Market Volatility: Bank Worries Strike Again

U.S. stocks fell again Wednesday, with the Dow Jones Industrial Average touching its lowest level in over four months, as concerns over the banking sector spread to Swiss lender Credit Suisse.

Shares of Credit Suisse sank to a record low after its largest shareholder, Saudi National Bank, declined to offer more support to the troubled European bank after it reported problems with its financial reporting.¹ The prospect of another bank failure further riled investors already shaken by the past week's shutdown of Silicon Valley Bank and two other U.S. regional lenders. Crude oil futures dropped under $70 a barrel to a 15-month low amid escalating recession concerns.

"Credit Suisse's problems were today's trigger, but markets were already on edge due to the banking issues in the U.S.," says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.

The following is a round-up of today's market activity:

• The S&P 500 Index was down 27.26 (0.7%) at 3891.93; the Dow Jones industrial average was down 280.83 (0.9%) at 31,874.57; the Nasdaq Composite was up 5.9 (0.05%) at 11,434.05, after falling as much as 1.7% earlier.
• The 10-year Treasury yield was down about 16 basis points at 3.473%.
• Cboe's Volatility Index was up 2.41 at 26.14.

The Credit Suisse reports sent European bank stocks tumbling and overshadowed the release of weaker-than-expected data on U.S. producer prices and retail sales. Such data may have been welcome news to investors looking for reasons for the Federal Reserve to become less aggressive in its campaign against inflation.

Kathy says the banking system as a whole may not pose a systemic threat, but financial instability "is inherently deflationary/disinflationary because it causes banks pull back on lending, which tightens financial conditions in turn."

"Consumer confidence tends to fall, leading to lower consumption," she adds. "And asset prices fall, leading businesses to pull back on investment."

Bond yields have fallen sharply over the past week amid growing expectations the Fed may be tempted to hit pause on further rate hikes after boosting its benchmark funds rate eight times in the past year. There's now a 46% probability the Fed won't raise rates following its March 21-22 policy meeting, according to the CME FedWatch Tool. Yesterday, the chance of a quarter-percentage-point increase stood near 80%.

"Financial stability trumps inflation-fighting," says Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. "Central banks can't pursue their mandates without financial stability. We don't think it's reasonable for the Fed to hike rates in this environment. A pause seems most likely with the Fed/Treasury maneuvering to calm markets. The rate-hiking cycle may be over."

Wholesale price inflation cooler than expected, retail sales drop

Earlier Wednesday, the Labor Department reported the Producer Price Index (PPI)—a measure of supply conditions in the economy—fell 0.1% in February from a month earlier. (Economists polled by Bloomberg were expecting a 0.3% rise.) The department also lowered January's reading to a 0.3% increase. The core rate, which excludes food and energy, was unchanged from the month before.

U.S. retail sales fell 0.4% in February from the month before, matching economists' forecasts, and down from January's upwardly revised 3.2% jump. Sales excluding automobiles dipped 0.1% from the previous month, in line with forecasts, though January's figure was adjusted to a 2.4% increase. Sales excluding-autos and gas were unchanged from the month before, versus estimates of a 0.2% decline.

¹"Swiss Regulators Offer Financial Lifeline to Credit Suisse," The Wall Street Journal, March 15, 2023.