Good Tuesday AM,

The first thing on my mind today is the tragedy in Nashville. I cannot stop thinking about these young children and the adults who were brutalized and killed, and how their parents and families will have to endure this pain for ever. I cannot make any sense of it. These events which happen all too often scar me.

Markets are stuck in a bit of mud for the most part today.

Bonds are fairly flat, equities, too. The banking sector seems to be rebounding and with it, expectations on the next Fed meeting have for the moment changed to 50/50 on another rate hike. We have a lot of data between now and then starting with the PCE report this Friday. I suspect the majority of stronger than expected headlines is about over and we will see what is left under the surface soon. I think that amounts to a weakening economy with fewer available jobs, high debt load/interest expense, and a slowing of inflation. We will soon see. On a positive note, I don’t think this has a negative impact on housing. I think improving rates will help housing regardless of the overall economy. In fact, a weakening economy will actually bring greater velocity to the housing market as people choose to sell or have to sell. Housing can often run contrary to the overall economy. What we need more than anything is inventory.

This is a great graph to share on how house prices have faired from Jan 2022 to Jan 2023.

Wall Street is warming up to banks.

A growing number of investors are betting on a rebound in the banking sector, wagering that regional lenders are in much better condition than many initially feared after the collapse of Silicon Valley Bank. The situation in the banking sector is fluid, and investors broadly remain on edge, but many challenge the notion that there is any fundamental, widespread problem on the asset side of bank balance sheets. On Monday, First Citizens’ share price rose 54% after it reached a deal to buy large parts of SVB and shares of U.S. regional banks also rallied; First Republic Bank climbed 12%, PacWest Bancorp 3.5% and Western Alliance Bancorp 3%. Deutsche Bank also rose, gaining 6% after falling 8.5% Friday on contagion fears. Keep in mind that less fear (of any kind in the markets whether it be banking, employment, etc.. ), will lead to higher rates.

And following up on banking, Bloomberg shared:

The turmoil that we saw in March in the banking sector obviously delivered a big jolt to the rates outlook. Most notably we see it at the short end of the curve, as two-year yields have come in dramatically. And they’re notably lower than the Fed Funds rate, indicating imminent rate cuts.

Ok, fine, that makes sense. The Fed typically hikes until it breaks things. Judging by the slew of extraordinary events of the last month, it looks like that’s where we are.

Prior to all this, there was a lot of talk about how the economy was overheating again, and that rates would be higher for longer again. And the thing is, so far in the data, it’s not clear that the momentum has stopped.

While the overall Bloomberg Economic Surprise Index is slightly negative right now, the housing sub-index (probably the most rate sensitive area) has been surging.

Most labor-data points have remained robust as well. The one thing that’s really dragging things down are the regional manufacturing surveys, which can be highly volatile.

Meanwhile, the Atlanta Fed’s latest GDPNow estimate (last updated on Friday) shows growth of 3.2% for Q1.

So, intuitively, something has to give here. Either the March jolt starts showing in the real economy, with tighter financial conditions flowing through to lower hiring and investing. Or the rate cut bets are going to have to go away, because right now the two don’t seem consistent.

Please remain safe and stay healthy, make today great!