Markets See-Saw As Fed Indicates Rates Could Rise More than Expected, and How to Trade the Insurers After Today’s Pullback 6/14/23

0:01Right now and fast, the Fed pauses, but ads don't get used to it. Chair Powell saying more rate hikes are waiting in the wings of inflation doesn't keep dropping. Markets taking the news in stride. So in Jay Powell, we trust or the markets just not buying what the Fed is selling. Plus, health care headache. The sector crushed today after the CFO of United Health says seniors are now getting all sorts of surgeries that they had delayed because of COVID. How much pain is ahead for these stocks? And later, a charm offensive in China. Beijing bringing its business leaders in to get their advice on how to give the economy a jolt.

0:33At the same time, President Xi reportedly set to meet with Bill Gates this weekend. Could these moves put investing in China back on the map? I'm Melissa Lee. This is Fast Money. We're live with the Nasdaq MarketSite. On the desk tonight, Tim Seymour, Steve Grasso, Dan Nathan, and Guy Adami. And we start off with the pause heard round the world. The Federal Reserve holding its key interest rates steady at its latest policy meeting, but laying the groundwork for rates to climb even higher than expected later this year. The news sent shockwaves through the markets, with the Dow dropping as much as 428 points at its low before paring back those losses.

1:04The S &P and Nasdaq did manage to finish the day in the green. Meantime, rates rocketed higher with the yield in the two-year touching 4.8 percent for the first time since early March. For more on the Fed decision and Chairman Jerome Powell's press conference, let's bring in Steve Leisman, who was there. Some further rate hikes. That was the language, Steve, which I thought was very interesting. Yeah, that was a little bit stronger than the last time. What I think you might call this is an expected and welcome pause, Melissa, with an unexpected and unwelcome forecast that it could hike twice more this year.

1:36So now, for investors, I think it comes down to this simple question. Do you believe the Fed forecast for two red eggs? Or don't you? That is, are you feeling lucky? Go ahead. Trade against the Fed. Fed Chair Jay Powell, though, made pretty clear the rate-setting Open Market Committee is serious about bringing down inflation. From the SEP. The committee is completely unified in the need to get inflation down to 2 percent and will do whatever it takes to get it down to 2 percent over time. That is our plan. And, you know, we we understand that allowing inflation to get entrenched into the in the U.S.

2:11economy is the thing that we cannot cannot allow to happen. here's the forecast making the news here at 2023 they raised it by half a point to five six and then 2024 and also up a little bit more the long run remaining unchanged at two and a half percent but the main thing is the conviction four members at one hike nine members or half the committee supporting two hikes three members supporting three or more hikes so 66 percent of the committee at two or more despite that conviction it's worth noting veteran bond investor jeff gunlock in the last hour. He said he doesn't believe the Fed. He thinks inflation is going to fall sharply and the economy will slow and the Fed won't hike the market.

2:50Split decision. Embracing the July hike with a 60 percent probability about where it was this morning. But no contract is currently trading guys with that second hike built in. Melissa, I'm interested to see if your guys around the table there are buying or selling the Fed here. Well, that's how we open the show. Either the markets are totally, you know, believing Jay Powell because he also sort of opened the door to a a soft landing, a scenario in which we don't have to see super slow growth or very high inflation. Either they believe Jay Powell and trust him, or they just simply don't believe him at all.

3:23My money right now is on the latter as opposed to the former. I think it's worth remarking here that the market came to the Fed, Melissa, right? The market had these cuts built in. Those cuts are out. The Fed was wrong about inflation to start with. and it became more right when inflation stuck around and the idea of the Fed needing to stay high. That was right for a while here. So maybe we're in the rubber match of the Fed versus the market here. And I think at the end of the day, these numbers are going to come down. Jeff Gundlach is either going to be right and we are going to get some lower prints that will remain low and give the Fed that convincing evidence they need or they won't.

4:04And in that case, the Fed is not going to hike. So it doesn't really boil down to being right or wrong. It's whether or not your forecast for inflation is right or wrong, I think. Where do you stand, Tim? Well, if Steve referenced Dirty Harry, which is what I think he did when he started out, I think there's another something else in the chamber. Let's just say that. I don't want to get too graphic on cable TV here. And I think I believe him. I believe the Fed. But I also believe that we don't know where we're going to be in two or three months. I believe everything they're saying. Everyone's saying the market doesn't trust the Fed.

4:34I think the market believes that the Fed really can't go much past where they are. and what's 25 basis points amongst friends? And I'm sure Clint Eastwood would have said it just like that. Yeah. It's remarkable. Again, we play this game a lot. If you had told me all the time, if you had said they're going to say they're going to pause but say maybe two rate hikes this year. You would have said sell-off. So the market's S &P's down 80 handles. Absolutely. And at one point it was down, what, 40-something handles? I don't know what happened late in the day to get back to unchanged, but I'll say this as well.

5:02Two tens went out to about 94 basis points like that. Now, it's fascinating. If you listen to Michael Schumacher yesterday, Steve, I don't know if you heard this. He said from 159 to 26. The cha-cha-cha. And that's exactly right. Whatever move happens in the bond market. And the stock market as well is exactly right. So, Steve, I'm with you. I think I believe what the Fed is saying. I believe they're earnest in this. The market's clearly not buying it, though. Steve, are you going to I could ask Steve a question because I still see his box right there. He's still here. Steve, why are we talking about 2 percent?

5:36I know 2 % was untouchable when there was no sign of inflation. Shouldn't it be 3 %? Is the door open to that? Why is 2 % the number? Why shouldn't it be 3%, 4 %? I mean, it's a good question, but it's 2 % because it's the level that they promised. It's the goal and the target that they had. And the fear is that if they change that rate, that their credibility will just go to hell. There could be a discussion about changing it if they hit the 2 % target and then say, you know what, 2 % is too tight. We want to go to 2.5 or 3. But I don't think they're going to change it until they get to that rate.

6:16And there's, I think, a decent argument to be made for 2%, which is that it's not 1 and it's not 3. That 3 is a level that businesses start to talk more seriously about the impact of inflation on their businesses. But just one thing for Tim on this issue of whether or not to believe the Fed. Right now, that probability is 60 percent. But, you know, I would think you could take it meeting by meeting. And one idea that's out there is that forget this data dependence, forget everything else Powell said today. All he really wanted to communicate is that they want to hike every other meeting like we did in 2019.

6:50And that's what they're about to do. You know, it's interesting. Steve mentioned Jeffrey Gunlock's response immediately. And so he doesn't think they're going to hike again. But he also actually takes issue, I think, with the indication of what the economy is doing. And you heard that. And it's interesting. You know, we talked about it last night. You know, look at how small caps traded today. So look at the Russell 2000. Look at how energy traded today. Look at how financials traded today. They didn't trade particularly well. All three of those sectors, OK, are down considerably from their 2021 highs or their all time highs made in the last, let's call it 18 months or something like that.

7:24So it's kind of interesting because, again, guys said, I don't know what the heck happened into the end. You saw the move the Nasdaq 100 made. I mean, like, NVIDIA rallied 6%. We're at all-time highs on semiconductors. So let's be clear about where the market is. I mean, it's definitely. But, again, it's the same stuff, like, leading the charge in a way. It remains the safety trade, though. And the reason why the Russell can't perform is that he didn't take July off the table, which means it's going to be tougher for those small companies to survive. But the more this happens, it's just the more danger that presents.

7:53And we used to think, and Steve said something like the market is coming the way of the Fed or something like that. The market is really, the stock market is really working against the Fed right now. Because a bubble is inflating. And by raising rates, you're trying to avert that. You're trying to avert a housing bubble, right, by doing this. But there's no cares. So the nature of investors and the risk that they're willing to take, that should be concerning to people. And I think that's probably what concerns Gunlock a little bit. Steve, do you think that irks the Fed? I think it does. I think there's a really interesting dynamic right now, which is that the market is coming to believe that this AI thing is for real.

8:28And it has dramatic implications for both company earnings and for the economy. The Fed can't really factor that in unless at some point in time, it starts to make a decision that this is a real productivity enhancer and a reason to lay back in terms of rates. But it can't really do that. And that's what I think is really motivating the market right here. And I agree with what Dan is saying, that at least at the initial phase of this, it is working against the Fed. When I say the market has come to the Fed, I actually mean the pricing and the funds market, not necessarily the stock market. Right.

9:03Steve, thanks so much. It's always great to get your analysis on today like today. Steve Leisman, senior economics reporter. The AI, I sent some skepticism in Steve Leisman's voice when he was talking about the AI bubble. But if you are a believer in the spending cycle, this spending cycle will defy what is happening in the economy. And maybe that's why we're seeing NVIDIA do well today, for instance. Well, I'm not ready to make a call on the spending cycle. I'm ready to make a call on NVIDIA, show it how far out in front they were. Making a call on the spending cycle, to get to Steve Leeson's point, sorry to interrupt.

9:36Making a call on the spending cycle, though, is actually admitting that AI will have an impact in terms of productivity, and so therefore has to be a factor in the Fed's forecast. OK, well, and that's fine. But on a day when semiconductors got to all time highs effectively, we're within like a rounding error. I don't believe you're going to have a tech CapEx spend that warrants the kind of move that we've seen in a lot of these semis. I do think NVIDIA can go higher. And I think the valuation there is something I think we all have to question what, you know, how we're valuing a company that's growing that fast, especially on peg ratios, which don't look expensive.

10:09But I don't think that tech is suddenly going to have to go bananas here in terms of capex spend. I think data center is starting to get very crowded. I think margins are pressurized. I just think this is really a function as much about the market itself, positioning and sentiment, which have changed no matter what he said today. There's only so much the Fed has left to do. And at some point it's going to. Now, the Fed funds have adjusted dramatically. We actually now have 15 or 20 basis points of hikes between now and year end. And that used to be 100 basis points of cuts three months ago. So I just think what the market is doing and Dan's right, like financials and banks didn't act well today.

10:47And if anything, more Fed, more aggressive Fed means more runs on banks, both because deposits get more. They get tastier in Treasury bonds and because regional banks have more credit. But just think about where CapEx went. CapEx was nonexistent. Everyone thought we're going to be in a recession by now. Everyone thought that earnings were going to collapse. Didn't happen. So if anything, CapEx is going to be ratcheted up in the next couple of months, not taken down because it was not in anyone's model whatsoever. There's also an unchanged scenario where it doesn't go up or it doesn't go down. You know, I think they pulled back.

11:19It doesn't, but I think companies pulled back aggressively because they were a product of the overall market, thinking that the overall market was going to dictate the recession. And look at how many tech firms fired people, laid people off. But here's the question. If we have a bubble, let's say we have a bubble in AI. You don't believe this whole thing. Can you have a bubble in this area of tech, which is basically levitating the entire markets and be in this rate hike cycle guy? Still, something's got to go. Something's got to get. I agree. So the technology is real. I'm not suggesting the technology is a bubble.

11:51But when NVIDIA moves thirteen dollars in a half hour at the end of the day, seemingly on the back of nothing, a trillion dollar valuation on maybe 40 billion dollars of revenues or stuff, historically, that is unsustainable. unsustainable. Now, even if they had twice the revenues of that, it's still an expensive stock historically on valuation. So something's got to give here. And I think the bubble is starting to be created in a lot of the enthusiasm for these names. All right. For more reaction, all this, let's turn to Tom Michaud, the CEO of KBW, a Stiefel company. Tom, great to have you here on set.

12:22Great to be with you. Do you believe that the Fed's going to end up going two more times? I think the economy's slowing. And when I look at what happened today, I believe more the statement, more about watch what they do rather than what they say. And I think the dots are going to be the most least reliable of everything that was communicated today. So what I see is that the economy is slowing. So I think we're near the end of this rate increase cycle. And frankly, if we get another 25 basis points or not, I think the outcome in the economy is going to be very similar. So it sounds like you just don't you don't believe what the Fed is saying right now.

12:56I think trying to deliver a new message with these dots is not what I'm willing to hang my my hat on from what I see happening in the economy. I think that banks were already tightening in the fourth quarter of last year. It didn't just start in March. Loan growth had been slowing. For the banking system, the first half of the year is an adjustment to the new interest rate environment. In the second half of the year, we're going to be talking more about credit quality. And then the other thing is, whether it's technically a recession or not, I think it's going to feel the same way, because even like what you all were just talking about, It's different sector by sector.

13:32So if you're in the large corporate commercial real estate business right now, you feel like you're in a recession already. Frankly, investment banking revenues have been in a recession. Residential mortgage origination has been in a recession. So it's almost vertical by vertical. The main reason for the Fed holding off this meeting is to see what the effects of the prior rate hikes will be and how they play out. So how do you see the long and variable lag effects playing out? What do you see that you think the Fed may or may not be missing? Because it seems like you're seeing the impacts right now in a much deeper sense than what the Fed has portrayed during the press conference.

14:09Yes, I think there is a delayed impact. And I'll also say 25 basis points at 5 % is very different at 25 basis points off 50 basis points, for example. So this is getting to be the real deal at the moment because of the level of rates. And so I think the bite of these higher rates is gaining traction almost every day. Even if you look, you know, there's a lot of talk about how home sales are down in America. Part of the reason why I think that is, it's because America loves their mortgage. They don't want to get a new mortgage. I've never seen America love their mortgage like they do right now.

14:44Because when you buy a new home, you have to think about financing it at current rates. And that's a good incentive to stay in your current home. So these are having an impact slowly. And I think the latest data on inflation is showing that disinflation is here. And at least in our area of expertise and financials, we see it in the fundamentals. So, Tom, if rates stay higher for longer and you talked about banks and you talked about people, you know, that since you have to finance mortgages, how about banks that have to finance deposits? And if we had bank failures over the last three months, rates staying higher and possibly moving up a little bit higher.

15:19I mean, this is the part I can't reconcile. And you're talking about credit. You've been through these cycles before. This might be the most foreboding of all storm clouds, no? So I think there are two pieces to this conversation. One is I think there are elements of, like, the global financial crisis that are in bank stocks right now. And I think the rally that we've seen since early May is a relief rally that that's not happening, right? The other part is the earnings estimates haven't settled. They haven't stopped going down. So before the first quarter, we cut bank estimates by 11 percent.

15:53After the quarter, we cut them by 4 percent. My instincts are we're going to cut them again. And that's why the stocks are trading at six and eight times earnings, because we don't really know where the earnings are going to settle in. But my sense is when we get close to hitting that point, and if the Fed stops raising rates, that's when we're going to find that out. I think that's going to be an important signal for investors. We not see the floor in bank stocks until the Fed stops cutting or until we solve a I know that you've testified on the Hill about reforming deposit insurance. Is that another key aspect to stabilizing the sector for good?

16:26So what I think is, I think there is more relief rally in these stocks. You know, I look at U.S. Bancorp, which is one of the trophies of the banking industry. Trades at six times earnings, 6 % dividend yield. We've trimmed estimates, and we still think they're going to earn 20 on tangible common equity next year. That is an inexpensive stock that's a trophy that's on sale. Stock may not do much in the near term, but we think in the next couple of years you'll be happy if you bought it. So that's the relief rally. The overall industry rally for all participants probably doesn't happen until we get some more stability in what we think the earnings are going to be.

17:03Tom, thank you for stopping by. We appreciate your time. Great to be with you. KBW. Thank you. Well, you've liked the USP for a long time. Yeah, and it hasn't traded particularly well. But Tom's pretty thoughtful on this. Tim mentioned this a week or so ago that these regional banks are probably in lack of in the absence of bad news. They'll continue to rally, get to some level that sort of makes sense. But the bad news is coming. So you got to game it out. You know, you want to play that game of chicken and continue to buy these stocks, which has been working. Or at some point, the next shoe drops.

17:32That's been the move in the Russell. The move in the Russell is not predicated on the economy getting better. The move in the Russell, to a large extent, is predicated as people playing catch up with regional banks. Yeah, I actually think, you know, the XLF, if you look at the large banks, too, I think some of the stuff that Tim was saying about just rates higher for longer and everything that Tom just said about the recessionary aspects of these businesses. I just think that, again, they're always cheap. They're going to remain cheap, but it's not going to be a great back half of the year for them.

17:56Actually, one of the things I did today after when I was digesting what the Fed was saying and everything like that. And again, there were no big surprises there other than the fact that rate cuts are off the table for 2023. And now further hikes are on the table here. I think you could sell the XLF. And I don't think it's one of those ones that you're going to get too hurt in. There's no surprises, in my opinion, for the large U.S. money center banks in the next few months. I think the takeaway real quick is we went from a trading range of$3 ,800 to$4 ,200. That was pretty much kryptonite at that wall.

18:25And now I think we're in a higher trading range,$4 ,000 to$4 ,350-ish, give or take. Obviously, we're above it now. But I think to Dan's point where he started the show, people are still looking for safety in those large cap tech names. until that starts to deflate a little bit, the market's going to hang right here. And I do think we should have a little bit of a reset in the overall market. You know, the timing for the Fed in terms of two more rate hikes, it doesn't work well with Jackson Hole, which has always been seen as a time to sort of, you know, change pace if a pace change is needed.

18:57And that's actually what Paul McCauley has said in the past, that he believes that Jackson Hole, that's where the Fed's going to start laying the groundwork for a rate cut. Do you think that a rate cut or laying the groundwork for thinking about a cut is completely off the table? Yes. I mean, I think the Fed has latitude in each direction verbally. But certainly what they did today, we all expected this hawkish pause. And I just I don't think, especially when the quotes are risks of inflation or the upside, we still haven't seen the full effect of our tightening. I mean, these are these are at least dynamics that say we're on the switch.

19:34We may be concerned about overdoing it. You know, another stat that just came out over the last couple of days, especially as student loans take hold. You think about where the consumer credit is, you know, 60 to 80 billion now needs to be paid back. Debt debt service coverage ratios are at their highest in 17 years. And that's something that, you know, we talk about how great the consumer is because they have a job. That's the part of this. And no one's even we're factoring in banks. We're factoring in commercial real estate. We're factoring in some of the corporate stuff. So, you know, I can't look past that either.

20:02Real quickly, you know, on the rate cut, if they signal it, it's because the neutral rate, right, that they speak to all the time. If inflation comes down faster than expected, then you should expect a rate cut. And again, the stock market has not been bothered about 5 percent Fed funds because of where inflation is right now. And so to me, that could actually be a bit of a misnomer, especially when you think about where valuations are right now relative to expected growth. We still have GDP growth that's well below the pre-pandemic average of about 2.2 percent over the prior 10 years. So to me, a rate cut does not mean get back all in.

20:38You have to really factor. We spend so much time talking about this two-time version. The ultimate lagging indicator, to your point, sort of right around the bend. They're always too late, too late to act, too late to stop acting. Which is why they should have raised 25 today and signaled that it might be done. Yeah, and Jackson Hole would have been the opportunity to then really redefine what the inflation picture. Maybe it actually gives them the opportunity to say 2 % was a pre-pandemic thing. The economy is just different from here on out going forward. Coming up in earnings alert on Lenar.

21:09Shares of the home builder on the move after reporting results. The details from the quarter next, plus a big swoosh for Nike and a bullseye for Target. Finally, two beaten down stocks getting a boost. But one of our traders says not so fast on one of these names. Why he doesn't believe the bounce. That's straight ahead. Fast Money is back in two.

21:31Welcome back to Fast Money. We've got an earnings alert on Lennar, the home builder moving higher after a top and bottom line beat. Diana Olick's got the details. Hi, Diana. Hey, Melissa. Yeah, it was a strong beat. Lennar's stock came close to a record high yesterday as the builders have been benefiting from the shortage of existing homes. And Lennar chairman Stuart Miller said as much in the release. He said as consumers have come to accept a new normal range for interest rates, demand has accelerated, leaving the market to reconcile the chronic supply shortage derived from over a decade of production deficits.