U.S. stocks are falling in pre-market trading as recent banking turmoil on this side of the pond made its way to Europe. Credit Suisse is falling and dragging the European banking sector down after its largest shareholder said it will not provide further capital assistance. This is exacerbating recent worries toward the financial system that has come from some failures of U.S. regional financial institutions and has called into question on whether the Fed may pause its aggressive monetary policy campaign. Meanwhile, a benign read on February producer price inflation was a welcomed sign, and last month's retail sales report showed a key core component of spending unexpectedly rose and the prior month's figures were revised to larger-than-expected jumps. In other economic news, mortgage applications rose for a second-straight week, but manufacturing output in New York contracted much more than anticipated. After the opening bell, we will get a read on homebuilder sentiment and business inventories. In other equity news, Lennar Corporation topped quarterly expectations. Treasury yields are resuming a tumble and the U.S. dollar is rallying. Crude oil prices are dropping and gold is gaining solid ground. Asia finished mostly higher after the rebound in the U.S. yesterday, while Europe is falling on the banking worries.
As of 9:03 a.m. ET, the June S&P 500 Index future is 72 points below fair value, the Nasdaq Index future is 166 points south of fair value, and the DJIA future is 565 points below fair value. WTI crude oil is dropping $1.97 to $69.36 per barrel, while Brent crude oil is falling $1.69 to $75.76 per barrel. The gold spot price is up $22.40 to $1,933.30 per ounce. Elsewhere, the Dollar Index is rallying 1.1% to 104.66.
The banking sector remains volatile and trading to the downside, with the turmoil flaring up in Europe after Credit Suisse Group AG (CS $3) is tumbling after its top shareholder, the Saudi National Bank, said it will not provide more capital assistance. This comes following the failures of SVB Financial Group (SIVB), and crypto-related Silvergate Capital Corp. (SI), and the closure of Signature Bank (SBNY) over the weekend. These stresses have fostered severe volatility in the markets and fueled concerns about contagion in the financial markets. Meanwhile, the Treasury Department, the Fed and Federal Deposit Insurance Corporation (FDIC) have enacted several measures to contain the issue.
For a look at what our experts think about the recent stock market drop, read our latest article, Bank Failure Pressures Stocks. Fixed Income Strategist with the Schwab Center for Financial Research, Collin Martin notes that, "The U.S. banking system is still relatively healthy. Capital ratios, a measure of banks' ability to cover their loans, have declined over the last year but are still at adequate levels." Meanwhile, he adds that "although markets are still pricing in additional Fed rate hikes at upcoming policy meetings, concerns about the financial sector have helped push down the expected "peak" rate."
In other equity news, Lennar Corporation (LEN $101) reported fiscal Q1 earnings-per-share (EPS) of $2.06, exceeding the $1.55 FactSet estimate, as revenues grew 5.0% year-over-year (y/y) to $6.49 billion, versus the Street's expectation of $5.91 billion. The homebuilder issued Q2 new orders and delivery guidance that was above estimates and raised its full-year delivery outlook.
Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Caveat Emptor: Important Market Shifts Underway, how given the topsy-turvy nature of the market thus far in 2023, it remains crucial for investors to know what they are buying—especially as it relates to growth, value, and quality.
Wholesale price inflation cooler than expected, retail sales dip but control group activity rises
The Producer Price Index (PPI) (chart) showed prices at the wholesale level in February dipped 0.1% month-over-month (m/m), versus the Bloomberg consensus estimate of a 0.3% gain, and following January's downwardly revised 0.3% increase. The core rate—excludes food and energy—was flat m/m, below estimates calling for a 0.4% increase, and versus the prior month's negatively adjusted 0.1% gain. The headline rate was 4.6% higher y/y, below expectations of a 5.4% increase, and compared to the prior month's downwardly adjusted 5.7% rise. The core PPI was up 4.4% y/y last month, south of the estimated 5.2% rise and compared to January's negatively revised 5.0% growth rate.
Advance retail sales (chart) for February were down 0.4% m/m, matching forecasts, and compared to January's upwardly revised 3.2% jump. Last month's sales ex-autos dipped 0.1% m/m, in line with forecasts and as January's figure was adjusted favorably to a 2.4% increase. Sales ex-autos and gas were unchanged m/m, versus estimates of a 0.2% decline, and compared to January's positively adjusted 2.8% advance. The control group, a figure used to calculate GDP, increased 0.5% m/m, versus projections of a 0.3% decrease, and following the prior month’s favorably revised 2.3% gain.
The Empire Manufacturing Index, a measure of activity in the New York region, showed the index moved further in contraction territory (a reading below zero) than expected for March. The index fell to -24.6 from the -5.8 reading that was posted in February, and compared to estimates of a move to a level of -7.9.
The MBA Mortgage Application Index rose 6.5% last week, following the prior week's 7.4% increase. The index rose for a second-straight week as a 4.8% gain in the Refinance Index was accompanied by a 7.3% increase for the Purchase Index. The rise came as the average 30-year mortgage rate declined 8 basis points (bps) to 6.71% and is up 244 bps versus a year ago.
Treasury rates are resuming a recent tumble, as the yield on the 2-year note is plunging 36 bps to 3.84%, the yield on the 10-year note is dropping 18 bps to 3.45%, and the 30-year bond rate is dropping 13 bps to 3.63%.
Bond yields remain under pressure as the markets wrestle with uncertainty regarding if the Fed may change its tightening campaign a bit sooner than expected in the wake of the recent turbulence in the banking sector.
Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, How to Prepare for Landing, how a "soft landing," with declining inflation but positive growth, would be ideal. However, she points out that turbulence appears likely.
Later this morning, the economic calendar will deliver the NAHB Housing Market Index for March, with homebuilder sentiment expected to deteriorate to 40 from February's 42 level though a reading below 50 denotes poor conditions. The heavy day of data will culminate with the release of business inventories, forecasted to be flat m/m in January, following the 0.3% gain in December.
Europe falling a banking sector worries ramp back up
Stocks in Europe are falling broadly in afternoon action, with the banking sector in the region leading the drop on the news that Credit Suisse's largest shareholder said it will not provide further capital assistance for the lender. The exacerbated pressure on the banking sector has caused some investors to speculate that the Fed may pause its aggressive rate hike campaign, while the European Central Bank is expected to hike rates tomorrow, though today's turmoil may be impacting expectations. Schwab’s Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Waves of Inflation, how although inflation may be receding, intermittent waves of price increases may cause investor uncertainty about the direction of economic growth and central banks' policy response. In other central bank news, focus will be on this week's monetary policy decision by the European Central Bank, which is expected to raise its benchmark rate by 50 bps.
In economic news, France's consumer price inflation for February was revised to a higher rate than initially reported, and Eurozone industrial production rose more than anticipated for January. The euro and the British pound are falling versus the U.S. dollar, while bond yields in the Eurozone and the U.K. are dropping.
The U.K. FTSE 100 Index is down 2.9%, France's CAC-40 Index is falling 3.6%, Germany's DAX Index is dropping 3.0%, Italy's FTSE MIB Index is tumbling 3.9%, Spain's IBEX 35 Index is plunging 4.3%, and Switzerland's Swiss Market Index is trading 2.1% lower.
Asia mostly higher after U.S. markets stabilize
Stocks in Asia moved mostly to the upside, as turmoil in the U.S. banking sector seemed get a reprieve yesterday and lead a rebound. Equities have seen heightened volatility, dropping as uneasiness was fueled by the failure in a few U.S. regional banks, which has fostered uncertainty regarding the ultimate impact on the global financial market system. The turmoil has also caused some speculation that this may prompt the Fed to back off of its aggressive monetary policy campaign, with some investors pricing in the probability of a hold at next week's monetary policy meeting. Meanwhile, the Bank of Japan (BoJ) left rates unchanged, as widely expected last week and Schwab's Jeffrey Kleintop discusses in his article, Are You Focused on the Wrong Central Bank?, how while investor attention is on the Fed, changes at the Bank of Japan might bring shifts to the economic environment, impacting the global markets. In economic news, China's industrial production for February rose by a smaller amount than anticipated, and the country's retail sales grew at a clip that matched forecasts. In late-day action, India reported that its exports fell for last month.
Japan's Nikkei 225 Index finished little changed, with the yen holding onto yesterday's decline versus the U.S. dollar. China's Shanghai Composite Index rose 0.6%, and the Hong Kong Hang Seng Index rallied 1.5%. Australia's S&P/ASX 200 Index increased 0.9%, South Korea's Kospi Index advanced 1.3%, and India's BSE Sensex 30 Index traded 0.6% lower.
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