U.S. equities were able to claw out of a deep hole to finish mixed, as the recent turmoil in the banking sector on this side of the pond made its way to Europe. Credit Suisse fell after its largest shareholder said it will not provide further capital assistance, further amplifying concerns toward the financial system that have come in the wake of failures of some U.S. regional financial institutions. The worries overshadowed a welcome benign read on February producer price inflation and a retail sales report that 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, homebuilder sentiment unexpectedly improved, mortgage applications rose for a second-straight week, but manufacturing output in New York contracted much more than anticipated, and business inventories surprisingly dipped. In other equity news, Lennar Corporation topped quarterly expectations. Treasury yields tumbled and the U.S. dollar rallied, while crude oil prices dropped, and gold was higher. Asia finished mostly higher after the rebound in the U.S. yesterday, while markets in Europe fell with the banking worries dragging stocks lower across the board.
The Dow Jones Industrial Average decreased 281 points (0.9%) to 31,875, and the S&P 500 Index was down 27points (0.7%) to 3,892, while the Nasdaq Composite gained 6 points (0.1%) to 11,434. In heavy volume, 6.5 billion shares of NYSE-listed stocks were traded, and 5.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $3.72 to $67.61 per barrel. Elsewhere, the gold spot price increased $12.50 to $1,923.30 per ounce, and the Dollar Index rallied 1.1% to 104.72.
The banking sector remained volatile and traded to the downside, with the turmoil flaring up in Europe after Credit Suisse Group AG (CS $2) tumbled 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, as well as Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bank Turmoil: What Does It Mean for Fed Policy? Kathy notes that the situation may relieve some pressure on the Federal Reserve, possibly leading to a pause or slowing in its current rate-hike cycle. You can follow Kathy on Twitter @KathyJones.
In other equity news, Lennar Corporation (LEN $100) 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. LEN traded slightly lower.
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. You can follow Liz Ann on Twitter: @LizAnnSonders.
Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.
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 National Association of Home Builders (NAHB) Housing Market Index (HMI) showed homebuilder sentiment unexpectedly improved in March. The index rose to 44 from February's unrevised 42 level, and versus the estimate calling for a decline to 40. Despite the surprising improvement, this was the eighth-straight month that homebuilder sentiment was below 50—which suggests poor conditions. The depressed sentiment has come amid the backdrop of rising interest rates and elevated home prices, which have caused affordability to plunge, as well as elevated materials and labor costs.
The NAHB noted that, "Although high construction costs and elevated interest rates continue to hamper housing affordability, builders expressed cautious optimism in March as a lack of existing inventory is shifting demand to the new home market. While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers."
In other housing news, 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.
Business inventories dipped 0.1% m/m in January, compared to forecasts of a flat reading and December's unrevised 0.3% advance.
Treasury rates resumed a recent tumble, as the yield on the 2-year note plunged 33 bps to 3.88%, the yield on the 10-year note dropped 16 bps to 3.47%, and the 30-year bond rate fell 9 bps to 3.67%.
Bond yields remained 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 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. Kathy offers insight on how to handle it.
The final piece of the February inflation picture will come tomorrow, courtesy of the Import Price Index, with economists calling for a 0.2% m/m decline. Housing starts and building permits are also slated for release, with starts forecasted to have increased 0.5% m/m to an annual rate of 1,310,000 units and permits to have nudged 0.1% higher to an annual rate of 1,340,000 units. Initial jobless claims for the week ended March 11 are on tap, expected to show 205,000 first-time unemployment applications were filed, and the Philadelphia Fed Manufacturing Index will round out the docket, projected to improve to a level of -15.1 in March from last month's -24.3, but remain in contractionary territory as denoted by a reading below zero (economic calendar).
Europe tumbles as banking sector worries ramp back up
Stocks in Europe fell broadly, 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. You can follow Jeff on Twitter: @JeffreyKleintop.
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 were noticeably lower versus the U.S. dollar, while bond yields in the Eurozone and the U.K. dropped.
The U.K. FTSE 100 Index was down 3.8%, France's CAC-40 Index fell 3.6%, Germany's DAX Index dropped 3.3%, Italy's FTSE MIB Index plunged 4.6%, Spain's IBEX 35 Index tumbled 4.4%, and Switzerland's Swiss Market Index traded 1.9% 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.
Tomorrow's international economic calendar will offer retail sales, core machinery orders, the trade balance and industrial production from Japan, labor data from Australia, consumer price data from Italy, and Spain's trade balance. In central bank action, the European Central Bank will announce its monetary policy decision.
