Another crisis averted as the Federal Reserve AGAIN shows up in their fire truck after setting the house ablaze with years of cheap money followed by one year of a vertical rise in interest rates. Putting aside the moral hazard/bailout debate, thankfully many small and medium sized businesses will live to fight another business day and their employees can get paid. And hopefully we can calm the depositors for now at all other small/medium sized banks. But, the analysis can’t stop there as to what this means for small/medium sized banks and the US economy is even more unclear.
Firstly, have we just implicitly done away with the $250k insured deposit cap? If so, fine if that’s the new government approach to the banking sector. If there is nothing explicit though, and it remains maybe implicit, maybe not, sort of an FDIC grey area, I would think that would result in the further shifting of deposits from small banks to larger ones as why take the chance with a small bank and the insurance cap is still in place. SVB was high profile but what about the hundreds/thousands of banks that have just a few branches? There are more than 4,000 commercial banking institutions in the US by the way according to the FDIC. Are their uninsured depositors forever protected or not? Maybe as a result we’ll start to see a wave of small/medium sized bank mergers.
Secondly, as part of the need of banks to work in this grey area, we could be on the cusp of a notable rise in the interest rates banks pay on savings and checking accounts in order to stem the deposit bleed. It will be great for the holders of such accounts but a big crimp in bank profitability could come from the shrinking of loan margins and has the potential consequence of a credit crunch where loans don’t flow so easily. This at the same time bank lending standards have already been notably tightening. Something to watch.
I’ll finish with this, it’s certainly a new economic and investing world, when after the two bear markets/recessions before covid were the crash of tech stocks and home prices, it’s now the ownership of risk free (in terms of the guarantee of getting principal back upon maturity) assets like Treasuries and agency MBS that does the damage and all because duration bites.
As for the Fed, oops, they did it again (sorry Britney). The fed funds futures are pricing in a 60% chance of even a 25 bps rate hike next week after getting as high as 68% chance for two after Powell last spoke. The 2 yr yield is lower by 81 bps in the last 3 days. It will be really interesting to hear not just what Powell has to say next week but his colleagues that have remained uber hawkish thinking that there was no problem taking the fed funds rate up 500 bps in one year after 15 years of near zero at the same time conducting QT. Either way, the monetary tightening process in order to combat high inflation is now driving on black ice and what happens at the same time if inflation remains sticky and persistent?
I’ll use this as another opportunity, for the umpteenth time, that gold will now really be a beneficiary of what has transpired, especially because the Fed is just about done hiking rates. The price this morning stands at a 5 week high.
Gold
In response to not just the lowered odds of a Fed rate hike, bonds are rallying globally on the same assumption for other central banks, particularly the ECB which meets this week. The Euro STOXX bank stock index is down by 6.6%. The Japanese TOPIX bank stock index was lower by 4%. The US dollar is getting sold off for a 3rd straight day. We still like and own Japanese bank stocks.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.