reuters.com:*:nL2N2VX20G
(Terence Gabriel)
*****
FOR TUESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT
- CLICK HERE: urn:newsml:reuters.com:*:nL5N2W3310
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
IXIC04052022 https://tmsnrt.rs/36X9p87
earlytrade04052022 https://tmsnrt.rs/38i3N8D
ISM services PMI https://tmsnrt.rs/3x2JHJR
Markit versus ISM https://tmsnrt.rs/3JclcME
Trade balance https://tmsnrt.rs/3J7B8jn
Russell 2000 performance relative to S&P 500 https://tmsnrt.rs/3NOd2ha
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)