Some insiders have even declared the "liquidity crisis" to be over. Amid all the chaos, many on Wall Street were surprised yesterday by the European Central Bank's (ECB) decision to lift rates by 50 basis-points.
There was a lot of speculation that the bank might opt for a less-aggressive move.
Keep in mind, the EU's inflation problem is even worse than the US, running at a rate of +8.5% versus +6% here at home. What's more, the latest move only pushes the ECB's benchmark rate to 3% after starting out in negative territory when the central bank began its tightening campaign last year. The US Fed's target range is currently 4.50%-4.75%. Analyst expectations for the Fed's policy meeting next Tuesday-Wednesday range from no raise at all to a 25 basis-point hike.
There are some who think a rate cut is possible but they are a very small minority. There is an argument to be made that the Fed is already back in the "easing" game due to the moves it is making to shore up banks that might be facing liquidity shortfalls.
Banks this week have borrowed at least $12 billion so far from the "Bank Term Funding Program," a tool the Fed rolled out on Sunday to help prevent a liquidity crisis. Even more banks have turned to the Fed’s discount window, with borrowing rising by almost $153 billion this week, a record high.
Meanwhile, bridge loan totals to banks are over $140 billion thus far this week. In total, the lending programs have increased the Fed's balance sheet by over +$300 billion. In other words, at least half the approximately $600 billion worth of bonds the Fed has offloaded from its balance sheet via the "quantitative tightening" (aka "QT") program it began in March 2022.
The reduction of the Fed's balance sheet is one of the strategies the central bank has been utilizing - in conjunction with interest rate hikes - to combat inflation.
Whether the Fed opts to pause rate hikes and/or "QT" as the liquidity crisis plays out or continue along its current path could be determined by new developments in the days ahead.
If more banks run into trouble or financial contagion looks like it is spreading, Wall Street will increasingly expect the Fed to play a more active roll in containing the fallout, including changes to its rate hike plans. On the other hand, if the upheaval appears to be settled and no immediate dangers are visible on the horizon, most anticipate a 25 basis-point hike will be in play.
According to the CME's Fed Watch Tool, traders place the odds of a 50 basis-point hike at a big fat zero, down from nearly 70% just last week.
The bigger debate is whether the Fed will signal a pause in its tightening campaign starting with the next meeting on May 2-3.
Today, investors will be digesting Industrial Production and Consumer Sentiment.
Looking to next week, obviously the major highlight is the Fed's March 21-22 policy meeting. The housing market, a particularly stubborn area of US inflation, will be in the spotlight as well with Existing Home Sales on Tuesday and New Home Sales on Thursday.
Traders will also be anxious to see preliminary manufacturing and services sector indexes from IHS Markit on Friday. In the earnings spotlight, NIKE and GameStop report on Tuesday, followed by Accenture, Darden Restaurants, and General Mills on Thursday
Wall Street Banks Inject $30 Billion to Rescue First Republic: A group of financial institutions has agreed to deposit $30 billion in First Republic in what’s meant to be a sign of confidence in the banking system, the banks announced Thursday afternoon. Bank of America, Wells Fargo, JPMorgan Chase, Goldman Sacks, and Morgan Stanley are among the banks contributing. The deposits are obligated to stay at the bank for at least 120 days, according to an announcement from First Republic. In the great financial crisis, several struggling banks were bought for cheap by the larger firms in an effort to help calm the banking system. However, the unrealized losses on First Republic’s bond portfolio due to last year’s rapid rise in interest rates have made an acquisition unappealing, the sources said. The markdown, which would involve the bank’s held-to-maturity bond portfolio, would amount to about a -$25 billion hole on First Republic’s balance sheet, sources told Faber. First Republic typically caters to high-end clients and firms, and its business includes wealth management and residential real estate loans. The company reported more than $212 billion assets at the end of December and generated more than $1.6 billion in net income last year. Source CNBC
Interesting Read on The Banks - Both Fitch Ratings and S&P Global Ratings downgraded First Republic Bank’s credit rating on Wednesday over concerns that depositors could pull their cash. Many regional banks, including First Republic, have large amounts of uninsured deposits above the $250,000 FDIC limit. Although not close to SVB’s massive percentage of uninsured deposits (94% of its total), First Republic has a sizable 68% of total deposits that are uninsured, according to S&P Global. That led many customers to exit the bank and put their money elsewhere, creating a problem for First Republic: It has to borrow money or sell assets to pay customers their deposits in cash. To make money, banks use a portion of customers’ deposits to give out loans to other customers. But First Republic has an unusually large 111% liability-to-deposit ratio, S&P Global says. That means the bank has lent out more money than it has in deposits from customers, making it a particularly risky bet for investors. If you are wanting to learn more about the details involving SVB, I encourage you to read an article titled, "The economist who won the Nobel for his work on bank runs breaks down SVB’s collapse—and his fears over what’s next." Source Yahoo Finance Read More Here
YouTubeTV and Other Streaming Services Raising Prices: The cost of content continues to rise for streaming platforms. YouTube TV is raising its prices from $64.99 to $72.99 per month, with the company saying its content costs have risen as it continues investing in the quality of its service. Competitors Sling TV, FuboTV, DirecTV Stream, Hulu, Disney+, and others have all raised prices within the last six months Source Techcrunch
Ryan Reynolds Sells Mint Mobile for $1.35 Billion to T-Mobile: Ryan Reynolds used his celebrity and wit to build Mint Mobile into a low-cost competitor in the crowded wireless business. Now, the Hollywood star and his backers are cashing in: selling the upstart brand to T-Mobile US Inc. in a cash and stock deal valued at up to $1.35 billion. Mr. Reynolds owns roughly 25% of Mint Mobile, according to people familiar with the matter. That means he stands to personally receive more than +$300 million in cash and stock from the transaction. Mr. Reynolds was the personality in the company’s ads, both on television and social media. The ads, such as a recent one where he read ad copy written for him by Chat GPT, also showcased his own advertising agency. Source WSJ
Retailers Are Rolling Out Their Recession Playbooks: The U.S. economy may not be in a recession, but it feels like it in a lot of stores across the nation. Now, major retailers are dusting off their playbook for a recession or at least for a period of slower sales. Companies previewed their strategies for the tougher backdrop in recent weeks, as they reported holiday-quarter earnings and shared full-year outlooks. Target is bulking up on food and household essentials to drive foot traffic. Macy’s and Walmart are trying to win more sales from their most loyal customers. Best Buy and others are chasing new and exclusive products that may nudge customers to open up their wallets and even pay full price. As the travel and restaurant sectors bounce back, it looks like the “rolling recession” is coming for the retail sector, even if the economy remains strong. Many retailers are calling for flat to declining sales this fiscal year, especially once the lift from inflation is taken out. It’s a sharp turnabout from the early years of the pandemic, which was a boom time for retail spendin. Source CNBC
Microsoft's New "Copilot" Uses AI to Automate Everyday Tasks: Microsoft is using artificial intelligence to help eliminate drudgery at the workplace. At its "Future of Work" event, the company has revealed an AI-powered Microsoft 365 Copilot that, as suggested by leaks, can create content in Office apps using text requests. You can ask PowerPoint to create a presentation based on a Word document, for example, and even get it to apply animations or styles across all your slides. Other apps have similar functionality. Word can create a proposal based on spreadsheet data, or change a report's entire tone. Excel can break down data or predict the effect of a variable change. Outlook can summarize your emails or draft responses, while Teams can recap meetings or even weigh the pros and cons of a discussion topic. The new technology is running on the same OpenAI GPT-4 model that powers the upgraded Bing search rolling out to everyone. The technology is more factual, higher performance and less likely to venture out of accepted boundaries than the GPT-3.5 predecessor that currently powers ChatGPT. Microsoft is already testing 365 Copilot with 20 business customers. It plans to expand access in the "coming months," and will share details of IT administrator controls to help deploy the technology. Pricing and other details will be available in the months ahead, the company says. Source TechCrunch
Railroads Average Three Derailments Per Day in US: Since a fiery Ohio derailment on Feb. 3, trains have derailed in Florida, West Virginia, Michigan, Oklahoma, Alabama, and Nebraska. On Wednesday evening, a BNSF freight train carrying corn syrup derailed in western Arizona. On Thursday, another BNSF train derailed in Washington state, spilling diesel fuel on tribal land along Puget Sound. Data shows these derailments are not unusual. Every day, the nation's railroads move millions of tons of raw materials and finished goods around the country on about 140,000 miles of rails, but their safety record is getting new attention amid the ongoing scrutiny of the East Palestine derailment disaster. Federal data from 2021 and 2022 says an average of about three trains derail in the U.S. a day. The majority of those derailments happen in freight yards. Because the cars on yards are frequently being switched between tracks, there's a greater chance of derailing, experts told USA TODAY. Although the numbers aren't as bad as they used to be, there's now a growing push for tougher safety regulations, including a new bipartisan proposal in Congress aimed at improving rail safety. Railroad workers say large freight railroads have been skimping on maintenance, repairs and staffing in order to squeeze out higher profits. Meanwhile, on Thursday, a railroad industry group warned members about safety concerns with 675 rail cars, similar to the kind that derailed in Ohio earlier in March. The Association of American Railroads asked members to remove those cars from service pending further investigation. Source USA Today
Texas's Latest Boom is Its Biggest Yet: This April will mark 45 years since “Dallas”, a hit soap opera, first aired. The show, with its greedy oilmen, sun-soaked cattle ranches and lilting drawls, introduced the Lone Star State to the world. But it’s not just the big hair and grainy resolution that make “Dallas” seem dated today. It is also the Dallas skyline. Since these shots were filmed, the skyline has soared and the city has sprawled. There is no open country for miles around. Instead, Dallas and nearby Fort Worth have merged into a “metroplex” of about 7.8m people. From 2010 to 2021 the population of the area grew by +22%—triple the national rate and the fastest pace among America’s biggest cities. Its economy grew by +46% over the same period. Dallas-Fort Worth is expected to overtake greater Chicago as the country’s third-largest metropolis in the mid-2030s. And it is not just the area around Dallas that is booming. The population of Texas as a whole grew by +18% from 2010 to 2021. The state’s economy grew by +39%, one and a half times faster than the national one. Employment has been growing even more quickly. From February 2020, just before covid-19 took hold, until the end of last year, Texas gained some +760,000 jobs, an astonishing +35% of the total net increase in employment across the whole of America. Texas now has more than 30m people. Its gdp is $2trn—bigger than Canada’s. It would be the world’s ninth-biggest economy if it were independent. Source The Economist
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