Monday Takeaways: A Word of Caution

Shah Gilani|April 15, 2024

Boring old bonds, eh?

Hardly.

When they speak as loudly as they did last week, we’d better pay attention.

We got a clear message… and it’s one many folks may be surprised to hear.

It’s time to be cautious… and I explain why in your latest Monday Takeaways.

Plus… bank results are coming in… and there’s even more reason to be cautious. It’s all thanks to one metric that tells us how our economy at large is doing.

You can see what it is… and what it means… below.

Click on the image below to watch it.

 

Transcript

Hey, everybody. Shah Gilani here with your Monday Takeaways.

First big takeaway from last week’s bond market action is be careful out there.

We got a worse-than-expected CPI number last week. PPI was in line, but the damage was done with the CPI number.

Bonds got hammered. The 10-year now trading at 4.55%. It was 4.20%. Just seems like a few days back.

Absolutely hammered.

Now it’s about the rate cuts, and so the story goes, maybe not. Maybe there won’t be any rate cuts in 2024. The narrative is changing. It certainly changed from the end of 2023 and the very beginning of 2024, when there were as many as six rate cuts expected, at least according to the Fed fund futures.

Now the futures are pricing in maybe three, but investors and analysts are thinking maybe not, maybe two. Some are saying one, and some are saying none. So higher for longer seems to be the takeaway. Okay?

That doesn’t bode well for mortgages, which hit something like 6.88%. The 30-year hit 6.88% last week.

That’s a huge jump. So is it affecting the housing market? It’s going to work its way through the housing market eventually if things don’t come down, and I don’t think they’re gonna come down. So the takeaway there for builder stocks that have done really well is maybe this time to maybe take some profits and make sure you have some stops in there if they come back down, if you’re in any of the big builders.

Next up, as far as takeaways goes, the bonds yesterday, excuse me, last week were so beaten up, and then people didn’t realize that the 10-year auction, a huge 10-year auction, went really poorly with dealers stepping up and buying more of the auction than anybody expected. And then we had a 30-year, which was pretty much above bust too. So a 10-year auction and then a 30-year auction not going well, when you would think investors who were clamoring at the beginning of the year for 10-years at 4% and just a little over, they’re now balking at 4.55%.

That’s scary. If they’re balking at buying bonds with a 4.55% yield risk free Treasurys, what are they waiting for? Five percent?

Back to higher for longer seems to be the narrative. The takeaway there is don’t go chasing bonds right now. If you wanna lock in some good yields, do it. There’s some good yields we had, but there could be higher yields down the road that you could lock in.

So I don’t know that we’ve seen the end of the cycle. It wouldn’t surprise me to see the 10-year get to close to 5%. That would be scary, and that would certainly slow the economy down, and that’s what I think may happen, and that’s why I think that we will see cuts later in the year, because I think we will get there as far as the 10-year, and that will slow the economy down. And the Fed will be worried that if we do get up there, then things might break, including what I’ve been pounding table at for quite a while now, CRE, commercial real estate at the banks, mostly the regional banks and some of the small community banks that holds a whole tons of commercial real estate.

Oh, speaking of the banks, last week, we got a glimpse of some bank earnings. Not so good.

What happened? Well, on Friday, we had Citi, we had Wells Fargo, we had the big boy, JPMorgan Chase, and we had BlackRock. Well, JPMorgan Chase got absolutely hammered on Friday. Now, maybe they’ll see a comeback this week as far as the banks go, but what happened was the expectation for net interest income or net interest margin, as some folks call it, what they make on the spread for when they lend and what the interest that they charge is, that’s been great, except the expectations where they would maybe hold up.

But, no, it tumbled. So net interest income tumbled in the first quarter for these banks. JPMorgan got absolutely hammered. JPMorgan stock was down on Friday 6.47%.

I mean, if you look at chart of that, it just collapsed.

OK? Wells Fargo led the pack in the worst net interest income numbers. They were down 8% quarter over quarter in the first quarter. Down 8% unexpected. So the banks took a little bit of a hit, and that includes BlackRock.

Well, takeaway from there is if the banks aren’t living up to expectations – after the nice run that they had, they’re part of the leadership group – if they start to falter here, then the market’s leadership group, which has been financials, to a degree, for sure. We know tech is always there, but financials have done very well. If they start to roll over, then some of the energy that has moved this market higher is gonna start to dissipate.

You’re looking at what happened last week, your takeaway is there’s caution out there now. There’s maybe people are putting in stops. They’re putting in protective positions. They’re buying safe haven stuff because of geopolitical tensions.

The VIX soared last week. Why? Because, again, bank earnings weren’t good. In the morning, we got bad news, like, uh-oh, bank stocks are getting hit.

And then, of course, we had the weekend coming, and everyone was afraid that Iran would retaliate on Israel, and who knows what that would lead to, some greater conflagration in the Middle East. And so, a lot of put options were better, a lot of hedging was put down. So the VIX spiked on that. Now, fortunately, what’s happened so far has been contained, but those geopolitical tensions are still out there.

The markets are a little nervous in here. Futures this morning, a little bit higher. That’s all good. Let’s see how long it lasts.

Goldman Sachs was out early this morning with their earnings, hit it out of the park. Will that be enough to bring some stability to the banks?

Well, we’re just beginning earning season, and the takeaway there is stuff that’s not working is gonna get hammered.

We saw that with JPMorgan Chase. Absolutely hammered. If companies beat, let’s see how they get rewarded.

But if they miss, we know they’re going to get beaten up, as they did in the fourth quarter too.

So guess what? Takeaway there is there’s caution out there. Be cautious to yourselves.

My takeaway from what happened last week is higher for longer, and yikes…

Stuff is looking a little bit like it’s maybe weakening, maybe wants to roll over. Bonds rolled over. Will stocks roll over?

Gotta be careful out there. That’s your big takeaway for this week.

Catch you guys next week. Cheers.