Stocks Sink as Investors Digest Fed Statement, and Eli Lilly’s Breakthrough for Alzheimer’s 5/3/23

0:01Right now on Fast, it's all about the data. The days of the Fed hiking rates on autopilot are over. The chairman said decisions will now be made meeting by meeting. How will this policy shift impact the markets? We'll debate that straight ahead. Plus, Eli Lilly's big breakthrough. The drug giant saying it's experimental Alzheimer's drug appears to slow symptoms in a large-scale study. The CEO telling CNBC this is a significant step forward. The stock surging to an all-time high. A deep dive coming up. And later, crude's climb now crumbling, now back below 70 bucks a barrel. Starbucks' grande-sized fall after earnings and the options action on Apple ahead of tomorrow's results.

0:38I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq Market Side. I'm the desk tonight. Tim Seymour, Karen Feinemann, Dan Nathan, and Steve Grasso. We start off with a third day of losses on Wall Street. Major indices closing at session lows following the Fed's decision to lift rates by another quarter point. The Dow sliding 270 points. The S &P 500 and Nasdaq also closing in the red. The market taking a leg lower after Fed Chief Jerome Powell indicated that after 10 rate hikes in a row, there are no plans for rate cuts because of stubbornly high inflation. So if this is where the Fed pauses and it's higher for a longer scenario, then what's next for this market?

1:13Tim, what do you think? Well, this was as expected. This is a Fed that's gone 10 straight times. Everyone knows these numbers. And you have a case where you've got a jobs market that's still stubbornly tight. We've had data this week that's actually been better than expected. And we have an economy that the Fed is kind of conceding light recession. Not a great environment for stocks. If you look at Fed Fund Futures, they don't believe the Fed. Market doesn't really seem to believe the Fed either. In other words, the market right now, I would say equities, even with a little pullback today. And it was, yeah, I was a little surprised at some of that.

1:47I guess parsing through the Fed statement, there was, you know, some of it could have been a little bit more dovish on the cut here. But anyway, long story short, I just think that the market doesn't believe the Fed here. And pause does not mean pivot. And I think for equities, that's a problem. The market doesn't believe the Fed because Jay Powell went out and he spoke to the world and didn't seem to have a lot of conviction or clarity about what's going on. And that seemed very clear. Jeffrey Gundlach of Double Line was on with Scott Wapner right afterwards, and he made that point. And it was something that I felt after listening to the Q &A.

2:18I know, but at some point. How could it? Well, I mean, OK, but markets don't like uncertainty. So to me, I'm actually very surprised the market wasn't down a lot more today. I think it will be down a lot more tomorrow. And if you think about just where, like, some of the readings that we have as it relates to volatility in the equity markets and the Treasury markets, they are really just stuck here. And that seems very odd to me. But if you look at one indicator to me that I think is probably one of the most important, we talked about it last night, crude oil. I mean, you guys tell me what's going on.

2:45If that is not a reflection on expectations for growth, it's no longer a supply demand story here. So I just think that some of the volatility that we've seen in the commodity markets, that we've seen in foreign exchange markets, I think it will work itself, obviously, and in the rate market, will work itself in the equities. I thought you were going to say gold. It was either crude or gold in my mind. No, that would be Guy. Steve. So I think Steve Leisman asked a couple of good questions, and the other reporters asked a couple of good questions. Steve asked if the Fed knew that there was some sort of stress on the banks a month ago, why didn't that catch his attention?

3:18And he stuttered. Yeah. Then another reporter asked if in the beginning of the year you slowed down the pace to see what the lag effects would be. Why did you why do you now you see them with the banks failing? Why do you keep pushing on it at this point? So we have what? 200 basis points in lag coming. Why wouldn't you just wait? So now you had 175 basis points into this meeting. Now you have 200 basis points of a lag coming along in variable lags. To me, it just seems as if any bank that fails from here going forward, he's wearing it. And that's not even including the equivalent of rate hikes that will be credit tightening.

4:03Mark Zandi has pegged that as two to three rate hikes, so 75 basis points or so. So add that on top of the lag effects, and you've got a lot of tightening that's going to still be felt here. We are seeing headlines in the after hours, by the way. If we can show a chart of PacWest, this is a regional bank that has been under pressure in recent days. It is now almost cut in half in the after-hours session. This on reports that it is weighing strategic options, including a sale. This, according to Bloomberg, we're telling you this report because the stock is moving on the back of this. This is all part of the same story, though.

4:34And to your point, Stephen, to Steve Leeson's point, it was pretty much on the eve of a rate hike. He saw this, you know, deck about SVB being in trouble in interest rate risk. And here we are again, even though everybody's saying the banking system is fine. Well, a couple of things to that. Why would he continue to raise? Because inflation is still really high. Right. Right. And his mandate is maximum employment and stability. Well, the stability is still way out of whack. So things would have to break. So I sort of feel like I understand people think that the Fed is a sort of co-conspirator, but I feel like that was their job.

5:15They had to do this. Where they really screwed up to me was 2018, where they didn't start. That was the time they should have started raising then. Anyway, that's how you hear that this. You and I were talking right before the show started. I was wondering, why would PacWest say this? Why wouldn't you do this in private? it. And you were saying maybe it wasn't them that said this. Right. It's other sources saying this. This is very bad for them in a different environment. Strategic alternatives is a great thing. Right. You hope you want to stop. Exactly. This hurts value because if you're a customer of the bank, you're you know, that's not a great thing you want to read.

5:51So clearly, clearly there will be collateral damage in the space. And PacWest had just given an update recently and they talked about how their deposits were up 6 % from that March period to the April period, that their CET ratio was over 10%. So you had a message that, you know, like a week ago wasn't that bad. And we signed up improvements and forget net interest margins. We know where they were going to go, but the balance sheet, the deposit base, and that should make everybody think twice about all of these regional banks. And that's what this kind of announcement does. Right. But more bank failure, I mean, as it relates to the Fed, and when you think about more bank failures or potential bank failures.

6:27That's more stress on the system. And that may be yet another reason for the Fed not to hike in June and to stay. Yeah, I don't think June matters anymore. I mean, I think to Steve's point, there's more tightening that's coming by the way of just what they end up doing or not doing with their balance sheet. Right. And so that's a really big point. So listen, I think five percent Fed funds and they're going to stay here until something meaningfully changes their mind about growth. And that would be the thing that would cause them to start changing their interest rate policy to the downside, but that will not be good for equity valuations.

6:57Let's make one point about financials. I mean, Schwab, you know, I don't know what's going on, but it closed at a two-year low. I mean, so it closed at a two-year low. Did you see JP Morgan is giving back all of the gains that it had this week from this supposed sweetheart deal from First Republic? I don't think they really wanted to buy this asset, and it looks like they might get a chance to buy something else. I think they did. I disagree. But it doesn't, that's here nor there, because there's five others that are going to go under, that the equity is going to zero. And just, you know, the one thing I'll just say is, like, we go back to 2008 when Bernanke said that this crisis was contained in the first half of 08.

7:32What I heard today from Jay Powell, he said it's possibly different this time. So different this time are three of the worst words you could hear. Possibly doesn't make them any better. All right. Let's get more on the Fed's decision in Powell's press conference with senior economics reporter Steve Leisman. Steve, there's a lot of grounding. What was your take on his response to you, it did seem like it struck me that this was a moment that I saw. I thought that he was very uncomfortable in answering your question about what he saw in that deck about, you know, regional bank stress and specifically SVB.

8:07Yeah, I think they dropped the ball on that. And that was the answer. But he didn't want to give that answer. I mean, he said that it wasn't alarming. And then when I followed up and said, how can you say it wasn't alarming? He said he He didn't say it wasn't alarming, but he did say it wasn't alarming. So there's a couple of things to unpack there. The first thing was saying that the banking system is doing well. Well, they've lost$400 billion of deposits in the last month, and there's no particular end seen to that. They've lost three banks in the past month. The KBW is down 30 percent, I suppose, or maybe more today.

8:40What I thought was interesting was I asked him about the separation principle, monetary policy on the one hand, and supervisory policy on the other hand. If you don't mind, Melissa, can we listen to his response to me on that? I think in this particular case, we have found that the monetary policy tools and the financial stability tools are not in conflict. They're both working well together. We've used our financial stability tools to support banks through our lending facilities. And at the same time, we've been able to use our monetary policy tools to foster maximum employment and price stability.

9:16Right. So working well together. Let's take a look at the KBW just after the Fed hiked today. It's down another 2 % today. You talked about PacWest that was out there. Zion was down big. So not working so well together, I think, is the issue. And that's why a lot of people I was talking to, I've been talking to saying the Fed should not have hiked today. And now they're just another quarter point into the hole with the banking system. So I think that's, you know, they've dug the hole a little deeper here. Do you think it was bold of him, and I mean bold sort of loosely, of him to say that rate cuts aren't in the cards?

9:54I mean, given that there's a lagged effect of the hikes they've already done, there's the unknown tightening that is yet to come from credit conditions because of the banking crisis, which seems, I mean, you mentioned PacWest. We're witnessing another unraveling of yet another regional bank. So, you know, the credit tightening could be even more than what we expected when we thought the banking system was was sort of has stabilized. I don't know. It just seems sort of like why would you say that? Look, I mean, he is not yet at the point, whatever his read is or the Fed's read is of the banking data that they're looking at.

10:32The senior loan officer survey. I'm sure they see deposits on a daily basis. they're not at a point where financial stability is trumping monetary policy for a lot of people i think it is there were many people who were so i've got people on the phone saying the fed to fix the banking system needs to cut 100 basis points powell is not there maybe not there yet that may be the issue um but the question is how far down this road he wants to go with the uncertainty which he said several times melissa that it's uncertain what the effects are Well, from my standpoint, I think they're playing with fire here.

11:07I don't want to have to report on another broader banking crisis. It's one thing for banks to go down. But if it's one after another after another, at some point, you start to be concerned that there's a systemic issue. Look, they've already declared systemic risk exceptions twice. They've had to create a new fund to liquefy the banks and their portfolio. So to say everything is hunky-dory, I think, is just wrong. Steve, thank you for your work today. Steve Leisman. Let's bring in Paul McCulley, PIMCO's former chief economist. Paul now teaches Fed watching at Georgetown. What a course that is.

11:41I want to know who your best student is. I want to have him on the show. In terms of what Steve was just mentioning and the notion of the unknown of bank stress and what the Fed is doing. Do you think that this is a huge mistake? You already thought that the Fed should have paused. I'm not sure it's a cardinal mistake. I wouldn't have done it. But I think they're very clear about the whole issue of wanting to separate the acute phase of the banking issue and the chronic phase. And I think the acute phase, which is actually banks going down and we're losing our weekends, waiting for the resolution, that seems to be drawing to a close.

12:24So from that standpoint, you can say it's stable. But the chronic problem is that where the level of short-term interest rates is, and given the deep inversion of the curve, it is a chronic drag on bank profitability, reducing NIMS, reducing risk appetite, leading to a pullback in bank lending. So I think we are shifting to the whole notion of the credit tightening, taking over the lead and weakening the economy. And he's uncertain of how much. So effectively, he does a lot of hand waving. I didn't think he was terribly comfortable in front of the podium today. That's not a criticism, just an observation, because there basically are paused but don't want to say that at our wedding to see just how nasty the credit tightening is going to be.

13:19How many more banks would have to fail, Paul, in your view, for this acute phase, as you call it, to continue? Because you said that that phase is probably over. And yet we're witnessing in the after-hour session PAC West down 50-plus percent. And that's on top of huge declines that we've already seen this week. It feels like the same story is playing out here right now with that same sort of like what is going to happen to this bank, which is reportedly considering strategic options, including a sale. Yeah, it's hard to make a sharp line between acute and chronic. And after First Republic, you know, we could say, and Jamie said, you know, the acute portion is over and we will still have some more.

14:05Can they be handled, you know, without us being up all weekend, every weekend, in which case it's a chronic issue. But the real issue, I think, from a policy perspective and how it feeds back into how they handle monetary policy is I think the credit tightening is going to be very meaningful. Because even if you don't have flight of deposits in a run fashion, I think they will keep walking for the higher rate of eternity, which is now a 5 % on a money market account. So I think chronic is going to last a fair amount of time is going to weigh on the economy. And I think the day was the last hype and the next move will be at ease.

14:48And I think that's probably what Powell was stressing the most is he knows that we think that. And he was pushing back on it because bottom line, he wants to see a weaker labor market. Professor Paul, it's Tim. You know, you indicated you wanted a pause for this event. And 345 ,000 jobs are added in the first quarter. Fed always overstays the party. Are they staring at the wrong numbers right now? Because that number means very little looking forward. I get the sense that the employment numbers being so strong are throwing everybody off. I think that's right, Tim. They were stronger than I anticipated in the first quarter, particularly because they were driven by the half million in January.

15:29and they've been surprised that the labor market has been as stout and sturdy as it has been and they want it to soften and that will be the bell ringer for them that they can actually say yes we paused and not push back so hard on us with respect to the easing that's priced in but we're not there yet. And meantime, we have this chronic condition that I think is a really tight vice on Main Street lending, if you will. So that's the real tension we have in the system. And I think it will be resolved in the notion that the tightening credit on Main Street will dominate and the job market will slow.

16:19But, you know, I have to recognize that I've been anticipating that and it's been sturdier than I think. You said the next move will be a cut. When will that cut be in your view? I think, you know, sometime after Jackson Hole, which would put it into, you know, the fall months. And Jackson Hole, and we've talked about this before, has been hugely important to me as I look out on the forward calendar, because it was last August when he gave his famous pain speech, and they've tightened a pot load since that stage of the game. The economy slowed. Inflation is going the right direction. We have a chronic banking issue.

17:00So I'm looking at August at Jackson Hole is the time where he can give a more fulsome sort of speech about the notion. We are now sufficiently restrictive. In fact, we might be just a little bit too restrictive. So between now and then, I think it's going to be a choppy period. And I'm not terribly optimistic going forward on the capital markets. I'm not a big screaming bear, but I'm not optimistic like I was at the beginning of the year because the markets are not cheap right now. Paul, great to speak with you. Thank you. Paul McCauley. in Georgetown. What do you think, Steve? So I don't think he's going to cut.

17:43The way he acted when he pushed up against it, he was so stern today. And he was off base. By the way, a couple of people have said that, where it seems like he was a little off base today, other than other meetings before. To Karen's point, inflation is too high. Easier to afford milk, egg, cheese, when you have a job and their prices are too high than when you don't have a job and the prices stay flat for a little bit. We've never had more people have jobs. Yeah, that's my point. He wants to break the back of the jobs market in order to say victory. So he wants to push inflation down. If you have a job, you can afford expensive items.

18:21If you don't, you can't. It's not an argument between you and I. And look at what has happened to unemployment. Right? So are you saying, all right. He continues to push because he's only using his litmus test as the unemployment. So if he keeps pushing on that, he's going to make whatever recession that we thought would be short and shallow could be deep and long at this point. What's your feeling about the markets now versus 24 hours ago? Well, again, I look at Fed funds. They have the Fed doing 150 basis points of cuts in the next calendar year. I actually think that the market tomorrow and for the next couple of days could find some relief in the reality of that the Fed is done.

19:02I don't love equities up here on an EPS earnings multiple perspective. I think the market has been a function of positioning and sentiment as much as anything. And right now, again, I think the market has gotten like at 40, 4150 to 4200 markets at the top end of a range. Coming up, we're watching some after hours action in Qualcomm. Shares lower after reporting results, bringing the details next. Plus, a crude awakening for the energy sector. Oil now below 70 bucks a barrel. But will prices continue to drop? How to trade the moves when Fast Money returns?

19:41Breaking news on J &J's Kenview IPO. Pippa Stevens got the details. Pippa. Hey, Melissa. Well, Kenview has priced its IPO at$22 per share, according to a source familiar with the matter. That is the high end of the range, which was$20 to$23. The maker of household products like Tylenol, Band-Aid and Neutrogena upsized the size of their offering and will raise$3.8 billion in the sale. And this would be, Melissa, the largest U.S. IPO in more than a year. Back to you. Pippa, thank you. Pippa Stevens. Earnings alert here on Qualcomm. Shares extending the day's losses despite reporting a revenue beat for its fiscal Q2.

20:16The chipmaker issuing weaker guidance for the current quarter as it continues to face higher inventories and lower demand. Christina Parts and Nevelis has some of the details from the report. Christina. Well, Qualcomm striking a more dour tone. Although it's trying to diversify away from auto as well as IoT sales, the bulk of its revenue still comes from handsets. And that segment fell 14 percent year over year. So the earnings calls underway right now, the CEO saying the handset inventory drawdown will remain a, quote, significant factor for at least the next couple of quarters. Management also warning they have not seen evidence of a meaningful recovery in China, which is different than what other chip makers have said, which is why also its Q3 EPS outlook fell well below estimates.

20:55They also said on the call that 3G, 4G and 5G smartphone units in 2023 is expected to be down at least high single digit percentage. And then one line that really stood out to me in the report was, quote, we estimate a larger than normal sequential decline in QCT revenues, which is pretty much the sale of the chips, but primarily due to the timing of purchases by a modem-only handset customer. Keep in mind Qualcomm's CEO has previously told CNBC that has no plans to provide Apple with modem chips in 2024. So you can see losing that customer could hurt. Yeah. Christina, thank you. Christina Parts and Nebulas.

21:31We've got a lot of data points from the chip sector so far. A lot this week. So just to be really clear, you know, Apple is a 20 percent customer of Qualcomm. OK, so earlier this week, so last night. So we're just we have a warning on handsets. That's what that is. That's what just came out right here. OK, so we heard AMD on data center last night. That wasn't good. That stock was down 9 percent today. The day before that, we had Arista Networks was down 15 percent. That's not a small company. We don't talk about it that much. OK, five and a half billion dollars in revenue. And they were talking about weak demand from the cloud customers.

21:59Their customers are Meta, Alphabet, Amazon, Microsoft. OK, so you put all that together. You think about the outperformance that Tim has highlighted on numerous occasions of the semiconductor sector off the bottom that the Nasdaq rallied 20 percent. The SMH was up 60 percent. And you say to yourself, there's something going on here. There's a lack of visibility here. And just by the way, you know, Apple is down four bucks and it reports tomorrow night. Yep. Are you worried about Apple? Yeah, I'm worried about Apple, especially the rally it's had going into outperforming the S &P in the last four months.

22:29And, you know, essentially within a handful of percent off of its all of its all time high. So, as you pointed out, Apple is responding to the the Android, but also the China dynamics and saying that we see, you know, by the way, Qualcomm, who's given us a lot of bad news. It's not as if Qualcomm has been telling people that their business is very strong. So it's interesting to me that Apple hasn't ever really responded. It's after hours. Markets are thin. But, no, I'm going to be able to buy Apple lower. And I expect to be able to buy Apple lower. And I don't think it's even$10 lower. I mean, I think it's 20 % lower.

23:06Yeah, 2 % lower in the after hours so far. Coming up, shares of Starbucks seeing its worst day in years. What is behind this move? Plus, a game changer for Eli Lilly. Shares surging after some big data on a new drug. What the news could mean for the pharma stock's future. You're watching Fast Money Live from the Nasdaq Market Site in Times Square. Back right after this.

23:30Welcome back to Fast Money. Stocks selling off late in the session after the Fed signaled that rate cuts may not be coming in the near future. The Dow dropping 270 points. The S &P falling 7 tenths of a percent. And the Nasdaq down nearly half a percent. Major averages down three days in a row now. Some movers from today's session. Starbucks dropping more than 9 % after the company kept full year guidance steady despite a beat in Q1. The stock notching its worst day since March of 2020. Shares of CVS dropping nearly 4 % after its results this morning. The company cutting its forecast due to costs related to recent acquisitions.

24:02And Etsy on the move after our shares higher after a beat on revenues earnings in line with estimates. People are buying the Guyadami sock puppet, which is custom made. Starbucks. We sat here on Monday and I was telling you, I'm happy to see this. The stock did not belong. And at 116-ish, which is where I was selling the last bit of my upside calls and was able to buy that back at zero today, essentially. You know, the stock's trading about 34 times. I don't I didn't hear from these numbers. I didn't hear from management. They kind of reaffirmed 23. They didn't reaffirm numbers out to 24, 25, where they'd been a lot more aggressive.