Bulls are slightly more optimistic that the bank turmoil is contained as no new failures have occurred since Signature Bank back on March 12. While regulators are still working out a plan to fully shore up First Republic Bank, insiders say the firm's situation is stabilizing already thanks to previous moves to boost its liquidity.
Investors hope to learn more about the full extent of the bank fallout and possibly plans to guarantee deposits as Congress holds hearings on the recent bank failures this Tuesday and Wednesday.
Notably, the stress on banks is itself expected to tighten financial conditions and do a lot of heavy lifting for the Fed's inflation fight. Many bulls believe a resulting slowdown in growth could see the US Federal Reserve resorting to rate cuts before the end of the year to prevent the economy from slipping into recession.
Bears, however, expect turmoil in the banking sector will continue to play out as the Fed's higher rates unveil further weaknesses that perhaps have not been anticipated.
Bears are also quick to remind that the Fed has really only two mandates - price stability and full employment. Right now, price stability is viewed as being the bigger risk to the economy with inflation still nearly 3 times the Fed's 2% target rate. By contrast, the US unemployment rate remains at historic lows with the most recent data showing nearly 2 jobs still available for every unemployed worker. And while the Fed may opt to pause rate hikes at its next meeting on May 2-3, that doesn't mean interest rate cuts will soon follow.
The central bank typically only lowers rates in order to manage a financial crisis or to boost the job market when unemployment spikes. It's worth noting that unemployment usually shoots up only after the economy has entered recession. Meaning the job market is not a leading indicator of US economic strength. Recent data continues to send mixed signals as to where the economy is heading and where the Fed is heading. For example, data last week showed a plunge in February Durable Goods Orders but preliminary PMI data for March showed an acceleration in both Manufacturing and Services activity.
Fed funds are currently 4.75% to 5.00%. The trade is now thinking there's only about a 17% chance that the Fed will hike rates by another 25 basis points at its next upcoming FOMC meeting in May. The trade is giving 83% odds on the Fed leaving rates "unchanged" in May and ending the string of nine-consecutive rate hikes, which has pushed the Fed benchmark rate to its highest level since 2007.
The trade also most recently placed over +60% odds that the Fed leaves rates "unchanged" again in June, but if they do make a move it's more likely to be a cut in rates rather than another hike. In fact, many sources on Wall Street are now thinking Fed Fund rates could be a half to a full basis point lower by year-end as the Fed may be forced to cut if the regional banking crisis starts to more aggressively spill over.
This week, the data highlight will be the PCE Prices Index on Friday with most economists expecting the monthly pace of inflation to accelerate +0.4% from a month earlier. More importantly, the so-called "core" rate that strips out food and energy is seen holding steady at a year-over-year rate of +4.7%, which would indicate that inflation remains stubbornly entrenched. Investors today will be digesting the Dallas Fed Manufacturing Survey.
There are no earnings of note today.
Bank of America Warning Investors: According to Bank of America analysts led by Michael Hartnett, another bubble has emerged, courtesy of the bank-sector crisis. Harnett and the team say money-market funds are the new hot asset, pointing out that assets under management for money funds have now exceeded $5.1 trillion, up over +$300 billion over the past four weeks. They also counted the biggest weekly flows to cash since March 2020, the biggest six-week inflow to Treasurys ever. The last two times money-market fund assets surged, in 2008 and in 2020, the Federal Reserve slashed interest rates. Hartnett is fond of the saying, markets stop panicking when central banks start panicking, and he noted a surge in emergency Fed discount window borrowing has historically occurred around a big stock-market low. There is one difference this time, in that inflation is a reality and that labor markets, not just in the U.S. but in other industrialized nations, remain exceptionally strong. History, according to the BofA team, says to sell the last interest rate hike. “Credit and stock markets are too greedy for rate cuts, not fearful enough of recession,” they say. After all, when banks borrow from the Fed in an emergency, they tighten lending standards, which in turn results in less lending, and that leads to less small-business optimism, which eventually cracks the labor market. Investors should sell equities after the last rate hike over the negative impact of higher unemployment, Hartnett said. “It’s now a longer-than-normal bear market” but policy intervention meant stocks have not priced in a large slump and biggest bull market recoveries “occur only after the biggest declines. Source MarketWatch
Home Listings Lacking for Spring Buying Season: Existing-home prices have fallen slightly from year-ago levels, but new listings remain scarce. There were 980,000 units available for sale at the end of February, up from February 2022’s scarce supply of 850,000, but significantly below the February historic average of roughly 2.15 million. Early data from Redfin shows that homeowners’ reluctance to sell may have continued into March: the number of new listings during the four-week period ended March 19 was -22% lower than one year prior. In the meantime, new homes could absorb some of that demand. About one in four for-sale homes right now is new. That share is normally closer to one-in-ten. Source Barrons
Retail Real Estate Might Be in Big Trouble: Like other commercial real estate, malls are built on debt. Owners typically provide some equity and depend on bank loans and commercial mortgage backed securities (CMBS) lenders for the rest. Recently, much of the concern swirling around commercial property has focused on the office space. But Fitch Ratings estimated that the highest rates of CMBS loan delinquencies will be in retail; climbing to as much as 11.3% by the end of this year from 5.7% in October. The bulk of maturing class B and C mall loans will likely default as access to capital gets harder, it said — and that was before banking troubles sent a shudder through markets. Regional and local lenders represented about 46% of financing for retail real estate in 2022, according to a report from MSCI Real Assets. Source Bloomberg
Bank Panic Could Trigger a Special Type of Downturn: Two weeks ago, the economy was flying high, with growth in the first quarter tracking above 3%. But the banking chaos, starting with the failure of Silicon Valley Bank and running through the coordinated aid for First Republic Bank yesterday, has the potential to mark a trend break in the economy, maybe even to bring it down into a hard landing. A special type of downturn usually follows a financial crisis. Economists call it a “balance sheet recession.”In a balance sheet recession, sectors of the economy are stuck with bad assets from a collapsed bubble. Their primary means of avoiding bankruptcy is to sell, pay down, or otherwise dispose of those assets. The focus on reducing asset holdings makes net new borrowing grind to a halt, and low interest rates have limited effectiveness in stimulating growth. Recoveries from balance sheet recessions, hampered by debt paydown, are slow, weak, disappointing, and painful. The U.S. was stuck in this type of deleveraging well into the 2010s, Europe was until recently, and Japan has arguably been in it since 1990. Source Barrons
Global IPO Market Revival Undermined by Banking, Recession Risks: Banking turmoil and recession risks have kept the global IPO market mired in a slump. Companies have raised just $19.7 billion via initial public offerings in 2023, according to data compiled by Bloomberg. That’s down 70% year-on-year and the lowest comparable amount since 2019. The steepest fall was seen in the US, where only $3.2 billion has been raised. The subdued activity follows on from last year, when high inflation and aggressive rate hikes by central banks sapped investors’ risk appetite. A strong equity rally at the start of 2023, driven by optimism about China’s emergence from its Covid Zero policy and smaller rate hikes, has largely fizzled out and dashed hopes for a reopening of the IPO market. The one bright spot in equity capital markets activity has been in share sales in listed companies. Secondary offerings have fetched $76 billion this year, a 48% increase from a year ago, the data show. That includes a block trade in Japan Post Bank that could raise as much as 1.3 trillion yen ($9.9 billion), the biggest such sale in nearly two years Source Bloomberg
Can Positive Thinking Prolong Your Life? Scientists have known for quite a while that people with strong ties to friends and family tend to live long. A team from Brigham Young University looked at results from 148 studies dating back to 1900 that investigated whether solid relationships are a lifesaver. All told, the studies included 308,849 participants and followed subjects for an average 7.5 years. At the end of that time, people with strong social connections were 50 percent more likely to be alive than those who were isolated and lonely. According to the analysis, a satisfying social life was as beneficial for long-term survival as quitting smoking (something my mother did after a four-decade habit) and may be even more crucial than exercise and overcoming obesity. Social connections may influence health through what the researchers call “stress buffering.” Support from others helps us adapt emotionally to illness, the death of a loved one, or other challenges that often pile up as we get older. Better coping, in turn, eases the flow of stress-induced hormones that weaken our immune system and increase susceptibility to deadly infections, heart disease, and stroke. Strong relationships also encourage us to take better care of ourselves, and can provide a sense of purpose—another factor associated with longer life. Source National Geographic
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