As regional banks pressures spread, S&P 500 faces headwinds. But look for possible near-term bottom of banks (per Newton). April Jobs and CPI are next 2 key data points.

At the start of the week, I was hopeful that the combination of Fed decision day (5/3) and soft readings on labor (JOLTS, employment report) would cause markets to constructively reprice a Fed "pause" -- this is what we viewed as a positive resolution to the "make or break" week:

  • The Fed provided sufficient rationale for "pause" to become our base case (no hike in June) but equities fell sharply, down -3% since last Friday, while bonds and Fed futures rallied on the pause -- US 2Y fell from 4.04% to 3.77% (sizable move). So bonds rallied sharply while stocks tanked.
  • Part of the reason for equity softness are driven by the spreading regional bank crisis and the growing concerns about the US debt ceiling and the "x" date approaching far sooner. During the FOMC press conference, the KBW Regional Bank Index fell -6% (see below) as Powell's comments of a "conditional pause" and need to stay "high for some time" placed additional pressure on regional banks. And Tom Block, Fundstrat's head of policy strategy, notes the impasse is particularly tough for the debt ceiling in 2023.
  • On Thursday, the entire regional bank complex came under selling pressure again, but two stocks were into a downward spiral PacWest -51% ($PACW) and Western Alliance Bank -39% ($WAL) and both saw their short-term bonds fall 50% to $30-$40, very distressed prices. The assurances of regulators is not what investors want to hear, as the mounting concerns of deposit flight, funding costs, CRE exposure and the fact $FRC $SIVB equity holders were zero'd out means regional banks are no touch.
  • But we are arguably reaching a point of hysteria. For instance, Pacific West Bancorp ($PWBK) had to issue a press release and on its website state that it is not PACW -- and after falling -5%, managed to close the day higher. Similarly, Republic First Bancorp ($FRCB) had to issue notices that it is not First Republic ($FRC) and after seeing its shares fall -20% managed to close down only -5%. And there are some suggesting that 0DTE options and short term speculators are adding to pressures.
  • Fortunately, Mark Newton, Head of Technical Strategy at Fundstrat, believes regional banks could bottom by this Friday (see below). This is an incremental positive. After all, the entire stock market becomes somewhat "untouchable" if investors feel that the FDIC, Fed or White House needs to intervene in the banking system. This raises too many tail risk issues including credit tightening, commercial real estate and wide economic implications. Additionally, the DeMark daily indicators might trigger a '13' buy signal Friday, but a price reversal would be key.
  • As for the near term outlook for stocks, two key events are on the horizon. The first is April jobs report (Friday 5/5) and DeepMacro is forecasting a miss. A miss would be good as it would strengthen the case for a longer pause. And next week is April CPI (5/10) and while the risk is core CPI is higher, a miss would be welcome. Consensus is looking for +0.3% MoM, which is downshift from +0.4% last month.
  • Starting Friday 5/5, there will be 13 Fed appearances/speeches post-FOMC. And we believe these 13 meetings will ultimately be about "damage control on regional bank fallout" -- that is, there will likely be some walking back on the tone of hawkishness and "higher for longer." As the intraday chart below clearly highlights, it was the Powell's statements about the above that triggered incremental selling.
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