The bank run stopped inside the United States last week but a global banking crisis continued into this weekend. As of now, UBS agreed to take over the troubled rival Credit Suisse with the Swiss National Bank pledging a loan up to 100 billion Swiss francs to support the takeover. If Credit Suisse was let go like Lehman Brothers was during the 2008-2009 financial crisis, the destruction to the global economy is far greater this time as Credit Suisse is a far greater global bank than Lehman Brothers was.
The global regulators learned hard lessons last time, so it’s not surprising to see a shotgun wedding with explicit government support like this to avoid another global financial crisis.
The post March Fed meeting conference is at 2:30 pm Wednesday, March 22, 2023. The Fed Chairman Powell will be forced to acknowledge the present banking crisis which is a direct result of the Fed’s aggressive rate hiking campaign. Powell will need to strike a perfect balance between price stability and financial stability. Our guess is that Powell will not raise interest rate and will let the inflation fight to take a backseat. The recent events surrounding the bank failures are hugely dis-inflationary. Huge sums of real money have been destructed and drained out of the system. The bank failures are doing the Fed’s job fighting inflation.
Even if Powell raises another 25 basis points, it is symbolic to save face. He will probably say that he will pause after this hike to let the lag effects to work through the system.
We don’t believe the global central banks will let this banking crisis morph into a global depression. This banking crisis will force Powell to effectively end the rate hiking cycle now. In our last blog, we talked about the Fed’s history of being cornered time after time. The Fed is never predictive, but always reactive. Historically, the time between the rate hike pause and the first rate cut is bullish for the stock market. It is a rate hiking relief rally.
The present rally started on October 14, 2022. If it survives its five-month mark, which is March 2023, then it can stretch to 7-8 months and perhaps 12 months too. So if the market rallies from the Fed’s decision next Wednesday, it probably can last a few more months after March 2023.
Technically, it is 22 weeks into the currently weekly cycle. It is due for a bottom. A normal weekly cycle is about 18 weeks, the longest weekly could be 26 weeks.
In the S&P 500 weekly chart below, you can see that during the entire 14 months correction, the S&P 500 cash index has managed to stay above its 200-week moving average. If the market has some structural problems, the S&P 500 would have been sold below its 200-week moving average in the first 5-7 months. It is less likely for the S&P 500 to fall below its 200-week moving average at this point, 14 months into the correction, especially there is a triple bottom formation in the NASDAQ.
On the daily chart, the NASDAQ marked a daily cycle bottom on March 13, 2023. It is already 4 days into the daily cycle. At the moment, all things are hinged on the Fed’s decision on Wednesday.
