4/21/23 – Markets on an Even Keel

To put in trading desk parlance, we were “Unched” this week!  That pretty well sums up trading activity.  The 2-year note was 9-basis points higher in yield and the 30-year bond also drifted higher, but only by 5-basis points.  The S&P 500 traded lower by less than 1%.  Economic activity, for the most part, came right on the screws, with housing starts and existing home sales reports in line with forecasts.

There were plenty of Fed speakers on the tape this week, but their message hasn’t changed.  Effectively, “inflation is still too high”, but “we’re closer to the end of the tightening cycle.”

Notably absent this week among the Q1 earning releases has been any substantial surprises in the financial sector.  For the most part, bank earnings have met expectations, which was a relief for investors.  Many had feared the mismanaged balance that drove SVB out of business was endemic to the broader industry.  Happily, that doesn’t seem to be the case.  However, investors continue to cite concerns about commercial real estate positions held on bank balance sheets.  Commercial real estate loans are typically reset periodically and the cost to refinance those loans continues to rise with each successive rate hike.  As that interest cost rises the value of real estate development projects falls.  The concern is that the fall in value raises the possibility of default, which is a very real concern.

Looking to next week, economic data is back-end loaded with the first look at Q1 GDP coming on Thursday, followed the next day by personal consumption data and the final April reading of the University of Michigan surveys.  With the next FOMC meeting coming on May 4th, next week will be the blackout period for Fed member comments so we will not be subjected to their nonsensical opinions on everything from inflation targeting to the monetary effects on global warming.

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