??? No Pause for Powell ?? Also: No Blankets for Bankers; Man Utd top the table (for selling prices) ?? Junk Bonds
?? Focus
?? In the Markets
?? MoneyFitt EXPLAINS
?? Focus
No Pause for Powell
Despite global banking turmoil triggered by failures in its own mid-sized banking sector, the US central bank, the Federal Reserve, continued with its inflation-busting policy of hiking interest rates with a 0.25% hike on Wednesday, saying "some additional policy firming may be appropriate."?
This brought rates to the highest level since 2007 and was largely in line with expectations, though there were some hopes of a pause considering that the recent collapse of three US banks was caused in large part by the rapid rise in interest rates (in combination with truly terrible balance sheet risk management, particularly in terms of duration and concentration.)?But they did consider it.
"We did consider that." Fed Chairman Jerome Powell, when asked if they considered a pause rather than a hike.
By not pausing, The Fed was possibly signalling that it was not in panic mode about the slow-motion train wreck that some see its banking system to be in the middle of (or just starting.) The European Central Bank sent that message last week with a sassy 0.50% hike, even while European banking giant Credit Suisse was teetering on the edge of extinction (though Switzerland is not a Eurozone country.)
?????? Along with its policy announcement, the Federal Open Market Committee (FOMC) also released its quarterly economic forecasts in its Summary of Economic Projections (SEP), including the (in)famous dot plot which maps out the individual Fed members' expectations for where interest rates could be headed (page 4.) 10 of 18 of them still expect rates to rise another 0.25% by the end of the year, though one unnamed member expected another full 1% hike by then vs. one seeing rates unchanged. (The median projection for the end of the year stayed at 5.1% with the end of 2024 actually rising from 4.1% to 4.3%!) Not one member of the rate-setting committee is expecting a cut this year.?
Not so, financial markets cried. We know better!
A lot can happen in two weeks. *A lot* DID happen in the two weeks since JPow's recent semi-annual congressional testimony!
- Image credit: CME FedWatch Tool
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?????? A mere two weeks ago, during Powell's congressional grilling in which he stressed that he might accelerate the pace of rate hikes, futures markets were expecting the first cut to come in January 2024. Now traders are seeing the first cut in June of THIS year, after just one more 0.25% hike in May. These are (as we say in the box above) implied probabilities and not forecasts, but it's a huge swing, reflecting recent events and the ongoing fear of a full-blown banking crisis.?
?????? The thinking seems to be that jittery banks concerned about their own horribly managed balance sheets will be stricter with borrowers and overall reduce their lending. This will slow the economy by sucking money out of the system, thereby doing the Fed's work for it and reducing the need to raise rates higher. (When a bank lends money, it earns interest and makes a profit. In doing so, it also creates a new asset -the loan- and a new liability -the deposit made by the borrower into a bank- therefore increasing the money supply.)?
?????? Related to this is the possibility that the economy slows right down as a result of past rate hikes and the cost of living crisis on top of a paralyzed banking sector, and starts looking like a recession and high unemployment on the cards. In that case, the Fed will move into rate-cutting mode to stimulate the economy as its dual mandate calls for not just price stability but maximum employment.
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?? In the Markets
US stocks took a brief break from having spasms about the banking sector and initially rose on the news of the rate hike. However, they started turning more negative after Powell dismissed the idea of rate cuts this year, followed by comments from Treasury Secretary Janet Yellen (see below.) The higher-and-maybe-faster-for-longer narrative has given way to a-bit-higher-but-still-for-longer. The yield (the actual interest rate you get at the price) on the forecast-sensitive two-year US Treasury Bonds dipped, indicating lower expectations of interest rate rises ahead. (See Focus story above.)
No Blankets for Bankers
Back in Crashing Bank News... crisis-hit lender First Republic dropped 15% and Beverly Hills-based PacWest fell 17% on Treasury Secretary Janet Yellen's comments to the Senate that ruled out a blanket expansion of deposit insurance for all savers with balances above $250,000 in the near term. This was the catalyst for yet another sell-off in shares of small and mid-sized US banks and the markets as a whole, given hopes (that still persist) that the Federal Deposit Insurance Corporation (FDIC) would insure all consumer deposits at least through the end of the current banking crisis and trigger a return of customer deposits.
No blanket coverage for banker Tom's depositors
- Image credit: Tom and Jerry / MGM via Tenor
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?????? Fed chief Jay Powell had earlier told Americans their deposits were “safe” because of the actions taken by policymakers, but Yellen countered that the government "is not considering insuring all uninsured bank d eposits." But never say never. Yellen said uninsured deposits above $250,000 could be protected if a failed bank posed a systemic risk to the financial system, as did Silicon Valley Bank and Signature Bank.
?????? Staying ahead of the game, rating agency Fitch cut its credit rating on First Republic Bank to B from BB, i.e. even further into junk bond ?? range on the bank’s continued loss of deposits and increasing debt on its balance sheet. Just last week it was rated A-, which is investment grade. FRC rose 5% in after hours trading. (So did PacWest, after getting a $1.4bn line from investors.)
Man Utd top the table (for selling prices)
British petrochemicals billionaire and local Manchester United fan man and boy, Sir Jim Ratcliffe, is expected to bid more than US$6 billion for the Premier League club, a record price for any sporting franchise anywhere (the current holder is the NFL's Denver Broncos, which went for $4.65bn last year.) He will face stiff competition from Qatari businessman Sheikh Jassim bin Hamad al-Thani. Both have been granted extensions to the 9pm Wednesday deadline to "make improved bids."
?????? The selling Glazer family bought the club in 2005 for ￡790 million --$790mn at today's exchange rate-- in a leveraged buyout and listed the company on the NYSE in 2012. The FT's Lex column recently calculated that the club's actually "worth" around $1.6bn but bid speculation has the market capitalisation (share price X number of shares) today at $4.2bn after a 7% jump.
?????? (See MFM focus stories from January, when Sir Jim first threw his flat cap into the ring, and last November, when the owners first put Manchester United on the block. In an LBO, or leveraged buyout, the bought company gets saddled with the debt used to take it over, often high interest rate junk bonds ??.)
Rio wants a higher bid
- Image credit: Tenor
MoneyFitt EXPLAINS?
?? Investment Grade and Junk Bonds?
Investment grade bonds are a type of debt security that is considered to be of high credit quality and is therefore a relatively low-risk investment. Investment grade bonds are issued by companies, municipalities, and other entities, and are typically rated "BBB-" or higher by credit rating agencies Standard & Poor's and Fitch and Baa3 or higher by Moody’s.
The agencies assess investment grade (IG) bonds as less risky than non-investment grade bonds, also known as "junk bonds." Those are considered more speculative in nature and since a higher yield is needed to help offset the risk of default, they are also called high-yield bonds (HY).?
Bonds may be secured by specific assets, such as real estate or equipment, or they may be unsecured. They typically pay a fixed coupon (expressed as a percentage of the original issue price) with a fixed maturity date, at which point the principal is paid back to the investor... or not.
Advisor, Co-founder and former CEO at MoneyFitt
1 年Interesting how the market, at least as implied by Fed Funds futures prices, is again diverging wildly from what Powell is saying about interest rates this year (having briefly fallen into step 2 weeks ago) and what the FOMC members are expecting in the latest Dot Plot. Does the market have as little faith in the Fed's macro management skill as it has in the Fed's abilities in regulatory supervision?