Hey everyone, it’s been a while since our last update, and I wanted to let everyone know what I’m seeing in the market right now.
Since the collapse of SVB, Silvergate, and Signature Bank, the market seems to, once again, think a Fed pivot is imminent. However, I’m not so convinced. I went into some detail here, and I won’t repeat all of that today, but I still firmly believe what I wrote in that article last week.
Today will be a very revealing day as the Fed will announce not only their intent to raise interest rates or pause their hikes, but we’ll also see how much the regional bank panic is affecting their future hiking plans. That’s because at the end of each quarter, all of the Federal Reserve officials publish the “dot plot,” which shows where each official expects rates to be over the next couple years and beyond. Here’s a look at the most recent one from last December:
As you can see, at the end of last year, the majority believed that the Fed Funds Rate would be above 5% by the end of 2023. After that, however, the expectations were all over the place. For the end of 2024, expectations ranged from 3% to 5.75%, and for 2025 it was mostly between 2.25% and 4.5% with one official thinking rates will stay all the way up at 5.5-5.75%.
Now, these predictions should be taken with a grain (or truckload) full of salt. By no means do they predict the future. But as far as the market is concerned, this information will set the narrative for at least the next several weeks (or whenever the next victim of rate hikes is exposed).
The market seems to be expecting a pretty drastic reduction in expectations for 2023, as Fed Funds futures have shifted down dramatically over the past couple weeks:
The chart above shows where the futures market expects rates to be at the end of 2023, which is currently sitting at 4.49%. It should also be noted that this was at low as 3.4% intraday on March 15th. For reference, the current Fed Funds rate is in the 4.5-4.75% range, and it’s expected to be increased by 0.25% today.
So, the futures market is still expecting rate cuts by the end of the year. If the dot plot shows that Fed officials still have a consensus opinion that rates will be anywhere near 5% at the end of 2023, it will probably be a rude awakening to the stock market.
I think it’s more likely that their expectations are a little lower, but probably not as low as the market wants. My reasoning for this goes back to the article I linked to above. The BTFP plan to “bail out” banks is neither a bailout nor QE. There’s no “liquidity injection” into the economy. This is simply a program that offers banks the option to take on debt to meet deposits if they need to. It’s not even favorable to the banks; they’d have to pay a rate higher than the Fed Funds Rate on that debt, which will be a hit to their profitability, and they also have to pay that debt back in full within a year. It’s the epitome of a band-aid fix, and while it’s somewhat useful to banks that are dealing with panicking depositors, it’s by no means going to provide lasting relief to the economy.
In fact, I’d argue the opposite. Banks that need the support will take advantage of it, and because they’re now even more indebted, they’ll be extremely careful with who they loan to. On the other hand, the banks that are well capitalized and not facing as much panic will also curb their risk as much as possible, resulting in a deleveraging banking system that frankly doesn’t want to lend to anyone except the absolute safest parties.
For the economy, that means that conditions will actually tighten even more than they already were, and they were already very tight. As you can see here, about 45% of banks tightened their lending standards in Q1 as of February 6th:
That’s the 10th highest quarterly reading in the pat 33 years, and it means money is harder to come by. That means we’ll see the economy continue to contract, and it’s also deflationary.
So, what does this mean for the market and our portfolio?
Keep reading with a 7-day free trial
Subscribe to Ian Dyer to keep reading this post and get 7 days of free access to the full post archives.