Stock investors are debating the Federal Reserve's next moves in the wake of two bank collapses over the weekend.

Many view the sudden collapse of Silicon Valley Bank and Signature Bank mostly as casualties of the Fed's rate hiking campaign. While the government has set up a backstop to cover potential bank customer losses, bulls believe the Fed may be reconsidering how much tighter they can turn the screws.

Many on Wall Street have been warning that the Fed's aggressive tightening campaign was inevitably going to "break something" but whether this is just the first crack to form or an isolated trouble area remains heavily debated.

Today's Consumer Price Index (CPI) could certainly further influence Wall Street's expectations for future Fed policy. Economists expect the gauge to show inflation slowed in February to a year-over-year rate of +6% versus +6.4% previously. The so-called "core" rate, which strips out food and energy, is expected to slow to +5.5% from 5.6% in January.

If CPI shows inflation accelerated last month or otherwise comes in hotter than expected, it will obviously raise concerns that the Fed will need to keep pushing rates higher and run the risk of more collateral damage.

The only other economic data today is the Small Business Optimism Index. On the earnings front, SoftBank will likely draw a lot of attention considering they are the single biggest backer in the tech startup space. According to Bloomberg, the Japanese firm serviced more than 40% of venture-backed technology and health-care companies that went public last year. There is a lot of debate as to whether the venture group will need to bail out some of those companies and what assets it may need to liquidate in order to do so.

Bottom line, there has been a major shift in how Wall Street is thinking about the Fed's next several moves. Last week the trade was thinking the Fed would hike rates by 50-basis points at its upcoming FOMC meeting (next Tuesday-Wednesday) and keep rates higher for longer as it battles inflation. Many traders and investors say that theory is now out the window as the Fed will be very apprehensive as they try not to further destabilize the banking sector.

At the same time, many inside the banking world worry that many regional banks will start to really tighten up on making loans and extending credit when they are somewhat uncertain about the stability of their deposits.

If the banks tighten up, which many believe they will, that could really work to slow the US economy, which could ultimately make the Fed much more dovish in nature.

In fact, the trade is now a coin-toss on if the Fed will only hike by 25-basis points or not hike at all in its upcoming FOMC meeting. The trade now has the May FOMC meeting odds favoring "no hike" at all. here's the real curve-ball, the market odds for the June FOMC meeting have now fallen back to favor "no hike" but with 17% odds that the Fed might now start cutting rates by June.

Last week, the market was giving 100% odds that the Fed would be over +5.00% before the second half of this year, now the odds have shifted and there's talk the Fed might have to take on a much more dovish attitude, especially if the US economy looks like it is going to fall into a deeper recession.

More Money Flowing Out of Stocks: Retail assets in money-market funds are hovering near records, Investment Company Institute and Federal Reserve data show. money-market funds, high-yield savings accounts, certificates of deposit and Treasury bills are all boasting interest rates around 3% to 5%. In comparison, the dividend yield on the S&P 500 is about 1.7%. Investors have fled stock funds en masse. They have pulled more than $100 billion from U.S. equity mutual funds and exchange-traded funds since the beginning of last year, according to Refinitiv Lipper. The funds have suffered outflows for nine consecutive weeks, the longest such stretch since the summer of 2016. Source WSJ

US Federal Home Loan Banks Stock Up on Cash Amid "Heightened Demand": US Federal Home Loan Banks beefed up their lending warchests on Monday to provide more liquidity to banks amid continued higher-than-usual demand for funds as the fallout from the collapses of Silicon Valley Bank and Signature Bank reverberates through medium- and smaller-size financial institutions. The FHL Bank system raised $88.73 billion by selling short-term notes with maturities from three months to one year on Monday afternoon, according to Informa Global Markets, a provider of syndicated bond data. The offering was raised from an initial $64 billion due to high demand. The 11 FHL Banks, regional government-chartered institutions that raise money for low-cost lending to their members, are a vital source of funding to regional banks, often a preferred final stop for cash before banks in need turn to the Federal Reserve itself as a last resort. Their largely behind-the-scenes role has surfaced more prominently since back-to-back bank collapses raised concerns about wider financial stability. The FHL banks are seen as a preferred mechanism because they can be tapped for short-term funding by commercial banks without the taint associated with using the Federal Reserve's own safety net backstop known as the discount window. It was unclear if the new backstop rolled out by the Fed on Sunday - the Bank Term Funding Program - would draw business away from the FHL banks, but so far that does not appear to be the case. Source Reuters

Housing Market Could Find Relief From Shock Move in Treasury Market: The average 30-year mortgage rate dropped to 6.57% on Monday, according to the latest Mortgage News Daily quote. That’s down from 6.76% on Friday when SVB failed and 7% on Thursday when the bank’s stock got hammered. The rate tracks the 10-year Treasury yield, which has fallen around 30 basis points since Wednesday's close as investors bet the unfolding chaos could persuade the Federal Reserve to slow its interest-rate hiking campaign. The unexpected drop in rates could offer an opening for price-strained homebuyers and homeowners who have been waiting for an opportunity to lock in a lower rate, but housing experts remain uncertain how long the dip will last. A nearly half-point drop in rates could give a buyer at least 5% of their purchasing power back. But the latest decline still might not be enough to convince some homebuyers to come back into the market given lingering affordability concerns. Two weeks ago when rates were at 6.65% — a bit higher than now — a buyer of a median-priced home still faced a monthly mortgage payment that was +49% higher than a year ago, data showed. But further drops could spark activity. When rates started to fall at the start of the year, almost dipping below 6% at the beginning of February, mortgage applications for purchases and refinances both perked up. Source YahooFinance

Gen Z Spending Gets Supercharged by Inflation and Wage Growth: Most people enter adulthood feeling broke and spending frugally. Not Gen Z. Spending by the youngest group of US adults has been turbocharged by two once-in-a-generation drivers over the past year: decades-high inflation and a tight job market that has propelled strong wage growth, especially at entry levels. A boost in savings from forced inactivity at the height of the pandemic also helped. Whether it’s out of necessity in the face of soaring prices or because they can afford to splurge on travel and leisure, young adults today tend to be bigger spenders, credit-card data and surveys show. Gen Z includes those born in 1997 through 2012. While the youngest are still living with their parents, many are now old enough to think about big purchases like a car. Understanding their motivations can help define the direction the economy is headed. Members of Gen Z are more likely than other generations to combine financial ambition with the desire to live comfortably, according to a survey of adults by Bank of America Corp. Nearly half said that being able to afford material items was a motivator to achieving financial success. A separate survey conducted in December by financial-software company Intuit found that almost three in four Gen Zers would rather have a better quality of life than extra money in the bank. Source Bloomberg

China Could Control a Third of The World’s Lithium by 2025: China’s efforts to ramp up lithium extraction could see it accounting for nearly a third of the world’s supply by the middle of the decade, according to UBS AG. The bank expects Chinese-controlled mines, including projects in Africa, to raise output to 705,000 tons by 2025, from 194,000 tons in 2022. That would lift China’s share of the mineral critical to electric-vehicle batteries to 32% of global supply, from 24% last year. The race to secure lithium is playing out at the highest levels, with nations including the US prioritizing access to the materials necessary for making batteries as the world turns away from fossil fuels. China’s needs are particularly acute because it’s home to the world’s biggest market for new energy vehicles. Source Bloomberg

FDIC Planning Another Silicon Valley Bank Auction: Regulators are planning to take another crack at auctioning failed Silicon Valley Bank, according to people familiar with the matter, after they were unable to find a buyer for the firm over the weekend. Officials from the Federal Deposit Insurance Corp. told Senate Republicans on Monday that they had additional flexibility to sell the firm now that regulators had declared its failure a threat to the financial system. By declaring the firm systemic, regulators have more flexibility to cover all depositors at the failed bank, including those with deposits above a typical $250,000 insurance cap. The move also gives regulators the ability to offer would-be buyers deal sweeteners such as loss-sharing agreements, according to former regulators. The timetable for the second auction was unclear Source WSJ

Did the Government Bail Out Silicon Valley Bank: The collapse of Silicon Valley Bank prompted the US government to roll out the biggest rescue package since the 2008 financial crisis. But don't call it a bail out. SVB was closed by regulators, and is now under the control of the FDIC. When a bank fails, this is the government agency that ensures depositors get access to their money. Shareholders will get wiped out, and management has been removed. The FDIC insures bank deposits up to $250,000 per account. Any missing money is paid by the FDIC. But this cash doesn't come from taxpayers. Instead, the agency raises money from assessments on all US banks. This is how the SVB backstop is being funded. If the FDIC runs out of money, it can tap the US Treasury Department, which would mean taxpayer involvement. But even in the 2008 and 2009 financial crisis, when hundreds of banks failed, the FDIC avoided doing that. So there's been no taxpayer funded bailout of SVB. Other banks are essentially paying to clean up the mess, through those FDIC assessments. However, there is a new Federal Reserve lending program that provides liquidity for banks under stress right now. Source Insider

United Warns of Surprise Loss on Labor Costs: United Airlines Holdings Inc. warned it will post a surprise loss this quarter as it grapples with high labor costs. The adjusted loss for the first three months will be 60 cents to $1 a share, the Chicago-based airline said in a filing with the Securities and Exchange Commission Monday. Analysts had expected profit of 69 cents a share, according to the average of estimates compiled by Bloomberg. The latest projection marks a sharp turn from January, when United forecast profit in the first quarter of as much as $1 a share. The company now anticipates expenses from a potential new collective bargaining agreement with its pilots union to accrue this quarter rather than next quarter. The company is the latest US airline to acknowledge the hefty costs of new labor agreements, as rivals including American Airlines Group Inc. talk with their respective unions. Delta Air Lines Inc., whose pilots approved a new contract this month, surprised investors in January with a worse-than-expected first-quarter profit forecast due to higher labor expenses. Source Bloomberg

Urban Areas Are Adding People and Gobbling Up Land in Most States: The percentage of residents living in areas the U.S. Census Bureau calls “urban” grew in 36 states between 2010 and 2020, led by booming cities and suburbs in the South, Southwest, Midwest and California, according to a new Stateline analysis. Among urban areas with populations of at least half a million, the Texas capital city of Austin grew the fastest as more people arrived, and development intensified and spread. The Austin area’s population grew by 33%. The area also added almost 100 square miles of formerly rural land that the census now classifies as urban because of new development and population growth. As a result, Austin’s total urban area increased by 18%. Other urban areas also experienced rapid population growth: The urban population grew by 25% in Raleigh, North Carolina, and Charleston, South Carolina; 23% in Orlando, Florida; 22% in Provo-Orem, Utah; 21% in Des Moines, Iowa; 19% in Nashville-Davidson, Tennessee; 18% in Houston and in Riverside-San Bernardino, California; and 17% in Jacksonville, Florida. Growth in the Des Moines suburbs gave that urban area the sixth-fastest population growth and the third-fastest growth in land area nationally, behind only Austin and Charleston. Source Pew Research Center


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