A number of usually reliable indicators in recent months have warned of elevated recession risk for the US, but so far the economy has proven resistant to the darker forecasts that are bubbling in some quarters.

Recent nowcasts of the first quarter gross domestic product suggest that recession risk is still low. Ongoing strength in the labor market and consumer sector are on the short list of reasons why a number of forecasters have been surprised.

CapitalSpectator.com’s proprietary business cycle indicators have been warning of elevated recession risk, but so far those warnings have been surprisingly premature and may prove to be blatantly wrong. At the core of the challenge is the assumption, first made several months ago, that the fall of the Economic Trend Index (ETI) and Economic Momentum Index below their tipping points (50% and 0%, respectively, signaled the start of an NBER-defined recession. That was a reasonable view based on decades of history. But as recent events remind, history is an imperfect guide to real-time economics analysis. (Note: ETI and EMI are comprised of 14 indicators that capture a broad measure of US economic activity and are included in the weekly updates of The US Business Cycle Risk Report.)

Consider the recent slide in ETI and EMI below their tipping points. In previous declines below these marks a recession has soon followed, if one wasn’t already in progress. The difference this time is that while ETI and EMI and fell below their tipping points, the slide stalled.

Note that ETI and EMI declines below 50% and 0%, respectively, in previous years continued to relatively low levels. By contrast, the descents to date have been moderate (purple line) and, more recently, given way to a slight rebound.

This behavior is unusual – nearly unprecedented, in fact, for ETI and EMI’s history since 1969. Rising recession risk, in other words, suddenly faded and deteriorating conditions gave way to a revival in economic strength.

Although ETI and EMI continue to hold below their tipping points, it’s significant that they haven’t fallen further and reached depths that previously marked troughs during recessionary conditions.

The question is whether the recent downturn in economic momentum is a temporary soft spot in an otherwise ongoing expansion — or the start of a slower-moving recession that eventually takes its usual toll? Both scenarios are plausible. Deciding which will prevail will require more incoming data.

In tomorrow’s follow-up I’ll take a closer look at the underlying data sets that comprise ETI and EMI in a bid to handicap where we go from here.

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* Taiwan president’s US visit could provoke strong China reaction, says analyst
* Wall Street Journal reporter arrested in Russia on charges of spying
* GOP bill in House aims to sharply increase US oil output
* Small banks losing deposits to larger institutions after SVB collapse
* Spain inflation falls to 19-month low
* AI starting to have impact on white-collar jobs
* Research suggests ChatGPT may provide assistance in portfolio management
* US pending home sales rise for third straight month in February:

Gold trades near one-year high as banking worries linger and US dollar. “During periods of confidence being lost in the financial system or big drawdown periods, it tends to be when gold does the best,” says Todd Jones, chief investment officer at Gratus Capital.

Despite warning signs flashing from several indicators, the US economy is expected to report moderate growth in next month’s “advance” GDP report for the first quarter, based on a set of nowcasts compiled by CapitalSpectator.com.

The median estimate for Q1 firmed up to a 1.7% gain in today’s update (seasonally adjusted annual rate). Although the projection marks a slowdown from the 2.7% increase reported for Q4, today’s revision suggests that the economy will continue to skirt a recession in the first three months of the year.

Notably, today’s revised median nowcast firmed up from the weak 0.5% estimate posted in the previous update on March.

Optimists will focus on the strongest nowcast in the chart above: the Atlanta Fed’s GDPNow model, which is projecting a 3.2% increase in Q1 output for the upcoming release on April 27. If correct, this estimate would mark an acceleration in output vs. last year’s final quarter.

Overall, today’s median nowcast suggests that the economy remains resilient after a year of relatively sharp, rapid interest-rate hikes by the Federal Reserve. In turn, the resilience implies that the case for pausing, much less cutting, interest rates is weaker than some market indicators suggest.

“We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit,” BlackRock advised in a note for clients. “Now they’re causing the recession to fight sticky inflation and that makes rate cuts unlikely, in our view.”

Meanwhile, “March has so far witnessed an encouraging resurgence of economic growth, with the business surveys indicating an acceleration of output to the fastest since May of last year,” says Chris Williamson, chief business economist at S&P Global, which last week revised its US Composite PMI, a GDP proxy. PMI’s implied growth for US output in Q1 is 1.7%, based on analytics run by CapitalSpectator.com.

Although the Q1 GDP outlook remains relatively upbeat, a number of indicators are still signaling elevated recession risk. An inverted Treasury yield curve, for example, continues to forecast economic contraction for the near term.

Another headwind is the expected pullback in lending, due to the recent bank turmoil after the collapse of Silicon Valley Bank. Minneapolis Fed President Neel Kashkari earlier this week said that elevated stress in the banking sector raises recession risk for the US.

The question is when or if these and other risk factors will take a bite out of GDP nowcasts?

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* Taiwan’s president heads to US for visit, provoking China
* Fed’s Barr: there’s a ‘need’ for stronger bank regulation after SVB collapse
* BlackRock forecasts that investor bets on Fed rate cuts this year are wrong
* US Consumer Confidence Index ticks up in March, holding at middling range
* US electricity from renewables exceeds coal-based output for first time
* Amazon reportedly eyeing purchase of AMC movie theater chain
* US trade deficit in goods widened modestly in February
* US home prices continue to decelerate in January, easing to +2.5% annual pace:

US broad money supply continues to sink deeper into negative year-over-year comparisons. M2 money growth contracted 3.1% for the week through March 6 vs. the year-ago level — far below previous declines since at least the early 1980s, based on Federal Reserve data.

Forecasts that relative underperformers in the equities space are poised for a turnaround is a hardy perennial, but the expected change always seems to be postponed for several of the usual suspects. Notably, projections that foreign, small-cap and value stocks are set to outperform their broad US, large-cap and growth counterparts are facing new headwinds this year.

Profiling trends through pairs of ETFs continues to tell a story of failed breakouts and frustrated expectations, based on data through yesterday’s close (Mar. 27). Let’s start with US vs. foreign shares. Last year’s sharp losses for equities nearly everywhere gave equities ex-US a lift in relative terms. But the foreign edge is fading so far this year as US shares (VTI) and foreign developed markets (VEA) post comparable results following a reversal of fortunes for American stocks.

The trend barely wavered for US stocks (VTI) over shares in emerging markets (VWO). The VTI:VWO ratio wobbled a bit over the past year, but the upside bias for US companies has emerged no worse for wear on this front

Within the US market there has been renewed hope that value and small-cap shares would finally enjoy rallies that outperform growth and big-cap shares, respectively. Recent history offered reason to think that these trend changes had finally arrived, but the latest market activity has again dashed those hopes.

The relative strength for small-cap stocks (IJR) has fallen hard lately vs. big-cap names (SPY).

A similar reversal of fortunes befell the recent rebound in value stocks (IWD) over growth shares (IWF) in the large-cap space.

Part of the unwinding of relative strength for value and small-cap risk factors is linked to the revival in risk-on sentiment generally for US equities, based on the ratio for high-beta stocks (SPHB) vs. low-volatility names (SPLV).

The rebound in risk-on sentiment is also clear from the renewed weakness in the perceived safe haven of utilities stocks (XLU) vs. broad-defined equities (SPY).

To the extent that firmer confidence about the future and animal spirits have created new headwinds for small-cap, value and foreign shares, the recent bank turmoil in the US may be a sign that it’s premature to give up hope for those long-suffering markets. The caveat, of course, is that relative outperformance won’t count for much if the bear market resumes for risk assets generally.  

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* SVB collapse was “textbook case of mismanagement”: Fed official
* Banking turmoil due to ‘sentiment contagion’, say analysts
* US and Japan announce trade deal on electric vehicle battery minerals
* Bond market is still flashing warning signs for the economy
* Semiconductor firms may have to choose between US and China
* Wind-power industry projects rapid growth this year after 2022 slowdown
* China ramps up emergency loans to financially struggling nations
* Modest growth resumes in Texas manufacturing: Dallas Fed Mfg Index
* Regional bank stocks rally, suggesting banking turmoil is easing:

Big tech has become a safe-haven trade in the wake of recent bank turmoil, says analyst. “While it sounds like [a] Twilight Zone comment to many investors, tech stocks have become the new safety trade with Big Tech leading the way,” says Dan Ives, a managing director and senior equity research analyst at Wedbush Securities.

Nearly all the components of the major asset classes posted gains last week, based on a set of proxy ETFs. Real estate shares in the US and around the world were the downside exceptions, based on trading through Friday’s close (Mar. 24).

Stocks in emerging markets led last week’s rallies. Vanguard Emerging Markets Stock Index Fund (VWO) rose 2.6%, the ETF’s first weekly gain in the past three. Nonetheless, the fund still appears vulnerable to a downside bias. Unless VWO can build on its recent gains, or at least stabilize, the rise from October’s lows looks like a brief interruption in an ongoing bear market for the ETF.

Nearly all the primary markets around the world posted gains last week, with the exception of property shares in the US and abroad. Vanguard US Real Estate Index Fund (VNQ) posted the biggest decline, falling 1.2% and closing near its previous low in October.

REITs have suffered this year despite a moderate gain for US stocks overall. The recent banking crisis isn’t helping, says Bianca Rose, senior portfolio manager at Morningstar Investment Management. The turmoil has highlighted two risk factors for real estate firms, she explains. Real estate investment trusts (REITs) are especially vulnerable to tenant risk and financial system stability in the current environment, she advises.

Last week’s broad rally lifted the Global Market Index (GMI.F), which rose for a second week, gaining 1.3%. This unmanaged benchmark holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive measure for multi-asset-class-portfolio strategies.

All the major asset classes remained underwater for the trailing one-year trend. The deepest one-year loser: global real estate shares outside the US via Vanguard Global ex-US Real Estate Index Fund (VNQI), which is closed down 22.1% on Friday vs. the year-ago level after factoring in distributions.

GMI.F is also in the red with an 8.9% loss over the past 12 months.

Comparing the major asset classes through a drawdown lens continues to show relatively steep declines from previous peaks for markets around the world. The softest drawdown at the end of last week: US inflation-indexed Treasuries (TIP), which closed with a 9.9% peak-to-trough loss.

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* Israel in turmoil as mass protests erupt over plan for judicial overhaul
* China’s managed economy continues to postpone a ‘Lehman moment’
* China’s central government borrowing at fastest pace on record
* US recession risk rises from banking stress, says Fed’s Kashkari
* US authorities consider expanding emergency lending for banks
* First Citizens Bank will buy assets of failed Silicon Valley Bank
* Copper prices looks set to rise further this year, analysts predict
* US business activity rebounds to strongest pace in a year in March:

US financial stress index spikes to three-year high as head of the International Monetary Fund says there are risks to global financial stability. Managing Director Kristalina Georgieva advised that “risks to financial stability have increased.” She called for greater vigilance over the global financial system in a speech in China on Sunday, noting that she also sees “green shoots” in the world’s second-largest economy.

● Better Money: Gold, Fiat, or Bitcoin?
Lawrence H. White
Summary via publisher (Cambridge U. Press)
The recent rise of dollar, pound, and euro inflation rates has rekindled the debate over potential alternative monies, particularly gold and Bitcoin. Though Bitcoin has been much discussed in recent years, a basic understanding of how it and gold would work as monetary standards is rare. Accessibly written by a pioneering economist, Better Money explains and evaluates gold, fiat, and Bitcoin standards without hype. White uses simple supply-and-demand analysis to explain how these standards work, evaluating their relative merits and explaining their response to shocks, allowing for informed comparisons between them. This book addresses common misunderstandings of the gold standard and Bitcoin, using historical evidence to review the history of money with emphasis on the contest between market and government provision. Known for his work on alternative monetary institutions, White offers a reasoned discussion of which standard is most likely to provide a better money.

● The New Roaring Twenties: Prosper in Volatile Times
Paul Zane Pilzer and Stephen P. Jarchow
Summary via publisher (Matt Holt/ Penguin Random House)
Not unlike the famed decade of the previous century, our next ten years will be filled with striking cultural shifts, new challenges, and, ultimately, abundant financial opportunities. Paul Zane Pilzer, the economist/entrepreneur and New York Times bestselling author of 13 books, sees a better world on the horizon. In The New Roaring Twenties he imparts inspiration and a new template for escaping the shadow of a global pandemic, with all its fallout, and stepping into the resplendent possibilities of the future. Pilzer details 12 economic and societal pillars that will be essential for navigating our new world

● Business and Populism: The Odd Couple
Magnus Feldmann and Glenn Morgan (editors)
Summary via publisher (Oxford U. Press)
Business and Populism analyses the relationship between right wing populism and business with a focus on business responses and strategies in the face of the global populist turn. In the neoliberal era business had become accustomed to favourable economic policy regimes and governance arrangements that facilitated business influence on key policy issues. The rise of populist movements in various parts of the world is widely perceived as a significant challenge to policymaking, mainstream political parties and even to liberal democracy. Yet we know very little about the impact of populism on business, beyond the fact that the anti-elite challenge of populism frequently targets business with policies to restrict globalization, outsourcing, and labour migration whilst at the same time embracing capitalism, low taxes, and deregulated markets.

● Fool Me Once: Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry
Kelly Richmond Pope
Review via The Wall Street Journal
The truth is that honest people can be and are cheated all the time. In “Fool Me Once: Scams, Stories, and Secrets From the Trillion-Dollar Fraud Industry,” Kelly Richmond Pope explores how this happens. Small-business owners are blindsided when their bookkeeper turns out to have been cooking the books; multinational financial institutions find executives funneling out cash; the government of a small city discovers that an official has been skimming from its accounts for decades. Ms. Pope, a professor of forensic accounting at DePaul University, even includes a class of “accidental” perpetrator for those who start out as inadvertent beneficiaries of a mistake but who, rather than confessing, decide to lean into the opportunity.

● Mixed Signals: How Incentives Really Work
Uri Gneezy
Summary via publisher (Yale U. Press)
Incentives send powerful signals that aim to influence behavior. But often there is a conflict between what we say and what we do in response to these incentives. The result: mixed signals. Consider the CEO who urges teamwork but designs incentives for individual success, who invites innovation but punishes failure, who emphasizes quality but pays for quantity. Employing real-world scenarios just like this to illustrate this everyday phenomenon, behavioral economist Uri Gneezy explains why incentives often fail and demonstrates how the right incentives can change behavior by aligning with signals for better results.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

Turmoil in the bank industry and renewed concerns of economic headwinds are driving expectations that Federal Reserve interest-rate hiking is at or near an end. In turn, the outlook has sparked a rally in the US bond market.

Year to date through Thursday’s close, all the major components of US fixed income are posting gains, based on a set of ETFs. The 2023 rally is led by long Treasuries: iShares 20+ Year Treasury Bond (TLT) is up 7.4% this year. Most of the gain has unfolded over the past two weeks as news of bank turmoil lifted demand for safe havens.

Fixed income generally is enjoying higher prices lately, based on a broad measure of US investment grade bonds. Vanguard Total Bond Market Index Fund (BND) is up 3.5% so far in 2023.

Bloomberg earlier this week noted that Federal Reserve Chair Jerome Powell’s preferred measure of US recession risk is flashing a warning. In March 2022 he cited the spread between the current yield on three-month Treasury bills and their expected yield 18 months forward — a spread that’s now clearly signaling a recession at some point in the near term.

The combination of a banking crisis (albeit one that appears contained so far) and expectations for stronger economic headwinds, if not a recession, are inspiring revised forecasts for monetary policy decisions. After the Federal Reserve lifted its target interest rate by ¼ point to a 4.75%-5.0% range on Wednesday, analysts and investors wondered if that increase would be the last, at least temporarily. The change in sentiment has fueled demand for the relative safety of bonds in the second half of March.

The Fed funds futures market is currently pricing in moderately high odds – roughly 70% in early trading today — that the Fed will leave rates unchanged at the next FOMC meeting on May 3.

The 2-year Treasury yield is also signaling that the Fed’s target rate has peaked. This yield, widely considered the most sensitive maturity for rate expectations, traded down to 3.76% yesterday (Mar. 23), the lowest since September. The key takeaway: the wide gap between the lesser 2-year rate and the 4.75%-5.0% range for Fed funds reflects market sentiment that anticipates a pause and perhaps a cut in central bank monetary policy.

Keep in mind that elevated worries linked to bank turmoil and economic headwinds are driving bond prices higher and yields lower. “Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional rate hikes beyond May,” notes Michael Gapen, an economist at Bank of America Securities. “But for now, we think that risks are in the direction of an earlier end to the tightening cycle.”    

Timothy Duy, chief US economist at SGH Macro Advisors, advises that “the game has changed.” Writing in a note to client on Thursday he explains: “The banking sector turmoil has badly shaken the Fed. It has less confidence that it can continue to hike rates without severely impairing the banking sector. Until it can regain its confidence, the Fed will move more cautiously. Watch for the Fed to dismiss any strong growth and elevated inflation data as backward-looking as Powell basically did in [Wednesday’s] presser.”

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* Eurozone business activity rebounds to 10mo high in March: PMI survey data
* Will banks’ $1.7 trillion in unrealized losses become a problem?
* Expected fall in lending due to bank turmoil will help Fed tame inflation
* China could be a ‘relative safe haven’ this year, advise Citi economists
* Bond market volatility has surged, hinting at greater uncertainty and risk
* Tech consulting firm Accenture to cut 19,000 jobs
* US jobless claims edge down, continue to show tight labor market
* US economic activity eases in February: Chicago Fed Nat’l Activity Index
* New US home sales rebound for third month in February:

Gold rises to one-year high amid expectations that Federal Reserve rate hikes are at or near an end. “If they truly do pause that clearly has been a green light for the gold market, being a quintessential hedge against inflation,” says David Meger, director of metals trading at High Ridge Futures. “It’s likely that inflation would remain elevated if they’re unable to raise rates any further.”

Yesterday’s ¼-point rate hike by the Federal Reserve was expected, although there’s debate about whether another round of policy tightening is wise in the wake of recent bank turmoil following the collapse of Silicon Valley Bank (SVB).

Fed Chair Jerome Powell partly rationalized the hike by saying that SVB’s implosion was an “outlier” while the banking system overall remains “sound.” At a press conference following Wednesday’s rate increase announcement he told reporters: “This was a bank that was an outlier,” advising that the combination of a high percentage of uninsured depositors (accounts above $250,000) and mismanaging the bank’s duration risk felled SVB. “These are not weaknesses that are there at all broadly through the banking system.”

Perhaps, although regional bank stocks fell yesterday, which suggests that investors are still evaluating what to make of Fed policy that’s still pushing rate hikes at a time of higher risk for the financial sector.

A new set of economic projections published by the Fed yesterday – the so-called dot plot — point to interest rates peaking at 5.1% this year, which implies one more rate hike.

Fed funds futures, however, are currently estimating a mixed outlook for the next FOMC meeting on May 3. The implied probabilities for the rate outlook are more or less a tossup between putting rate hikes on pause vs. another ¼-point increase.

The policy-sensitive 2-year Treasury yield eased yesterday, suggesting that the bond market’s isn’t convinced that another rate hike is likely.

Meanwhile, a simple model of using unemployment and consumer price inflation suggests that Fed policy remains mildly tight after yesterday’s ¼-point hike. (Note: the chart below carries forward the February unemployment and inflation data as estimates for March.)

Even without additional rate hikes Powell advised that the bank turmoil of late will create new headwinds for the economy. In effect, the SVB-related blowback is a defacto rate hike, he suggested, explaining:

Financial conditions seem to have tightened, and probably by more than the traditional indexes say. … The question for us though is how significant will that be — what will be the extent of it, and what will be the duration of it. We’ll be looking to see how serious is this and does it look like it’s going to be sustained. And if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decisions.

“The bottom line is: Credit conditions are going to tighten, and the Fed is acknowledging that,” says Diane Swonk, chief economist at KPMG. The Fed “would like a slow cooling. They just don’t want a deep freeze. And this increases the chances that the economy falls through the ice.”

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* Treasury Sec. Yellen: blanket guarantee to all bank deposits not being discussed
* Fed’s Powell says SVB collapse was “outlier” and banking system is “sound”
* Bank stocks fall after comments from Federal Reserve and US Treasury
* Bank turmoil complicates debt-ceiling talks in Washington
* Fed oversight bill backed by Sens. Rick Scott (R) and Elizabeth Warren (D)
* Macro hedge funds hit hard by recent bank turmoil
* Investment firms buying land in US West for water rights
* SEC set to bring lawsuit against Coinbase, a leading crypto firm
* Federal Reserve raises interest rates despite bank turmoil:

The outlook for another rate hike at the next FOMC meeting on May 3 turns cloudy, based on Fed funds futures. “Financial conditions seem to have tightened, and probably by more than the traditional indexes say,” said Federal Reserve Chair Jerome Powell on Wednesday, after the central bank announced another 1/4-point hike in interest rates. “The question for us though is how significant will that be — what will be the extent of it, and what will be the duration of it.”

These are still early days for evaluating the risk outlook linked to the banking turmoil triggered earlier this month by the collapse of Silicon Valley Bank (SVB), but there are nascent signs that the worst has passed. Reverberations for the economy remain a threat, but for the moment the odds of contagion risk that spreads across the financial system seem to be receding. Blowback for the economy in the months ahead is less clear, but the immediate goal is avoiding a spike in financial-system risk writ large and on that front there’s a case for cautious optimism.

Let’s start with a proxy for gauging sentiment via an ETF of regional bank shares. During the early days of the SVB collapse, SPDR S&P Regional Banking ETF (KRE) fell sharply. But in recent days the fund has stabilized and so far this week has traded moderately above its crisis low.

A similar story applies to the broader financial sector via SPDR Financial Sector SPDR (XLF).

This could be the calm before the resumption of the storm, of course, and so a few days of stable pricing shouldn’t be viewed as an “all clear” sign. Nonetheless, it’s encouraging to see that market sentiment for the banking sector has calmed.

Fears of wider, global crisis swirled as Switzerland-based Credit Suisse looked set to implode last week, but the forced merger with UBS has soothed markets to a degree.

In the US, First Republic Bank (FRC) is considered vulnerable, but the battered shares rebounded on Tuesday (Mar. 21) after Treasury Secretary Janet Yellen released a statement that said the federal government is prepared to take additional action to backstop the deposits at more banks if contagion risk increased.

Risk is still high and reassessing the level of financial-system danger remains a day-to-day affair, but market sentiment at the moment is mildly encouraging.

The uncertainty is whether deeper trouble is lurking down the road. Global fund managers remain anxious, according to a new survey published by Bank of America. The March poll finds that a “systemic credit event” is now seen as the biggest threat for financial markets, MarketWatch.com reports.

Perhaps the bigger risk is how bank turmoil affects the economy in the months ahead. The outlook is mixed. On the positive side, the increased stress on banks is likely to be disinflationary, which is helpful at a time when inflation remains high. But there’s a dark side in that the rise in risk aversion that flows from recent events will likely slow lending activity, which in turn creates a stronger headwind for the economy at a time when some economists say recession risk is rising.

Indeed, even before this month’s bank turmoil it was obvious that banks were tightening lending standards through the first quarter. The tightening is likely to accelerate in the wake of recent events as banks err on the side of caution.

The year-over-year growth rate in commercial and industrial loans has already started rolling over through January, and the cyclical slide will probably accelerate as the bank turmoil continues to ripple through the financial system.

Exactly how recent events factor into the business-cycle outlook remains unclear, but it’s likely to take a bite out of growth. A number of economists advise that the banking turbulence of late will act as a defacto increase in interest rates for the economy.

The immediate question is whether the Federal Reserve adds to the monetary tightening with formal rates hikes from here on out to tame inflation? The Fed funds futures market this morning is pricing in a 90% probability that the central bank will announce another 1/4 point this afternoon.

If so, the wisdom of continuing to tighten policy during a period of elevated financial-system risk is open for debate. In fact, there’s a case for pausing rate hikes, or perhaps cutting, until it’s obvious that the banking turmoil is no longer a clear and present danger. To the extent the Fed disagrees, the onus is Jerome Powell to explain why at today’s press conference following the policy announcement.  

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* China’s Xi tells Putin he wants to ‘strengthen coordination’ with Russia
* Federal Reserve faces tough choice on today’s decision on interest rates
* Fed will come under intense scrutiny in Congress over SVB failure
* UK inflation posts unexpected increase in February
* Bank crisis is expected to pinch commercial real estate lending
* Bank turmoil takes a bite out of oil prices
* Gold pulls back after briefly trading above $2000 an ounce
* US home prices fall vs. year-ago level–first decline in 11 years
* US existing home sales rebound sharply in February:

“Systemic credit event” is now seen as the biggest threat to markets, according to Bank of America’s March survey of global fund managers. MarketWatch.com, reporting on the poll, released this week, writes: “Stresses in U.S. shadow banking and corporate debt and developed-market real estate could trigger such an event, said strategists.”

Technology is killing it–again. The sector is posting the strongest year-to-date performance for US equity sectors stocks, based on a set of ETF proxies. A close second: communication services. Meanwhile, financials and energy are suffering this year.

After a sharp 28% loss in 2022, Technology Select Sector SPDR ETF (XLK) is holding on to a strong 15.6% gain through Monday’s close (Mar. 20). Communication Services Select Sector SPDR ETF (XLC) is essentially tied for first place with a fractionally softer performance.

By contrast, the formerly high-flying energy sector is the worst sector performer so far this year. Energy Select Sector SPDR ETF (XLE) is in the hole by more than 10% in 2023 after a stellar run last year.

The financial sector is also enduring a rough ride this year as bank-industry turmoil of late takes a bite of prices in this corner. Financial Select Sector SPDR ETF (XLF) has shed 8.4% year to date, a loss that’s exceeded in the sector space only by energy shares.

The results arrive with a modest tailwind for equity beta writ large. US stocks are posting a modest gain so far in 2023 via SPDR S&P 500 ETF (SPY), which is up 3.4%.

Wedbush analyst Dan Ives says tech’s fortunes have recovered recently as investors now see the stocks as a relatively safe haven in the context of recent banking woes. “There are no Sunday night jitters with tech,” he tells Yahoo Finance. An added bonus: tech company executives have “cleared the deck” in terms of upbeat earnings and profits guidance.

Despite the strong gains in tech and communications services this year, upside momentum for the equity sectors overall is showing signs of fading after the recent rebound. Using a set of moving averages to track trend strength for equity sectors points to generally weaker performance ahead vs. recent history.

The banking crisis appears contained for the moment, but the macro outlook has taken a hit, advise Morningstar analysts: “Stress in pockets of the banking system and corporate sector in the aftermath of this episode may, on the margin, bring forward the weaker economic conditions that we already expected during 2023.”

Meanwhile, Fed funds futures are pricing in moderately high odds for another ¼-point rate hike at tomorrow’s FOMC meeting (Mar. 22). But the challenge of taming still-high inflation has greater risks in the wake of bank-industry turmoil.

“I wouldn’t add fuel to the fire by raising interest rates at the same time there already is a tightening of financial conditions provided by a financial shock,” advises Eric Rosengren, former president of the Boston Fed. “One 25-basis-point increase now will have a fairly modest effect on inflation, but it could have an amplified effect on financial conditions.”

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* Chinese leader Xi praises Putin in Moscow as Ukraine war grinds on
* Japan prime minister makes surprise visit to Ukraine
* Japan prime minister announces new Indo-Pacific plan during India visit
* French government survives no-confidence votes re: pension reform
* JPMorgan CEO Jamie Dimon leads efforts for First Republic Bank rescue
* Amazon will cut an additional 9,000 jobs
* Fed should continue rate hikes, says chief economist for S&P global ratings
* Fed to hike interest rates by 1/4 point tomorrow via futures market forecast:

Regional bank stocks rise in first day of trading week, offering support for cautious optimism that the worst of the banking turmoil may have passed. Morningstar reports: “It appears that the risk of regional banks being placed into receivership and wiping out the equity value has greatly diminished.”

Bond prices continued to rebound last week as investors worried that the turmoil in the banking sector could spread.

Government bonds in developed markets ex-US posted the strongest gain for the major asset classes in the trading week through Friday, Mar. 17, based on a set of ETF proxies. US stocks and bonds also rose while foreign equities and commodities suffered the biggest losses.

SPDR Bloomberg International Treasury Bond ETF (BWX) rallied 3.4% last week. The gain was partly fueled by a weaker US dollar in foreign exchange markets. The US Dollar Index fell for a third week as it traded near its lowest level in nearly a year.

The biggest loser last week: foreign stocks in developed markets ex-US. Vanguard Developed Markets Index Fund (VEA) fell 2.0%.

US equities, by contrast, rose last week. Vanguard Total US Stock Market (VTI) clawed back some of the sharp losses booked in the previous week with a 1.0% rally.

Despite last week’s rally in US shares, traders at JP Morgan advise that stocks are still vulnerable. “Longer-term, to achieve a rally, we need inflation materially lower (say 3.5% or less), earnings to accelerate higher, and you need the banking crisis solved,” they write. In the near-term, however, macro headwinds are lurking. “A recession seems to be a certainty given the banking crisis and the expectation for additional ‘unknown unknowns’ to emerge. Combined, this feels like another bear market rally rather than the beginning of a new bull market.”

The Global Market Index (GMI.F) rose last week, rebounding modestly with a 0.5% gain following a sharp decline previously. This unmanaged benchmark holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive measure for multi-asset-class-portfolio strategies.

All the major asset classes continued to post losses for the trailing one-year trend. The deepest one-year loser: global real estate shares ex-US via Vanguard Global ex-US Real Estate Index Fund (VNQI), which is closed down nearly 22% on Friday vs. the year-ago level after factoring in distributions.

GMI.F is also in the red with an 8.9% loss over the past 12 months.

Comparing the major asset classes through a drawdown lens continues to show relatively steep declines from previous peaks for markets around the world. The softest drawdown at the end of last week: US inflation-indexed Treasuries (TIP), which ended the week with a 10.9% peak-to-trough loss.

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* Chinese leader Xi meeting with Russia’s Putin today in Moscow
* Central banks say they will boost liquidity to tamp down bank-crisis risk
* UBS is buying Credit Suisse in effort to tame risk of banking crisis
* S&P downgrades First Republic’s credit rating deeper into junk status
* US lawmakers will review merits of higher FDIC bank deposit insurance cap
* Lending to small firms and individuals expected to fall in wake of bank turmoil
* Gold rallies to 11-month high:

Nearly 190 banks are vulnerable to failure, warns a new study. The risk factor is the sharp rise in interest rates, which has eroded the value assets held at banks. “The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” advise economists in a paper dated March, 13, 2023. “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”

● Meganets: How Digital Forces Beyond Our Control Commandeer Our Daily Lives and Inner Realities
David B. Auerbach
Excerpt via Gizmodo
The Googles, Facebooks, cryptocurrencies, and government systems of our world accumulate influence at a mystifying rate. The constant critiques and attempted regulation directed at these systems never seem to yield real reform. Such efforts run into a brick wall for one ultimate reason: no one is really in control. Even the companies and executives who run them are trapped by the persistent, evolving, and opaque systems they have created. What is it that has so destabilized our elites so that they have lost control of the very systems they built and run? With every passing day we intuitively sense a loss of control over our daily lives, society, culture, and politics, even as it becomes more difficult to extricate ourselves from our hypernetworked fabric. No explanation ever seems sufficient.

● The Battle for Your Brain: Defending the Right to Think Freely in the Age of Neurotechnology
Nita A. Farahany
Q&A with author via The Wall Street Journal
Employers can track workers’ emails, computer keystrokes and calls. What happens when they routinely start tracking employees’ brains?
Nita Farahany, 46, has been studying the possibility for years. A professor of law and philosophy at Duke University School of Law, Dr. Farahany has long been intrigued by potential legal challenges posed by devices in the workplace that measure electrical activity in the brain.

● Poverty, by America
Matthew Desmond
Review via The Economist
Many fine books on American poverty criticise capitalism and go in for intermittent moralising. It is indeed a moral failing that America continues to have a high rate of child poverty. But in this book, moral certainty and righteousness are the main substance of the argument.
Mr Desmond actively disparages nuance. “Hungry people want bread,” he notes. In response, “the rich convene a panel of experts. Complexity is the refuge of the powerful.” His policy analysis, when he gets to it, is cursory, somewhat contradictory and largely unconcerned with alternative explanations. He dismisses the prominent thesis that urban poverty is a result of deindustrialisation in a single short paragraph (which mostly gripes about the ugliness of that term).

● Bootstrapped: Liberating Ourselves from the American Dream
Alissa Quart
Review via The Atlantic
The Horatio Alger Association is one of the institutions that Alissa Quart, a journalist and the executive director of the Economic Hardship Reporting Project, critiques in her new book, Bootstrapped: Liberating Ourselves From the American Dream. In a wide-ranging 230 pages, Quart challenges our nation’s obsession with self-reliance. According to Quart, the fiction that anyone who works hard can have a better life increases inequality and promotes policies that hurt us. Meanwhile, blaming people for their supposedly bad choices is “a kind of nationwide bullying” that the poor internalize. Bootstrapped puts words to beliefs that I struggled to articulate as a teen and that haunted me into adulthood: Both success and failure were up to me alone, I was valuable only when I triumphed, and if I couldn’t overcome, I’d be better off dead.

● Shelter from the Storm: How a COVID Mortgage Meltdown Was Averted
Mark Calabria
Summary via publisher (Cato Institute)
The COVID-19 pandemic upended our daily lives. The crisis was not only an unprecedented shock to our health care system but also a threat to our economic well‐​being, including our mortgage and housing markets. Despite the reforms following the 2008 financial crisis, markets were not prepared, and March 2020 brought another financial crisis. When he was the director of the Federal Housing Finance Agency, Mark Calabria led a considerable part of the response to the 2020 crisis. In Shelter from the Storm, he tells the story of how millions of families were provided with mortgage and rental assistance, both to keep them safe and to keep our financial markets functioning. He offers readers a peek behind the curtain of government decisionmaking in a crisis and shows how housing disruptions were minimized at little cost to the public, while resisting calls for Wall Street bailouts.

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