More hikes = more bank failures
May 17, 2023
–Fed continues leaning against the short end curve, which has priced significant easing this year. Mester started it off by saying the Fed is not quite at the ‘hold’ rate yet. Barkin said he’s willing to raise again if necessary. Barr and Williams said the banking system is “sound and resilient”. Goolsbee said it’s too soon to be talking about cutting rates. SFRH4 was the weakest contract -9 at 9611.5. SFRU3 settled 9515, down 6 on the day, but that rate is still just 4.85% compared to EFFR of 5.08%. I.e. the market is giving a bit of ground, but not all the way. Spreads continue to reflect expectations of significant easing, even if the timetable is pushed out marginally:
–SFRZ3/Z4 made a new recent low a -150 (9558/9708, down 4.5 on the day), low settle just before SVB was -158.5. Lowest 1-yr calendar is still SFRU3/U4 at -174.5. SFRZ3/M4 6-month calendar settled exactly at -100 (9558/9658, down 1 on the day). Ten year yield rose 4 bps to 3.547.
–Powell speaks on a panel Friday joined by Bernanke, our friendly advocate of helicopter money to fight deflation. From his November 2002 speech: ” But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Does it have an “on/off” switch?
–Home Depot warned about forward sales. Retail Sales were +0.4. Not great on a real basis. PACW settled 4.57, down 14.6%. PACW was around 30 in early February. I am seeing many articles and ads about high CD rates; banks need funding costs below that of their assets. The Fed seems intent on driving funding costs higher. It doesn’t help much if a bank is able to maintain its deposit base if those funds cost significantly more…
–Seeing a bit more about the dwindling balance in the TGA, now around $87b vs typical need of > $600b.
