While I’m glad to not see another bank failure in First Republic, what a weird way to save a bank. Imagine if Janet Yellen called Walmart, Costco, Target and Amazon and encouraged them to buy stuff from another retailer, whose business has been teetering, each month to keep them alive. No one wants to buy First Republic? No one wants to take their marks on their own balance sheet I guess. And what happens when the day comes when the banks want their deposits back? When the retailers stop buying stuff each month?
With respect to the bank uptake of both the Fed’s discount window and the new bond term facility, I want to wait until next week to see how much of this borrowing was ‘just in case’ until things calmed and how much will be ongoing in order to satisfy the flight of deposits, if there are any from here. Either way, for the week it took back 4 months of QT. “You can check out any time you like but you can never leave.”
Fed’s Balance Sheet
Some hawks from the ECB came out today to explain why they wanted to go 50 bps and said rates will still have to rise from here. And a bit less of a hawk, Francois Villeroy of France, said “The priority is fighting inflation, and we have one commitment, which is bringing inflation back toward 2%. We’ve sent a signal of confidence that is strong and double: it’s confidence in our anti-inflation strategy and confidence in the solidity of European and French banks.”
Christine Lagarde tried really hard to say that what happens with the banks (financial stability) doesn’t impact much their stance on inflation (price stability) but I’m sorry, they are fully intertwined and cannot be separated out. That said, she of course acknowledged the changed atmosphere and why there was no pre-commitment from her on what comes next notwithstanding what the hawks want.
You’ve heard me talk about the under supply of used cars that will take place in the coming 3 years because of the well below trend of new car sales over the past 3 years largely due to the Covid disruptions and chip shortages. Well, the number of engagement rings are also on the 3 yr time frame and disrupted by Covid according to Signet Jewelers and what they said in yesterday’s earnings call.
“The jewelry industry’s bridal segment is composed of two distinct parts, weddings and engagements. After a decline during Covid, fiscal ’23 was the year of the wedding, a 40 yr high…Meanwhile, engagements held flat during Covid at pre-pandemic levels, but declined low double digits in fiscal ’23, and will again decline low double digits in fiscal ’24. We expect fiscal ’24 to be the trough of engagements with fiscal ’25 seeing a return to growth and fiscal ’26 returning to normalized levels. So quite a shift. It’s temporary and Covid driven. We have rich proprietary data on couples’ behavior. Engagements typically occur approximately three years after couples begin dating. Covid had a meaningful impact on dating, delaying the formation of new relationships, because of the lack of in person activities for the majority of 2020. So as we begin to lap that three year period since Covid began, we expect engagements and engagement ring sales to start recovering towards the end of fiscal ’24 and continue rebounding in fiscal ’25 and ’26.”
As seen in the TIC data Wednesday night, buyers out of the Cayman Islands continue to drive most of the buying of Treasury securities. Whoever it is, hedge funds, insurance companies, and other pools of capital incognito, they bought $79b of Treasury notes and bonds in January. Considering the net buying was $50.9b, that’s a lot. Japan bought a net $1.4b of notes and bonds while China sold $11b worth.
China cut its reserve requirements for big banks by 25 bps to 10.75%. The timing of the cut was more of a surprise than whether they would eventually cut it again. The offshore yuan weakened on the news that came out after their markets closed.
Lastly in Japan, it looks like the ‘Spring Offensive’ wage discussions between companies and unions is resulting in a 3.8% wage gain, the biggest since 1993 with base pay making up 2.3% of the rise. While this is good for Japanese employees, there was hope for something closer to 5%, but unrealistic and employees at bigger companies will get bigger raises than smaller ones who have less profitability. The bottom line is that this will put more pressure on the new BoJ Governor to get out of NIRP and widen YCC but at least this week with everything going on, bond yields are lower on the week but the yen has rallied.