The Federal Reserve may have a hard time hiking its key interest rate on Wednesday after the weekend passed with rescue attempts for several U.S. regional and community banks still faltering. Yet the S&P 500 and Treasury yields climbed Monday after a weekend merger took Credit Suisse (CS) off the critical list and amid some signs of stabilization among U.S. banks.
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Warren Buffett To The Rescue?
Still, the U.S. banking crisis remains in flux after last week’s rescue of San Francisco-based First Republic Bank (FRC) with $30 billion in deposits from 11 of the nation’s biggest banks. Still looking to shore up confidence, the government reportedly turned to next logical source of funds: Warren Buffett. In the wake of the Lehman Brothers implosion in 2008, Buffett had bolstered confidence in Goldman Sachs with a $5 billion investment.
But the lack of any news of a Buffett investment in regional banks as of Monday morning risked adding to doubts about what bank stocks are worth. In a Friday note, Wedbush analyst David Chiaverini cut his price target for FRC stock to 5 from 140. With a potential “distressed M&A sale” on the table, Chiaverini said holders of FRC common stock may be left with nothing or next to nothing.
Unlimited Deposit Insurance?
The Mid-Size Bank Coalition Of America has reportedly asked regulators to temporarily remove the $250,000 ceiling on FDIC-insured deposits to stem an outflow of deposits to banks deemed too big to fail. Former FDIC Chair Sheila Bair also backed such a move in a Reuters interview on Thursday.
A supermajority of both the Federal Reserve and FDIC can opt to insure all deposits of an individual bank. With the consent of Treasury Secretary Janet Yellen, they took that step in the case of SVB Financial Group and Signature Bank, citing a systemic-risk exception. However, a blanket deposit guarantee would require the FDIC and Treasury to seek authorization from Congress, as required by the 2010 Dodd-Frank financial reform act.
Therein lies a potential problem. If Congress mulls such a sweeping move but rejects it, that might shake confidence even further. Still, if the crisis was spiraling and Congress wouldn’t act, it’s conceivable that regulators could pledge in advance to support a systemic-risk exception in the event of any bank failures over the next year or two.
Banking Crisis: Hopeful Signs Amid Fragility
Investors were still processing the $2-billion UBS deal for Credit Suisse, a marriage arranged by Swiss bank regulators. The deal initially set off alarm bells because regulators allowed for the wiping out of $17 billion worth of bonds that were convertible into stock.
Also over the weekend, S&P Global cut its rating on First Republic debt to ‘B+,’ a lower-tier junk rating. S&P said the $30 billion in deposits “may not solve the substantial business, liquidity, funding and profitability challenges.” JPMorgan also is reportedly advising Free Republic on strategic options, including a capital raise.
FRC stock plunged 47% to a record low.
Not all the news coming from the U.S. banking sector was bad, though. Late Friday, PacWest Bancorp (PACW) and Western Alliance Bancorp (WAL) both announced that “net outflows have fallen sharply” after an initial surge amid SVB’s failure. PACW stock jumped 10.8% on Monday. But WAL stock slumped 6.7%.
Meanwhile, New York Community Bancorp (NYCB) shares leapt almost 32% after analysts hailed its weekend deal to acquire much of Signature Bank’s deposits and loan portfolio.
Still, the banking sector faces a long slog. On Tuesday, Moody’s downgraded its outlook for the whole U.S. banking sector. The ratings firm said it expects banks to raise their deposit interest rates to avoid outflows, a negative for profitability.
Meanwhile, loan delinquencies will likely rise as the economy weakens, whether due to higher interest rates or tighter lending conditions. Banks also face potential losses on commercial real estate loans with office buildings already grappling with high vacancy rates because more work is being done from home.
Federal Reserve Rate Hike Odds
As of Monday morning, markets were pricing in 77.5% odds of a quarter-point rate hike at the conclusion of Wednesday’s Federal Reserve meeting. That would lift the Fed’s key interest rate to a range of 4.75% to 5%. Odds of a Fed rate-hike pause slipped to 22.5% from 38% on Friday.
Still, Goldman Sachs economists are sticking by their prediction that the Fed will pause rate hikes “because of stress in the banking system.”
Whatever happens this week, markets see rate cuts starting this summer and solid odds of a sub-4% federal funds rate by the end of 2023.
S&P 500 Rises Ahead Of Fed Meeting
The S&P 500 rose 0.9% in Monday’s market action, before trimming gains. That put the index above its 200-day moving average and falling back below that level on Friday.
The 10-year Treasury yield climbed 8 basis points to 3.48% after ending last week near a six-month low.
Investors are weighing both the outcome of the Fed meeting and whether the banking crisis could turn out to be good news for stocks.
“Arguably, it would be better for the broader stock market if growth slowed because banks became more conservative in their lending than if it slowed because the Fed had to raise rates to over 6%,” BCA Research strategists led by Peter Berezin wrote on March 16.
The economy would slow in either case, BCA wrote. But in a banking-led slowdown, “the discount rate applied to earnings would not be as high,” which would be better for stock valuations. Yet, the analysts acknowledge that growth might not just slow but collapse. That could happen if the Fed keeps policy too tight as credit becomes harder to obtain.
Through Friday, the S&P 500 had climbed 9.5% from its bear-market closing low on Oct. 12, but remained 18.3% off its record closing high in January 2022.
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