Before the Bell: Another Day, Another Bank Drama; What Will the Fed Do Next?

Investing

Published: May 4, 2023 7:33 am

Premarket action on Thursday had the three major U.S. indexes trading higher. The Dow Jones industrials were up 0.04%, the S&P 500 up 0.13% and the Nasdaq 0.13% higher.

U.S. regional banks took another hit on Wednesday. A Bloomberg report in the afternoon sent shares of PacWest Bancorp (NASDAQ: PACW) tumbling. The report cited unnamed sources who said the bank is weighing its strategic options, including a possible sale. The stock traded down by about 40% in Thursday’s premarket session, after losing just 2% on Wednesday.

For investors, a sale without a seizure would be great, returning at least some of their investment. However, now that the FDIC has stepped in on three other occasions to make depositors whole while wiping out common stockholders completely, no one wants to wait around for that shoe to drop.

The damage is not limited to PacWest. In after-hours trading Thursday, PacWest tumbled by as much as 60%. Other regional banks were caught up in the after-hours downdraft: Western Alliance Bancorp. (NYSE: WAL) was down 30%; Metropolitan Bank Holding Corp. (NYSE: MCB) was down 20%; Valley National Bancorp (NASDAQ: VLY) retreated 15%; HomeStreet Inc. (NASDAQ: HMST) fell 11%; Zion Bancorp (NASDAQ: ZION) gave up 10%; KeyCorp (NYSE: KEY) sank by 8%; and Citizens Financial Group Inc. (NYSE: CFG) traded down 5%.

Losses moderated somewhat in Thursday’s premarket trading session. PacWest traded down about 46%, Western Alliance traded down more than 19%, Valley traded down about 7.7% and HomeStreet was down about 4.5%. For the others, shares traded within a point or so of their after-hours losses Wednesday.

The Federal Reserve’s Federal Open Market Committee (FOMC), as expected, raised the federal funds rate by 25 basis points to a range of 5.00% to 5.25% on Wednesday. Markets were underwhelmed, even though Fed Chair Jerome Powell hinted that the increase may be the last one for a while. The likelihood that the Fed will press the pause button at its June 14 meeting currently stands at 97.4%, according to the CME FedWatch Tool.

Not only that, but interest rate traders who contribute to the CME survey expect the FOMC to cut interest rates three times this year, in September, November and December. There is a 48.2% chance that the funds rate will close 2023 in a range of 4.25% to 4.50%.

Before U.S. markets open 0n Thursday, 146 companies are scheduled to report quarterly results. And more than 140 more firms will release earnings reports after markets close.

Power generation and energy storage equipment maker Generac Holdings Inc. (NYSE: GNRC) traded up 11.6% Wednesday after reporting first-quarter earnings and revenue that easily beat consensus estimates. The company said that sales growth would return in the second half of the year, but that it continues to believe that 2023 sales will be down by 6% to 10% year over year. Generac was the best-performing S&P 500 stock on Wednesday.

Ignoring the 90% drop in shares of First Republic Bank, the biggest S&P 500 loser on Wednesday was Esteé Lauder Companies Inc. (NYSE: EL). The shares lost more than 17% after reporting profit that missed the consensus estimate and issuing downside guidance for the fiscal year. Earnings per share guidance came in at $3.29 to $3.39, sharply lower than the consensus estimate of $4.99 per share. Revenue was forecast to fall by 10% to 12% year over year.

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Here is a look at how the markets fared on Wednesday.

All 11 market sectors closed lower on Wednesday. Energy (−1.92%) and financials (−1.19%) posted the day’s biggest losses. Health care (−0.11%) and communications services (−0.16%) had the day’s smallest losses. The Dow closed down 0.8%, the S&P 500 down 0.7% and the Nasdaq down 0.46% on Wednesday.

Two-year Treasuries dropped eight basis points to end the day at 3.89% on Wednesday, and 10-year notes lost six basis points to close at 3.38%. In Thursday’s premarket, two-year notes were trading at around 3.85% and 10-year notes at about 3.37%.

Wednesday’s trading volume was above the five-day average. New York Stock Exchange losers outpaced winners by 1,841 to 1,130, while Nasdaq decliners and advancers traded evenly.

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