Mon, May 29, 2023 @ 06:44 GMT
HomeContributorsFundamental AnalysisFed to Hike Rates as US Bank Turmoil Persists

Fed to Hike Rates as US Bank Turmoil Persists

Banking relief after JP Morgan swallowed the First Republic Bank on Monday remained short-lived, as some regional bank stocks, like Valley National Bankcorp lost another 3%, Western Alliance Corporation another 15%, and PacWest Bancorp another 28%, even though it had said last week that the deposit outflows had slowed in March.

As such, SPDR’s US regional bank ETF was down by more than 6%.

It means that, no, the US regional banking crisis is hard to wane, high interest rates are truly being felt and the latter will likely have a sizeable impact on credit lending, hence on economic activity.

That’s why US politicians now urge Federal Reserve (Fed) Chair Jerome Powell to stop hiking the interest rates. Elizabeth Warren and Bernie Sanders have reportedly written a letter to warn the Fed that the bank turmoil and the cumulative rate hikes leave the US economy ‘more vulnerable to an overreaction from the Fed’.

So maybe – but just maybe, the Fed will take that into account when it is expected to announce an additional, and perhaps the final 25bp hike at today’s decision time.

The Fed has been warned that keeping the rates steady as inflation rose was a bad idea. It is now warned that keeping its feet on gas as economy gives signs of suffering is a bad idea.

On the data front, the job openings data released yesterday in the US showed that the job vacancies in the US fell for the 3rd month, to 9.6mio. Job quits fell to levels before pandemic, and number of layoffs increased to 1.8mio in March. Due today, the ADP data is expected to show that the US economy added around 150’000 new private jobs in March, in line with what was printed a month earlier.

Treasuries, Gold gain

Bank stress and soft economic data fueled safe haven demand, and the expectation that the Fed would not carry on with rate hikes from next meeting – or at least, it won’t say it would!

The US 2-year yield slipped below 4%, gold rallied to $2020 per ounce, as the S&P500 fell more than 1%. Even big bank – which amass the deposit inflows that leave the regional banks, failed to convince yesterday – except for HSBC which announced the same day that its profit tripled following the Silicon Valley Bank (SVB) collapse, and a $2bn share buyback.

PS: And you know who else is rubbing its hands with this banking stress… it’s Apple! It launched a high yielding savings account for Apple Card holders last month, in association with Goldman – an account that pays an annual yield of 4.15%. That’s much better than the banks paying less than half a percent, and even better than your 10-year treasuries that are yielding at around 3.5% these days – and it’s risk-free. So you bet, Apple amassed nearly $1bn deposits in just four days, especially as money flew out of the US regional banks to find safer harbours.

ECB will likely go 25bp, as well

In Europe, there is no bank stress comparable to the US, but the latest survey of bank lending published yesterday showed that credit conditions tightened substantially, and more than expected, in Q1. Net demand declined by the most since the global financial crisis, as potential clients have insufficient solvency, or loans got simply too expensive for them.

Good news is the core inflation in the Eurozone slowed in March, from 5.7% to 5.6%, although we saw a small uptick in headline inflation to 7%.

Consequently, tightening credit conditions and softer core inflation hint that the European Central Bank (ECB) will likely hike by a 25bp at this week’s meeting, rather than a 50bp hike.

But the Europeans won’t stop hiking rates this month, they will likely hike by another 25bp, or maybe two more into this summer to fight inflation.

Therefore, the EURUSD rebounds back above the 1.10 mark, as both Fed and ECB expectations softened yesterday, but the Fed expectations softened more due to the banking stress, and I remain convinced that price pullbacks in EURUSD are interesting opportunities to strengthen long positions for those targeting an advance to 1.15 in the medium run.

Elsewhere, US crude fell 5.50% yesterday as the revived bank stress in the US raised odds for slower growth, hence lower oil demand. The barrel of US crude fell to $71pb. And even an almost 4mio barrel fall in US inventories last week couldn’t cheer up investors.

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