One of the best ways to know what the Fed will do next is to look at regional bank stocks.

Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee March 7, 2023 in Washington, DC.

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The market has changed its mind – again – about what they think the Federal Reserve will do next week in regards to interest rates.

On a morning when more banking turmoil loomed and stocks opened sharply lower on Wall Street, traders shifted prices to indicate that the Fed could stay on track when it meets May 21-22. 3.

The probability of not raising interest rates is up to 65%, according to CME Corporation Data Thursday morning. However, trading is volatile and the latest moves suggest an almost 50-50 ratio between no rate hike and a 0.25 percentage point increase. For most of Tuesday, the market showed strong upside potential.

Chairperson Jerome Powell and his fellow Fed policymakers will tackle the question of rate hikes by watching as macroeconomic reports continue to be updated, as well as data from regional banks and prices. Their stocks can provide bigger clues about the health of the financial industry.

Smaller banks have come under enormous pressure in recent days, following the closure of Silicon Valley Bank and Signature Bank, the second and third biggest setbacks in US history. The SPDR Regional Bank ETF has dropped another 1.5% on Wednesday and is down more than 23% over the past five trading days.

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SPDR S&P Regional Bank ETF, 5 days

In a dramatic move on Sunday night, the central bank launched an initiative it’s called the Bank Term Funding Program. That would provide a facility for banks to exchange high-quality collateral for loans so they can secure operations.

Cash inflows into affected banks can be reflected through their share prices to indicate how well the Fed initiative is working to maintain confidence in the industry and keep cash flows in check. money flows.

Fed officials will also receive data in the coming days to see how aggressive banks are in using the facility.

If banks are using BTFP to a large extent, that could indicate serious liquidity problems and thus act as a deterrent to rate hikes. The final public report on that data is due on Thursday, though the Fed will be able to monitor the program until its two-day meeting begins on Tuesday.

Betting on which direction the Fed will ultimately take came after a turbulent morning on Wall Street. stock is sharp drop in early tradingwith Dow Jones Industrial Average down more than 500 points.

Fed should be cautious now but continue hiking cycle, strategist says

Just as concerns began to ease regarding the health of the banking industry, news broke that Credit Suisse may need a lifeline. Switzerland’s second-largest bank plunged after a major Saudi investor said it would not provide more capital due to regulatory issues.

The drop came even as economic data seemed to lessen the urgency around controlling inflation.

The producer price index, a measure of wholesale pipeline prices, unexpectedly fell 0.1% in February, according to the Labor Department. While markets typically don’t pay much attention to PPI, the Fed considers it a leading indicator of inflationary pressures.

On a year-over-year basis, the PPI gain fell to 4.6%, a large slide from the 5.7% in January which itself was adjusted lower. PPI peaked at 11.6% in March 2022; February’s index was the lowest since March 2021. Excluding food and energy, the core PPI was unchanged for the month and up 4.4% year-on-year, down from 5% in January.

“The ability to rapidly reduce core PPI inflation continues to be at the heart of our relatively upbeat view on core [personal consumption expenditures] “The market doesn’t pay much attention to PPI, but the Fed does,” writes Ian Shepherdson, chief economist at Pantheon Macroeconomics.

PPI data along with the consumer price index report were relatively flat on Tuesday. Markets last week priced in the possibility of a half-point rate hike this month, but quickly pulled back.


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