S&P 500 3-2023

Is the Banking Industry Headed for Another 2008-like Crisis? (Wall Street Cheat Sheet)

Last week’s banking concerns persisted this week, affecting investor sentiment, and rightly so.

A joint statement from the Federal Reserve, Treasury, and FDIC on Sunday assured full protection for depositors at Silicon Valley Bank and Signature Bank of New York, both taken over by regulators.

Additionally, the Fed introduced the Bank Term Funding Program (BTFP) to help banks avoid selling government securities at a loss by allowing them to offer those securities to the Fed at par value as collateral.

It is beginning to sound like 2008 all over again, with big banks and businesses getting bailouts for bad business decisions. Capitalism doesn’t work if the government bails out bad companies.

These measures aimed to restore confidence in the banking industry, but bank stocks’ performance this week indicated a continued lack of trust. The SPDR S&P Bank ETF (KBE) dropped 12.5% last week, while the SPDR S&P Regional Bank ETF (KRE) fell 14.3%.

First Republic Bank (FRC) was at the center of bank stock trading after 11 major banks, including JPMorgan Chase (JPM), pledged to deposit $30 billion of uninsured funds into the bank. Despite an initial surge in FRC shares, they experienced significant losses again on Friday after the bank announced its common share dividend suspension.

These announcements and the news that banks borrowed $11.9 billion from BTFP and $153 billion from the Fed’s discount window caused widespread selling of bank stocks to end the week.

As a result, investors shifted to a risk-off mentality, with many focusing on mega-cap stocks perceived as more resilient to the banking sector’s problems. Alphabet (GOOG), NVIDIA (NVDA), and Microsoft (MSFT) all gained over 12.0% this week.

Last Week’s Economic Reports

CPI is Down But Still High

The US Bureau of Labor Statistics announced that the consumer price index rose by 0.4% in February, slightly decelerating from the 0.5% increase in January. Over the past 12 months, the all-items index has increased by 6.0% before seasonal adjustment, compared to 6.1% in December and 0.2% in November. Core CPI inflation now stands at 5.5%, down marginally from 5.6% in January. Retail and food service sales declined by 0.4% to $697.9 billion in February, with department stores, home furnishings, restaurants, auto dealers, and miscellaneous retailers being the most affected. Gasoline station sales fell by 1.8%.

Housing Starts Down 18.4%!

The US Census Bureau reported a 9.8% increase in housing starts, reaching a seasonally adjusted annual rate of 1.450 million units in February, but down 18.4% from a year ago. Single-family housing starts rose by 1.1% to 830,000 units, while starts for buildings with five or more units increased by 24.1%. New residential building permits grew by 13.8%, with the West leading at a 30% increase, followed by the South at 10.9% and the Midwest at 9.6%. The Northeast experienced a decline of 2.8%. The number of houses approved for construction but not yet started remained unchanged at 294,000 units, with the backlog for single-family housing decreasing by 3.0% to 130,000.

CALENDAR & MOVERS

  • Tuesday: Arrest of President Trump?
  • Wednesday: Fed Interest Rate Decision
  • Friday: Core Durable Goods Orders (MoM) (February)
  • Continued Bank Collapse Fallout

On Tuesday, we’ll hear from Christine Lagarde and check in on the German ZEW index. On Wednesday, the focus will be on UK inflation and the Fed’s rate decision. SNB and BoE monetary policy decisions and weekly US unemployment data are due Thursday. The flash PMI indexes for the leading economies and US durable goods orders for March will be released on Friday.

Fed Rate Decision

The big news next week will be the Fed Interest Rate Decision. Despite all the market uncertainty and a slight dip in the CPI, the CME FedWatch Tool shows a 64.2% probability of a 25 basis point rate hike at the March 21-22 FOMC meeting, up from 59.8% a week ago.

We will not see the Fed stop increasing rates soon unless CPI drops below 5% and unemploy jumps to at least 4%.

Notably, the European Central Bank raised its key policy rates by 50 basis points last week, despite concerns about Credit Suisse (CS), citing persistent high inflation.

The Arrest of President Trump?

On Saturday, former president Donald Trump said he anticipates being jailed after the years-long investigation into a hush money scam involving adult film actress Stormy Daniels.

There is some concern by the “media” that there could be riots around his arrest; I think there is very little chance of that, and it will not likely affect the markets.

That being said, I think it is a sad day for America because this persecution of Trump appears to be 100% politically motivated. What does this say about justice in America?

Earnings

Monday: FL
Tuesday: TME, ONON, NKE, GME
Wednesday: BZUN, WGO, WOOF, OLLI, EVGO, HYZN, SAVA, KBH, CHWY
Thursday: ACN, DRI, GIS
Friday: EXPR

Dividend Spotlight

Get ready for some good news from the dividend front! Here are some companies that are expected to increase their quarterly dividend payouts soon: Signet Jewelers (SIG) plans to up theirs from $0.20 to $0.22, First Bancorp (NASDAQ: FBNC) from $0.22 to $0.24, Dollar General (DG) from $0.55 to $0.60, TE Connectivity (TEL) from $0.56 to $0.60, and Qualcomm (QCOM) from $0.75 to $0.80.

BONDS

The European Central Bank, as previously announced, has effectively increased its key interest rates by 50 basis points to 3.50%. The next move is still being determined, as Christine Lagarde refrained from providing a concrete plan for the possible continuation or cessation of the interest rate hike cycle. Committee members are waiting for the release of upcoming economic indicators.

Given the resurgence of bank failures in the headlines, it is unsurprising that the ECB keeps its options open. Next week, attention will shift to the US Federal Reserve, which is set to announce its monetary policy decision on Wednesday.

The latest consensus suggests a 25 basis point increase will be unanimously supported. However, the Fed faces a challenging situation. Having assured investors that combating inflation is a top priority, maintaining the status quo could be interpreted negatively. This would contribute to a loss of credibility and fuel speculation of a 2008-like systemic banking crisis.

The technical setup of interest rates is also indicative: US and German 10-year yields are nearing pivot points at 3.35% and 1.99%, respectively. A breach of these levels could signal an impending recession.

COMMODITIES

OIL & ENERGY

Despite the Swiss National Bank’s support for Credit Suisse, the banking system’s second blow amplifies concerns of an economic slowdown, causing risky asset prices to plummet, including oil. An economic downturn implies reduced oil consumption, which explains the mid-week drop in crude prices. The growth in US weekly inventories further dampened investor sentiment. Northern European Brent and US WTI prices declined to $75 and $69 per barrel, respectively. Meanwhile, European natural gas prices stabilized at around 43 EUR/MWh for the Dutch benchmark.

PRECIOUS METALS & GOLD

Encouraging economic data from China for the first two months of the year indicates a recovery in industrial production and consumer spending following a challenging 2022 under Beijing’s restrictive health policies. However, these positive developments have taken a backseat due to heightened recession fears. Base metal prices fell this week, with copper trading at around USD 8,500 per ton and aluminum at 2,260 on the London Metal Exchange. In contrast, gold experienced a significant 3% increase for the week, marking its third consecutive week of gains and rising from $1815 to $1930.

CRYPTOCURRENCY

Amidst banking turmoil, bitcoin surged by 18% this week, reaching new highs for 2023 and trading around $26,200 at the time of writing. The possibility of the US central bank raising policy rates slower than anticipated has bolstered risky assets, including bitcoin. For staunch supporters of Satoshi Nakamoto’s creation, bitcoin’s rise in the face of banking instability demonstrates its potential as a safe haven. However, the digital currency remained 62% below its all-time high of $69,000 in November 2021.

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