The week ahead 03/20/2023
“Going forward, the Fed can either damage the currency or damage the long tail of small and medium banks.” — Lyn Alden
If the Fed’s goal was to “break something” — it seems like the “trust” in small-to-medium-sized banks is becoming quite broken.
And the reactions in the treasury market shows that there may be more problems ahead.
Remember — when the yield curve (10s minus 2s) is inverted, it reflects that bond investors believe there will be a decline in longer-term interest rates. This is typically associated with recessions.
An inverted yield curve is the investor’s way of saying..
“I expect interest rates to rise in the near term, but i also believe that higher borrowing costs will eventually hurt the economy and the Fed will need to ease monetary policy again.”
During the last 6 US recessions, we saw the yield curve steepen aggressively as the Fed entered a rate cutting cycle.
The market is pricing in the same today, pointing to a Fed Funds Rate of 3% by the end of 2024.
There’s been such a lack of trust in the banking world, that Balaji Srinivasan — the former CTO of Coinbase and former General Partner at Andreessen Horowitz — is betting big on Bitcoin as the immediate alternative:
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Key Earnings Announcements:
Nike, On Holding, and Darden Restaurants are in focus.
Monday (3/20): Foot Locker, Pinduoduo
Tuesday (3/21): GameStop, Nike, On Holding, Tencent Music Entertainment
Wednesday (3/22): Chewy, KB Home, Ollie’s, Petco, Shoe Carnival, Winnebago
Thursday (3/23): Accenture, Darden Restaurants, FactSet, General Mills
Friday (3/24): Express Inc.
What We’re Watching:
Wall Street expects Nike to post diluted EPS of $0.51 (-40% YoY) on revenues of $11.48 billion (+5% YoY). Investors want to know if excess inventories, heavy discounting, and inconsistent freight activity will continue to hurt gross margins.
On Holding (ONON)
Wall Street expects On Holding to report adjusted profit of 6 cents per share (reversing a year-ago loss) and revenue of $287.1 million (+38% YoY). I have no position in ONON, but it’s hard to ignore when I see them all over the place. I’m curious to see if On Running shoes are truly here to stay.
By the looks of it, this company seems to fit very well into my “invest into companies who are about to / newly free cash flow position” framework — as expanded upon here.
Darden Restaurants (DRI)
Wall Street expects Darden Restaurants to post EPS of $2.22 (+15% YoY) on revenues of $2.72 billion (+11.1% YoY).
Darden CEO Ricardo Cardenas has credited the company’s continued strength to their “strategy of pricing below our competition, pricing below inflation by finding other cost savings to help offset that, and [giving] our consumers a great value, so they don’t need a promotional message to come in.”
Investor Events / Global Affairs:
Banks in the U.S., Banks around the world, and Nvidia’s big conference returns.
Borrowing or Simply Gifts?
Last week, banks took out $152.85 billion in loans using the Fed’s discount window — the central bank’s traditional backstop that provides loans for up to 90 days.
Compare this to just one week prior — when banks took $4.58 billion in loans
Banks also took out $11.9 billion in loans through the Fed’s new Bank Term Funding Program (BTFP), which started last Sunday and offers them year-long loan terms.
Back to the Start:
The quote from the very beginning of today’s post really hits the nail on the head — are we going to let the banks take the hit or the currency? Based on the actions we’ve seen so far, it sure seems like we’re going to let the currency suffer.
Bank Update on a Global Scale
Moving from the topic of banks in the U.S. to banks around the world — the Federal Reserve and five other central banks announced a coordinated action on Sunday to boost liquidity in U.S. dollar swap arrangements.
“The US central bank has typically provided access to such arrangements at times when there’s a squeeze on the availability of dollars.
That can arise because banks outside the US typically have obligations that are denominated in greenbacks, and in times of financial strain have less access to dollar funding.” — Craig Torres, Bloomberg
Central banks that are involved in the dollar swaps will “increase the frequency of 7-day maturity operations from weekly to daily.” The involved banks are:
The U.S. Federal Reserve
The Bank of Canada
The Bank of England
The European Central Bank
The Bank of Japan
The Swiss National Bank
“Still, those actions alone can’t erase every concern from markets.
A big key event is obviously the Fed meeting this week.
Market players will be watching how current destabilized financial markets will affect the pace of rate hikes.” — Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp
Nvidia GTC Event
Nvidia (NVDA) developer conference runs throughout this week and is expected to showcase the “arms race” of generative artificial intelligence.
If you weren’t aware, NVIDIA has been an absolute RIPPER of a stock year-to-date:
You can learn more about the conference here.
“Despite macro concerns, hyperscalers are prioritizing cloud capex spending on a broad set of generative AI/ML use cases…
We view Nvidia’s flagship GTC conference next week to be a key event to showcase the future of generative AI for the industry.” — Atif Malik, Citi Research Analyst
Major Economic Events:
What in the world is J-Powell going to do this time?
Monday (3/20): N/A
Tuesday (3/21): Existing Home Sales
Wednesday (3/22): Interest Rate Decision by the Fed, Press Conference by Fed Chair Jerome Powell
Thursday (3/23): New Home Sales, U.S. Current Account
Friday (3/24): Durable Goods, Manufacturing PMI (Flash), Services PMI (Flash)
Rate Hike Drama:
The 2-Year Treasury Yield dropped from above 5% to below 4% last week. This is the largest 5-day decline in yields since the crash of October 1987.
The market seems to be calling the Fed’s bluff on further tightening after next week’s FOMC meeting. Fed Funds futures are currently pricing in just ONE more rate hike and then rate cuts thereafter.
Which stocks moved the most last week.
Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.
Meta CEO Mark Zuckerberg recently announced the company’s next round of layoffs — impacting 10,000+ employees.
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.