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Pre-Markets Not Pricing-In Future Rate Hikes (For Now)

Monday, May 8th, 2023

Last Friday, a robust labor report from the U.S. Bureau of Labor Statistics (BLS) was not enough to spook markets, as persistently high employment levels are by now widely expected to invite higher interest rate hikes at the Fed, in order to help curb inflation. The Dow gained over 500 points, the Nasdaq was up more than +2% on the day and for the first time in recent memory we saw strong workforce data as good news that is considered “good news” by the market.

Perhaps the specter of future higher interest rates has yet to land on investors, though this seems unlikely. Perhaps much more to the point, the general outlook from analysts had been — prior to the latest BLS data — that the Fed was finished with its rate hikes as of its dot-plot issued a few months back. That now, the monetary policy body would take a “wait and see” approach to 500 basis points (bps) of rate hikes in just over a year so as not to over-tighten interest rates and force the economy into recession.

The West Coast regional bank issues of the past two months have surely gone a long way toward instructing market participants to understand the real-life risks to such aggressive policy. Robust job numbers aside, considering that we have seen a bit of contagion in the banking space — nowhere near the financial crisis of 2008, but more than many initially suggested — the consensus appears to be that the “wait and see” approach at this time is by far the more prudent.

As a result, we see stabilization in regional banks as of today’s pre-market activity. Not only are the Dow and S&P 500 up slightly at this hour, following Friday’s big step higher, but previously beleaguered regional banks such as PacWest PACW, Western Alliance WAL and Zions Bancorp ZION are up +33%, +12% and +7% in pre-market activity thus far. These banks are still well underwater year to date, but we’ll take it one day at a time. The Dow is +80 points at this hour, the S&P is +7 and the Nasdaq is -25 points.

This is not to say all non-tech companies are roaring ahead this morning: reporting fiscal Q2 results ahead of today’s open is meat processing giant Tyson Foods TSN, which posted surprise negative earnings of -$0.08 per share from an expected +$0.81 (and a healthy +$2.29 per share in the year-ago quarter) on sales of $13.13 billion, which were shy of expectations by -3.45% (though slightly higher year over year). Profit margin pressures in the quarter and a lowered outlook have hit the shares this morning, down -9%, pushing year-to-date losses into double digits. For more on TSN’s earnings, click here.

This week, we’ll see important economic data mid-week, when the April Consumer Price Index (CPI) and Producer Price Index (PPI) prints will be out Wednesday and Thursday, respectively. Expectations are for sub-5% CPI year over year for the first time in the post-Covid era, with core CPI year over year still in the mid-5%s, perhaps dropping to a low-5-handle. PPI year over year was +2.7% in the last report, also expected to come down a bit, with core CPI year over year sliding somewhat from +3.6% last time around.

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Zions Bancorporation, N.A. (ZION) : Free Stock Analysis Report

Tyson Foods, Inc. (TSN) : Free Stock Analysis Report

Western Alliance Bancorporation (WAL) : Free Stock Analysis Report

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