Making sense of the markets this week: May 7, 2023


A big thanks to Diamond Hands Dale Roberts for so ably stepping in to cover the big market news over the last couple of weeks!

Powell sticks to forecasted script as Fed hikes interest rates 

On Wednesday, U.S. Federal Reserve chair Jerome Powell announced that key interest rates would go up from 5% to 5.25%. This rate hike was widely forecasted, and it appeared to have only a minor effect on the broader markets; the Dow Jones Industrial Average (DJIA) declined 0.8% on the day, but the larger Russell 2000 index (reflecting small-cap stocks) actually finished up 0.41%.

In addition to the hike, notable comments from Powell’s announcement include:

“Inflation remains well above our longer run goal of 2%. Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.”

“We on the committee have a view that inflation is going to come down not so quickly. It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates.”

“Wage increases have been moving down, and that’s a good sign. Down to more sustainable levels. I think the case of avoiding a recession is in my view more likely than that of having a recession.”

“A decision on a pause was not made today.”

“Looking ahead, we’ll take a data-dependent approach to determining the extent to which additional policy firming may be appropriate.”

Investors looking for confirmation that we had reached the end of this monetary tightening cycle were likely disappointed. However, it appears that Powell is trying his best to walk the tightrope of reining in bullish expectations, while at the same time not sending the entire banking sector into free fall.

TD will not be exploring new horizons

TD Bank (TD/TSX) announced on Thursday that it would be backing off its USD$13.4-billion offer to purchase U.S. bank First Horizon Corp. (FHN/NYSE).  

The announcement sent shockwaves through the already-struggling world of U.S. regional banking, as shares of First Horizon collapsed 36%; they now sit at close to USD$10—a far cry from the USD$25 per share that TD had agreed to pay. As part of the initial agreement, TD must now pay First Horizon USD$225 million in breakup and reimbursement fees.

Despite the expensive breakup and decreased expansion opportunities, TD investors appeared largely unfazed, as share prices finished flat on Thursday. There is likely merit to the speculation that TD might be using the rationale of regulatory hurdles to simply walk away from an increasingly toxic banking asset. Given how far First Horizon shares have fallen in the immediate aftermath, it appears TD dodged a financial bullet. We’re sure there are many Canadian investors out there who would rather see TD’s capital go to increased dividends and stock buybacks, as opposed to U.S.-based expansion, at this time. 

First Republic asset sale to JPMorgan

On Monday, U.S. banking regulators finally decided to put troubled First Republic Bank (FRC/NYSE) out of its misery, by forcing the sale of the mid-sized bank to financial giant JPMorgan Chase (JPM/NYSE).

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