Banking Crisis Round 2?
Risk markets took a beating after yesterday’s FOMC press conference, with the broad market S&P 500 falling 1.2% and Bitcoin declining 3.7% following Federal Reserve Chair Jerome Powell’s speech. What made markets sneeze, and how are they reacting today?
Markets went into free-fall after Chair Powell proclaimed that rate cuts were “unlikely” to occur by March, an event that the market had been pricing in, and reiterated that we had not yet achieved a soft landing, stating that the fight against inflation has a ways to go.
SUMMARY OF FED CHAIR POWELL Q&A (1/31/24):
— The Kobeissi Letter (@KobeissiLetter) January 31, 2024
1. There was no proposal to cut rates at this meeting
2. "I would not say we have achieved a soft landing yet"
3. "Don't think it's likely" that rate cuts start in March
4. It will take a couple of years for wages to normalize
5.…
The hardest hit yesterday were regional banking stocks. The S&P Regional Banking ETF (KRE) fell 9.6%, and New York Community Bank, the bank that acquired the failed Signature Bank in 2023, faced a double whammy, compounding the FOMC-induced slide with abysmal earnings for a total loss of 47% off its highs.
Powell’s statements may have indicated that interest rates will remain higher for longer, but bond bulls were not dissuaded, with yields on the US 10-year Treasury plunging post-FOMC and continuing to fall early today to a 2024 low of 3.84%.
Risk assets have managed to claw back some of their losses on the day, but increasing bond market volatility, plummeting yields, and renewed indications of trouble in the US regional banking sector should sound alarms; these factors preceded the March 2023 banking crisis!
Combined with the knowledge that the Federal Reserve does not intend to renew the emergency funding facility it created to deal with last year’s crisis – the BTFP – it appears that banking headwinds could bear down on the economy in coming months.
