More turmoil in the banking sector this week. We started off Monday with news that First Republic was no more. The FDIC arranged for J.P. Morgan to purchase the entire company, basically wiping out both the existing stock and bond holders while keeping all depositors whole.
First Republic will go down as the second largest bank failure by assets.
We’ve talked in the past about the drivers of today’s banking problems, so we won’t repeat them here. However, if you look at the history of bank failures, today’s insolvencies are closing in on 2008 levels if you measure failed bank assets as a percent of total system wide bank assets. A dubious claim to fame.
As the week progressed the worries about who’s next ballooned. Basically, the list below became the go-to list for short sellers. The chart shows deposit outflows for some of the larger regional banks. PacWest in particular was targeted, with its shares cratering for most of the week.
However, PacWest rallied over +80% on Friday. Should we read something into this? Is the worst over for bank stocks? It’s impossible to know. So much depends on the stability of the remining deposit base. But the volatility, both up and down, is wicked.
Gauging the Labor Market
The big economic news was Friday’s payrolls number. As always, there was something for everyone. The headline numbers came in hot - nonfarm payrolls increased +253k in April, exceeding consensus expectations for the thirteenth straight month. The unemployment rate declined by one tenth to 3.39%—the lowest level since 1969.
Average hourly earnings growth was also higher than expected - up +0.5% in April.
But there were hints of weakness. Prior reports were revised down, as you cans see below. In fact, the last three months have been revised lower. How much trust should we put in today’s number?
And this dynamic gets to the heart of why the payrolls numbers are pretty useless in gauging the strength of the economy. They are susceptible to large revisions, making it hard to have much faith in the data in real time.
Another smell check on the health of the labor market comes through the so-called JOLTS report. It showed that the number of job openings fell 384,000 to 9.59mn in March, the third straight large decline, bringing the number of openings to the lowest level since April 2021.
This isn’t a weak number, but it does indicate a cooling in the labor market. But the U.S. economy is like a supertanker, nothing moves very quickly.
Calling it Quits
Finally, the Fed met this week. As widely expected they hiked rates by another 0.25%.
This latest move finally gets the Fed Funds rate into positive real territory. The chart below shows the difference between the funds rate and CPI inflation. For the first time since 2020 the funds rate is higher than inflation.
For now, this is being viewed as restrictive policy and probably means the Fed is done. For example, the following sentence was dropped from the statement:
"The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."
And this was used instead:
“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
This is all pretty much as expected. The battle is really over when the Fed will cut rates. During the press conference Powell downplayed the idea of any rate cuts this year. He went out of his way to point out the strength in the labor market, noting that it was ‘even tighter than before we started hiking.’
However, the market is pricing in rate cuts as early as July. The chart below from MRB partners shows the market-implied Fed Funds rates through 2024.
Should make for an interesting second half of the year.
(Other) Charts We Found Interesting
- How many banks do we need in the U.S.? Since the early 80’s the answer appears to be fewer than the preceding year.
- Investors have jumped back into tech stocks this year after a disappointing 2022. Valuations are back to nosebleed levels.
- The yield on the 10-year Treasury bonds is below the yield on 3-month bills. The spread between the two is at record (negative) levels.
- Will inflation continue to soften this year? Commodity prices are certainly pointing that way.
- Apparently it’s coronation weekend. From this week’s Economist:
“On May 6th, in London, a man will be given a hat. He has never seemed that keen on this hat. At the age of 20, King Charles III described the realisation he would be king as dawning upon him ‘with the most ghastly inexorable sense.’
…for the list of those participating this weekend includes people with such titles as the Rouge Dragon Pursuivant, the Rouge Croix Pursuivant and the Portcullis Pursuivant. It involves a Garter King of Arms and people with titles so antique that their adjectives appear to be on back-to-front (the Lords Spiritual and Temporal of this realm). It involves beadles, heralds, princesses, kings, queens and His Most Godly Beatitude Theophilos III, Patriarch of Jerusalem and All Palestine. There are “Game of Thrones” episodes with more sober cast lists.”
- Malaysia might have the right idea – nine royal families take turns being in charge. Hopefully they don’t have nine royal budgets!!!
Have a good weekend!