Stocks Fade After FOMC Minutes Project a Mild Recession

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.41%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.89%.

Stock indexes Wednesday gave up early gains and settled moderately lower, with the Nasdaq 100 posting a 2-week low.  Stocks opened higher on the better-than-expected CPI report but then turned lower on hawkish comments from Richmond Fed President Barkin, who said, "There is still more to do to get core inflation down to where we'd like it to be."

Stock losses accelerated Wednesday afternoon when the minutes of the Mar 21-22 FOMC meeting showed policymakers projected a "mild recession" starting later in 2023.

U.S. Mar CPI rose +0.1% m/m and +5.0% y/y, a slightly smaller increase than expectations of +0.2% m/m and +5.1% y/y.  However, Mar CPI ex-food and energy rose to +5.6% y/y from +5.5% y/y in Feb, right on expectations.  The markets are currently pricing a 74% chance of a 25 bp rate hike at the May 2-3 FOMC meeting.

The minutes of the Mar 21-22 FOMC meeting showed policymakers scaled back expectations for rate hikes this year as "many participants noted that the likely effects of recent banking-sector developments on economic activity and inflation had led them to lower their assessments of the federal funds rate target range that would be sufficiently restrictive." 

The FOMC minutes also stated that Fed officials saw risks to economic activity as weighted to the downside and projected a "mild recession" starting in 2023 "given their assessment of the potential economic effects of the recent banking sector developments."

The weekly report from the Mortgage Bankers Association showed mortgage applications for home purchases climbed +7.8% w/w to a 2-month high.  Also, the U.S. 30-year fixed mortgage contract rate dropped -10 bp to a 2-month low of 6.3% in the week ended April 7, the fifth straight week the mortgage rate has declined.

San Francisco Fed President Daly said although inflation still has a ways to go to come down to the Fed's 2% goal, "the economy may be able to slow down enough on its own to accomplish that, even without further policy adjustments."

On the negative side, airline stocks were under pressure after American Airlines Group dropped more than -9% when it reported below-consensus preliminary Q1 adjusted EPS.  Also, media stocks retreated after Bloomberg Intelligence said it expects cord-cutting by video customers to approach 1.55 million in Q1.  In addition, regional bank stocks moved lower after Warren Buffett said that more U.S. banks are likely to fail and that troubled bank stocks aren’t valued investments because shareholders will likely be wiped out even if the government moves to protect depositors.

An increase in M&A activity was a positive factor for the overall market, with Triton International surging more than +32% after Brookfield Infrastructure acquired the company for $4.7 billion.  Also, National Instruments jumped more than +9% after Emerson Electric acquired the company for $8.2 billion.

Global bond yields were mixed.  The 10-year T-note yield fell -1.9 bp at 3.407%.  The 10-year German bund yield rose +5.9 bp at 2.370%, and the 10-year UK gilt yield rose +2.8 bp at 3.570%.

Overseas stock markets Wednesday settled higher.  The Euro Stoxx 50 closed up +0.02%.  China’s Shanghai Composite closed up +0.41%, and Japan’s Nikkei Stock Index closed up +0.57%. 

Today’s stock movers…

Media companies retreated Wednesday after Bloomberg Intelligence said it expects cord-cutting by video customers to approach 1.55 million in Q1.  As a result, DISH Network (DISH) closed down more than -9% to lead losers in the S&P 500.  Also, Warner Bros Discovery (WBD) closed down more than -5%, and Charter Communications (CHTR) close down more than -4%. In addition, Paramount Global (PARA) closed down more than -3%, and Walt Disney (DIS) closed down more than -2% to lead losers in the Dow Jones Industrials. 

Airline stocks fell, led by a -9% drop in American Airlines Group (AAL) after it reported preliminary Q1 adjusted EPS of 1 cent to 5 cents, the midpoint below the consensus of 4.6 cents.  Other airline stocks retreated as well, with United Airlines Holdings (UAL) closing down more than -6% and Alaska Air Group (ALK) Delta Air Lines (DAL) closing down more than -2%. In addition, Southwest Airlines (LUV) closed down by more than -1%. 

Regional bank stocks were under pressure Wednesday after Warren Buffett said that more U.S. banks are likely to fail and that troubled bank stocks aren’t value investments because shareholders are likely to be wiped out even if the government moves to protect depositors.  First Republic Bank (FRC), Franklin Resources (BEN), Lincoln National (LNC), and Capital One Financial (COF) closed down more than -2%. Also, M&T Bank (MTB), Northern Trust (NTRS), KeyCorp (KEY), Truist Financial (TFC), and Synchrony Financial (SYF) closed down more than -1%.

Fortive Corp (FTV) closed up more than +2% after it lost out to Emerson Electric in its bid to acquire National Instruments.

Dow (DOW) closed up more than +1% to lead gainers in the Dow Jones Industrials after Piper Sandler upgraded the stock to overweight from neutral.

Triton International (TRTN) closed up more than +32% after Brookfield Infrastructure acquired the company for $4.7 billion. 

National Instruments (NATI) closed up more than +9% after Emerson Electric acquired the company for $8.2 billion.

Pioneer Natural Resources (PXD) closed up more than +2% after the Wall Street Journal reported that Exxon Mobil is considering acquiring the company.

LyondellBasell Industries (LYB) closed up more than +1% after Piper Sandler upgraded the stock to overweight from neutral.

Raytheon Technologies (RTX) closed up more than +1% after Wolfe Research upgraded the stock to outperform from peer perform.

Becton Dickson (BDX) rose more than +1% after KeyBanc Capital Markets upgraded the stock to overweight from sector weight. 

Across the markets…

June 10-year T-notes (ZNM23) on Wednesday closed up +10.5 ticks, and the 10-year T-note yield fell by -1.9 bp to 3.407%.  A friendly U.S. Mar CPI report Wednesday sparked a rally in T-note prices.  Also, dovish comments from San Francisco Fed President Daly gave T-notes a boost when she said the economy might slow enough to curb inflation without the Fed tightening policy further.  T-notes maintained moderate gains Wednesday afternoon after the dovish Mar 21-22 FOMC meeting minutes were released. 

Hawkish comments from Richmond Fed President Barkin knocked T-note prices off their best levels when he said, "There is still more to do to get core inflation down to where we'd like it to be."  Also, weak demand for the Treasury’s $32 billion re-opened 10-year T-note auction weighed on prices as the auction had a bid-to-cover ratio of 2.36, below the 10-auction average of 2.41. 

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