Chances of a Federal Reserve rate hike grow as banking crisis fears fade; S&P 500 rising

The Federal Reserve may struggle to raise its key interest rate on Wednesday after the weekend is over, while rescue efforts for several US regional and community banks continue to falter. Yet yields on the S&P 500 and Treasury rose early Monday after a weekend merger Swiss credit (CS) from the critical list and amid some signs of stabilization in US banks.


Warren Buffett to the rescue?

Still, the US banking crisis continues to move after last week’s bailout in San Francisco Bank of the First Republic (FRC) with $30 billion in deposits from 11 of the nation’s largest banks. Still looking to bolster confidence, the government reportedly turned to the next logical source of money: Warren Buffett. In the wake of the 2008 Lehman Brothers implosion, Buffett had bolstered confidence in Goldman Sachs with a $5 billion investment.

But the lack of any news of Buffett’s investment in regional banks as of Monday morning threatened to add doubt about the value of bank stocks. In a Friday note, Wedbush analyst David Chiaverini lowered his price target for FRC shares from 140 to 5. With a possible “distressed M&A sale” on the table, Chiaverini said holders of FRC common stock can sit with nothing or next to nothing. .

Unlimited deposit insurance?

The Mid-Size Bank Coalition Of America has reportedly asked regulators to temporarily lift the $250,000 cap on FDIC-insured deposits to stem an outflow of deposits to banks deemed too big to fail . Former FDIC chair Sheila Bair also supported such a move in an interview with Reuters on Thursday.

A vast majority of both the Federal Reserve and the FDIC may choose to insure all of an individual bank’s deposits. With the approval 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 the Treasury Department to obtain authorization from Congress as required by the Dodd-Frank Financial Reform Act of 2010.

Therein lies a potential problem. If Congress considers such a drastic move but rejects it, it could further erode confidence. But if the crisis spirals out of control and Congress does nothing, it’s conceivable that regulators would promise ahead of time to back a systemic risk exception in the event of bank failures in the next two years.

Banking crisis: hopeful signs amid fragility

Investors were still processing the $2 billion UBS deal for Credit Suisse, a marriage arranged by Swiss banking regulators. The deal initially set alarm bells ringing as regulators allowed the wipeout of $17 billion in equity convertible bonds.

Also over the weekend, S&P Global downgraded its First Republic debt rating to “B+,” a lower junk rating. S&P said the $30 billion in deposits “may not solve substantial business, liquidity, funding and profitability challenges.” On Monday, FRC shares fell 16% to 23.

Not all news from the US banking sector has been bad, however. Friday late, PacWest Bancorp (PACW) and Bancorp of the Western Alliance (WAL) both announced that “net outflows have plummeted” after an initial surge amid the SVB’s bankruptcy. PACW shares rose nearly 7% and WAL shares fell more than 5% early Monday.

In the meantime, New York Community Bancorp (NYCB) shares rose 30% after analysts praised the weekend deal to acquire a large portion of Signature Bank’s deposit and loan portfolio.

Still, the banking sector faces a long battle. On Tuesday, Moody’s lowered its outlook for the entire US banking sector. The rating agency said it expects banks to raise their deposit rates to avoid outflows, which is negative for profitability.

Meanwhile, loan delinquencies are likely to increase as the economy weakens, either due to higher interest rates or tighter loan terms. Banks also face potential losses on commercial real estate loans, as office buildings are already experiencing high vacancy rates as more work from home takes place.

Chances of rate hikes by the Federal Reserve

As of Monday morning, markets were counting on a 73% chance of a quarter-point rate hike at the end of the Federal Reserve meeting on Wednesday. That would raise the Fed’s key interest rate to a range of 4.75% to 5%. The probability of a rate hike by the Fed dropped from 38% on Friday to 27%.

Still, Goldman Sachs economists are sticking to their forecast that the Fed will pause rate hikes “because of stress in the banking system.”

Whatever happens this week, markets see interest rate cuts starting this summer and a good chance of a federal funds rate below 4% by the end of 2023.

S&P 500 Rises Ahead of Fed Meeting

The S&P 500 rose 0.8% during Monday morning’s stock market action before curtailing gains. That brought the index back above its 200-day moving average after falling 4.55% last week.

The 10-year Treasury yield climbed 7 basis points to 3.47% after finishing last week near its 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.

“No doubt 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 above 6%,” BCA Research strategists led by Peter Berezin wrote in March. 16.

The economy would slow in either case, BCA wrote. But in a bank-led slowdown, “the discount rate applied to earnings wouldn’t be as high,” which would be better for stock valuations. Still, the analysts acknowledge that growth may not only slow, but collapse. That could happen if the Fed tightens policy too much as it becomes harder to get credit.

Through Friday, the S&P 500 was up 9.5% from the October 12 bear market low, but remained 18.3% off its January 2022 all-time high.

Be sure to read IBD’s The Big Picture every day to stay in sync with the market’s underlying trend and what it means for your trading decisions.


Here are the 5 best stocks to buy and watch right now

Join IBD Live every morning for pre-opening stock tips

IBD Digital: Unlock IBD’s premium stock lists, tools and analytics today

How to make money with stocks in 3 easy steps






Leave a Reply

Your email address will not be published. Required fields are marked *