Tag: debt

Dow, S&P 500 post modest gains Thursday as investor focus returns to banking risks

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U.S. stocks ended modestly higher Thursday in choppy trade as worries about potential weakness in the banking system resurfaced a day after the Federal Reserve increased hikes by 25 basis points. The Dow Jones Industrial Average
DJIA,
+0.23%
rose about 73 points, or 0.2%, ending near 32,103, down about 400 points from the session’s high. The S&P 500 index
SPX,
+0.30%
gained 0.3% and the Nasdaq Composite Index
COMP,
+1.01%
closed up 1%, according to preliminary figures from FactSet. Stocks closed off the session’s highs, but gained ground after Treasury Secretary Janet Yellen told a Senate committee that the federal government would take extra steps to stabilize the U.S. banking system, if necessary. Stocks closed sharply lower Wednesday after the Fed raised its policy rate to a range of 4.75% to 5%, up a year ago from close to zero. But some analysts said a catalyst of the selloff was comments from Yellen indicating she wasn’t yet considering ways to guarantee all bank deposits, despite regulators providing an exception to depositors in Silicon Valley Bank and Signature Bank, which failed earlier this month. Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, told MarketWatch on Thursday that the focus should be on underwater securities at all banks, not only regional lenders.

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March 23, 2023
‘This is a risk confronting all banks,’ ex-FDIC chief Sheila Bair tells MarketWatch

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Regional banks shouldn’t be the only source of worry for potential fallout from the Federal Reserve’s rapid pace of interest-rate hikes in the past year, said a former top banking regulator.

“I don’t see regional banks as having any particular problem,” said Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, in an interview with MarketWatch on Thursday. “We need to be mindful of all unmarked securities at banks — small, medium and large.”

Bair called the hyperfocus on regional banks and interest-rate risks “counter productive” in the wake of the collapse earlier in March of Silicon Valley Bank and Signature Bank
SBNY,
-22.87%
of New York.

“This is a risk confronting all banks,” she said. “All examiners need to be on alert for how interest-rate risk is being managed. If there is a run, they will need to sell these securities. Those are the kinds of things all-size banks, and all examiners should be worried about.”

A run on deposits at Silicon Valley Bank snowballed after it disclosed a $1.8 billion loss on a sudden sale of $21 billion worth of high-quality, rate-sensitive mortgage and Treasury securities. It was the biggest U.S. bank failure since Washington Mutual’s collapse in 2008.

The FDIC estimated that U.S. banks had some $620 billion of unrealized losses from securities on their books as of the end of 2022, including longer-duration Treasurys and mortgage securities that have become worth less than their face value.

“Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry,” FDIC Chairman Martin Gruenberg said on March 6, in a speech at the Institute of International Bankers.

Days after that gathering, Silicon Valley Bank and Signature Bank both collapsed, prompting regulators to roll out a new emergency bank funding program to help head off any liquidity strains at other U.S. lenders. Regulators also backstopped all deposits at the two failed lenders.

Bair earlier this month argued that if U.S. banking authorities see systemic risks they should go to Congress and ask for a backstop against uninsured deposits, beyond the standard $250,000 cap per depositor, at a single bank. Specifically, she wants zero-interest accounts, or those used for payroll and other operational expenses, to be fully covered, as was the case for a few years in the wake of the global financial crisis to stop runs on community banks.

Treasury Secretary Janet Yellen said Wednesday that blanket deposit insurance protection isn’t something her department is considering, but added that the appropriate level of protection could be debated in the future.

Fed Chairman Jerome Powell on Wednesday said the U.S. banking system “is sound and resilient, with strong capital and liquidity,” after hiking rates by another 25 basis points to a range of 4.75% to 5%, up from almost zero a year ago.

See: Fed hikes interest rates again, pencils in just one more rate rise this year

Bair has been calling for a pause on Fed rate hikes since December. She said that instead of raising rates by another 25 basis points on Wednesday, Fed Chair Powell should have hit pause and said the central bank needs time to assess.

“If we have a financial crisis, we won’t have a soft landing,” Bair said. “We have to avoid that at all costs.”

Read: Bank failures like SVB are a reminder that ‘risk-free’ assets can still wreck portfolios

Stocks closed modestly higher Thursday in choppy trade, with the Dow Jones Industrial Average
DJIA,
+0.23%
up 0.2% and S&P 500 index
SPX,
+0.30%
advancing 0.3%, while the Nasdaq Composite Index
COMP,
+1.01%
gained 1%.

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March 23, 2023
Americans will dump up to $1.1 trillion in stocks this year, and move the cash to credit and money-market funds, says Goldman.

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This year could mark the end of the affair — between Americans and their stockholdings.

That’s according to Goldman Sachs analysts who say due to the rise in bond yields since the start of 2022, and increased flows to bond and money-market funds, U.S. households could end up dumping up to $1.1 trillion of equity holdings this year.

“The current level of market yields clearly shows that the era of TINA (There is No Alternative) has ended and that now there are reasonable alternatives (TARA) to equities,” said a team of strategists led by Cormac Conners and David Kostin.

“Although equity demand remained resilient amid sharply rising rates in 2022, we believe the YTD [year-to-date] flows into money market and bond funds signal an escalating household shift away from equities and toward the alternatives.”

Their model of household equity demand is based on the 10-year U.S. Treasury yield and personal savings rate. The analysts say that higher yields and lower savings tend to be associated with a decrease in demand for equity among households.

In their base case, they estimate net selling of $750 billion this year, alongside their forecast for the yield on the 10-year Treasury note
TMUBMUSD10Y,
3.435%
to rise from around 3.6% currently to 4.2% by the end of this year, and the personal savings rate will rise to 5.3% from 4.5%. Conners and the team said such stock selling would reverse six previous quarters of household equity demand.

Uncredited

Should bond yields tilt lower, and the savings rate move higher, Goldman sees that estimate nearly halved to $400 billion in equity sales. In a worst-case scenario, where yields push even higher and the savings rate lower, household selling would reach $1.1 trillion, they cautioned.

Read: The Fed raised rates for the ninth consecutive time. Here’s what you should be earning on your savings account now (but probably aren’t)

As for the idea that there are now reasonable alternatives to equities (TARA), Goldman said households tend to buy fixed income products during years in which they sell stocks. They pointed to data showing $51 billion has flowed out of U.S. equity mutual funds and exchange-traded funds, year to date, while $282 billion has poured into U.S. money-market funds and $137 billion into U.S. bond funds.

Read: Money-market funds swell to record $5.4 trillion as savers pull money from bank deposits

Picking up some of the slack left by U.S. investors, the Goldman team predict foreign investors and corporations will be net stock buyers of $550 billion and $350 billion, respectively.

“We expect buyback and cash M&A activity will slow but remain relatively robust this year, driving corporations to be net buyers of U.S. stocks – though a potential [second-half] recovery in equity issuance presents one risk to this forecast. A weaker dollar should drive foreign investors to be net buyers of U.S. stocks in 2023. Pension funds will also be net buyers of $200 billion in equities in 2023,” said the strategists.

The pace of household buying has been slowing, they noted. Citing the Federal Reserve’s Financial Accounts data, Goldman said households are estimated to own 38% of the total equity market. From the start of 2020 through mid-2022, they bought $1.7 trillion in equities, but in 2022 demand for those assets fell 40% to $480 billion.

“Adjusting the Fed’s household demand series for our estimate of hedge fund net equity demand (which is included in the household category by default), implies households were net buyers of just $209 billion in equities in 2022, a 78% decline from 2021,” they said.

Up 2% so far this year, the S&P 500
SPX,
+0.25%
lost 19% in 2022, the worst year for the index since the global financial crisis of 2008, as a war in Europe added to inflationary pressures across the globe, driving central banks such as the Federal Reserve to raise interest rates sharply. Wednesday’s 25-basis point Fed rate hike marked the ninth rise since March 2022.

From under 1.5% at the start of 2022, the yield on the 10-year Treasury note
TY00,
+0.60%
has climbed to around 3.468%, levels not seen since the 2008 crisis.

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March 23, 2023
IMF’s Georgieva: ‘Risks to financial stability have increased’

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The outlook for the global economy is likely to remain weak in the medium term amid heightened risks to financial stability, according to International Monetary Fund Managing Director Kristalina Georgieva.

“We expect 2023 to be another challenging year, with global growth slowing to below 3 percent as scarring from the pandemic, the war in Ukraine, and monetary tightening weigh on economic activity,” Georgieva said on Sunday at a conference in China. “Even with a better outlook for 2024, global growth will remain well below its historic average of 3.8 percent,” she said.

“It is also clear that risks to financial stability have increased,” Georgieva said. “At a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates to much higher rates — necessary to fight inflation — inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies.”

Policymakers have acted decisively in response to threats to financial stability, helping ease market stress to some extent, she said. But “uncertainty is high, which underscores the need for vigilance,” she added.

Georgieva also warned about risks of geo-economic fragmentation, which she said “could mean a world split into rival economic blocs — a ‘dangerous division’ that would leave everyone poorer and less secure. Together, these factors mean that the outlook for the global economy over the medium term is likely to remain weak,” she said.

Georgieva spoke during the second day of the China Development Forum in Beijing. The three-day annual event is a social mixer of politics and business, bringing together members of the Chinese Politburo with dozens of CEOs from Western companies like Siemens, Mercedes-Benz and Allianz.

“Fortunately, the news on the world economy is not all bad. We can see some ‘green shoots,’ including in China,” Georgieva said, adding that Beijing is set to account for around a third of the global growth this year.

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Bartosz Brzezinski

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March 23, 2023
Jobless claims dip to 3-week low of 191,000 — labor market still very strong

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The numbers: The number of Americans who applied for unemployment benefits last week slipped to a three-week low of 191,000, signaling little erosion in a strong U.S. labor market even as the economy faced fresh strains.

New U.S. applications for benefits fell by 1,000 from 192,000 in the prior week, the government said Thursday. .

The number of people applying for jobless benefits is one of the best barometers of whether the economy is getting better or worse. New unemployment applications remain near historically low levels.

Economists polled by The Wall Street Journal had forecast new claims to total 198,000 in the seven days ended March 18. The numbers are seasonally adjusted.

Key details: Twenty-eight of the 53 U.S. states and territories that report jobless claims showed a decrease last week. Twenty-five posted an increase.

Most of the changes were small except in Indiana.

One potential red flag: The number of raw or actual claims — before seasonal adjustments — was much higher last week compared to the same week a year earlier. But so far there’s little sign of a trend.

“Even the tens of thousands of recent [high-tech] layoffs have almost completely been absorbed by a powerful labor market that has plenty of expansion left in it,” contended Robert Frick, chief corporate economist at Navy Federal Credit Union.

The number of people collecting unemployment benefits across the country, meanwhile, rose by 14,000 to 1.69 million in the week ended March 11. That number is reported with a one-week lag.

These continuing claims are still low, but a gradual increase since last year suggests it’s taking longer for people who lose their jobs to find new ones.

Big picture: Jobless benefit claims are one of the first indicators to emit danger signals when the U.S. is headed toward recession. It’s still not flashing a red-light, or even a yellow one, as the economy comes under more duress.

The Federal Reserve, for instance, just raised interest rates to a nearly 16-year high. And the failure of Silicon Valley Bank has put more stress on the U.S. financial system.

Both of these actions could constrain the economy in the months ahead, curb hiring and potentially boost a low unemployment rate. If so, watch the trend in new jobless claims.

Looking ahead: “Most companies are either still hiring or are holding onto their employees and seeking other ways to cut costs,” said chief economist Joshua Shapiro of MFR Inc.

“This is consistent with our view that layoffs will rise less dramatically than normally might occur as companies do all they can to avoid shedding workers who have been incredibly difficult to recruit and retain.”

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.23%
and S&P 500
SPX,
+0.30%
were set to open higher in Thursday trades. Stocks have been under pressure since the failure of SVB earlier this month.

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March 23, 2023
Bank of England hikes interest rates by quarter-point in 11th consecutive increase

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The Bank of England on Thursday matched the U.S. Federal Reserve by hiking interest rates by a quarter percentage point.

The 7-2 decision, the eleventh consecutive increase, brings the U.K. base rate to 4.25%, and comes after data showed inflation surprisingly accelerated in February to a year-over-year rate of 10.4%.

“Headline CPI inflation had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than expected previously,” the Bank of England said in the simultaneously published minutes of the meeting. “The members put some weight on the possibility that the stronger domestic and global outlook for demand was also being driven by factors over and above the weaker path of energy prices, given that the strengthening had at least in part preceded the falls in prices.”

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the central bank said.

The central bank did discuss the banking sector, and the failure of the U.S.’s Silicon Valley Bank and the run-up to UBS’s
UBS,
-3.09%
purchase of Credit Suisse
CS,
-5.48%.
SVB’s U.K. subsidiary was bought by HSBC for £1.

The central bank’s financial policy committee said the U.K. banking system maintains robust capital and strong liquidity positions and can “continue supporting the economy” even as interest rates rise.

The pound
GBPUSD,
+0.45%
traded over $1.23 after the decision. The yield on the 2-year gilt
TMBMKGB-02Y,
3.388%
however slipped 7 basis points to 3.42%, after a big rise on Wednesday when the inflation data came out.

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March 23, 2023
Dow skids 530 points, stocks close sharply lower after Fed raises rates, says cuts unlikely this year

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U.S. stocks closed sharply lower on Wednesday, giving up earlier gains, after the Federal Reserve raises interest rates by 25 basis points as expected, but talked down the possibility of cuts to rates this year. The Dow Jones Industrial Average
DJIA,
-1.63%
tumbled 531 points, or 1.6%, ending near 32,028, while the S&P 500 index
SPX,
-1.65%
shed 1.7% and the Nasdaq Composite Index
COMP,
-1.60%
closed down 1.6%, according to preliminary FactSet figures. Fed Chairman Jerome Powell said the U.S. banking system remained resilient after it and regulators rolled out liquidity measures to help shore up confidence in the banking system after the collapse of Silicon Valley Bank and Signature Bank earlier in March. Powell also said that tighter credit conditions for consumers, following the bank failures, would likely work like rate hikes in terms of lowering inflation. It will be a key area of focus for the Fed in the coming weeks and months, he said. The 10-year Treasury rate
TMUBMUSD10Y,
3.444%
fell Wednesday to 3.46%, a sign that investors in the bond market think growth will be slower.

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March 22, 2023
How First Republic stock’s tailspin started and why it hasn’t stopped

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Shortly after Silicon Valley Bank disclosed on March 8 that it was running short of cash and needed to raise capital, First Republic Bank’s epic stock slide began.

The stock
FRC,
-15.47%
has lost 90% of its value in less than two weeks, hitting an all-time low of $12.18 a share on Monday.

Supportive comments from Treasury Secretary Janet Yellen helped it snap back on Tuesday, but it’s hovering between positive and negative territory on Wednesday as investors await a key Federal Reserve decision on interest rates.

First Republic finds itself in a tough spot with a low share price and fresh debt downgrades and not even efforts to inject $30 billion into the company’s deposits in a scheme backed by JPMorgan Chase & Co.
JPM,
-2.58%
and a backstop from the U.S. Federal Reserve seem to be helping.

The bank’s troubles stem from its overlap both in clientele and parts of its balance sheet with doomed Silicon Valley Bank, which is being sold off this week by the Federal Deposit Insurance Corp. after it officially failed on Friday, March 10. Silicon Valley Bank suffered a classic run on a bank, when depositors, nervous that it needed to raise capital, yanked their deposits.

First Republic has suffered the same deposit flight.

As a San Francisco bank with a focus on serving high-end clients, First Republic has acted as wealth manager for the greater Silicon Valley region of executives, managing directors and startup CEOs, as well as their counterparts on the East Coast.

The list incudes Facebook
META,
-1.16%
Founder Mark Zuckerberg, who has a large mortgage courtesy of First Republic, as the Wall Street Journal has reported. Few of its loans ever sour — it had $213 billion in assets at the end of 2022 and $176 billion in deposits.

With its sophisticated lending products and access to the technology startup world, Silicon Valley Bank was also known for its a customer base from the venture capital and private equity world.

Also Read: 24 bank stocks that contrarian bottom-feeders can feast on now

Those well-heeled clients of both banks started running into problems as interest rates rose last year, pundits warned of an economic slowdown and investors switched to a risk-off strategy of conserving cash and containing costs.

The collapse of FTX and strain in the crypto world also fed the need for cold, hard government-backed currency. Rising interest rates made it more expensive to borrow and put a chill on the deal-making environment.

All of this and other factors led to a drain on deposits at Silicon Valley Bank and others as it faced “elevated client cash burn” at a rate that was double pre-2021 levels, even as venture capital and private equity funds were slowing down their capital raising activities, the company said in an ill-fated mid-quarter report.

On March 8 after the market close, Silicon Valley Bank said it planned to sell $2.25 billion in common stock and a type of preferred stock, with one of its major clients, private equity firm General Atlantic, in line to buy $500 million worth. Goldman Sachs Group Inc.
GS,
-1.14%
was handling the deal.

The company also disclosed that it had lost $1.8 billion on the sale of $21 billion in available-for-sale securities on its balance sheet to cover deposit withdrawals.

It was this last part that caused big trouble for First Republic. Not only did its clientele overlap with Silicon Valley Bank, its holdings included some of the same securities that Silicon Valley Bank sold at a loss.

Wall Street investors quickly started bidding down shares of First Republic and other regional banks and the credit rating agencies moved in, cutting the bank’s rating from investment grade deep into junk in just a few days.

None of this helped First Republic hold on to its deposits.

As one longtime banking official said recently, money from Silicon Valley types typically comes in the form of uninsured deposits, which means they’re in excess of the $250,000 that the FDIC will guarantee if a bank goes out of business. This so called hot-money is great for banks when times are good, but can move away quickly if the environment changes.

“When hot money gets nervous, it runs,” former FDIC chairman Bill Isaac told MarketWatch recently.

While an unprecedented effort on March 16 by 11 banks to inject $30 billion into First Republic’s deposits temporarily provided a lift to its stock, the move apparently wasn’t enough.

First Republic said last Thursday that it had borrowed between $20 billion and $109 billion from the Federal Reserve during that week. It also increased short-term borrowing from the Federal Home Loan Bank by $10 billion at a rate of 5.09%.

Jefferies analyst Ken Usdin said the numbers revealed that First Republic’s total deposits had dropped by up to $89 billion in the week ended March 17 past week—or about three times more than the $30 billion injection from the bank.

“With [First Republic’s] earnings profile clearly impaired, the new deposits effectively bridge the estimated $30.5 billion of uninsured deposits still on [the bank’s] balance sheet, providing time for [it] to likely explore a sale,” Usdin said.

Janney Montgomery Scott analyst Tim Coffey said First Republic’s stock drop in recent days reflects uncertainty around what a potential second bailout would look like, or how the bank’s balance sheet is faring after a steep run in deposits and the falling value of its long-dated securities.

Another unknown is the company’s latest Tier 1 capital Ratio, a key measure of a bank’s balance sheet strength.

Like Silicon Valley Bank, First Republic’s balance sheet has had more than the usual exposure to long-dated securities, which have been falling in value as interest rates rise.

A typical mix for a bank of comparable size is to hold about 72% of securities as available for sale. The remaining 28% are held to maturity. First Republic’s mix is reversed with 12% available for sale and 88% held to maturity.

The bank’s mix of longer-dated assets now commands a lower market value, given where interest rates are. The bank’s emphasis on long-dated securities provided a better return when interest rates were near zero, but they have been a liability in the current environment.

“They’ve had duration risk where the value of their securities started going down as interest rates rose,” Coffey told MarketWatch.

Another problem for First Republic is that many of those long-dated securities are in the mortgage business, which has been ailing as interest rates rise.

Plenty of questions remain about First Republic’s situation and whether it could have been avoided. The challenges facing First Republic as well as the demise of Silicon Valley Bank and Signature Bank will be the focus of hearings on Capitol Hill next week.

Wall Street is also awaiting comments from the U.S. Federal Reserve when it updates its interest rate policy later on Wednesday.

And JPMorgan Chase continues to work with First Republic on a potential bailout, even as the bank has reportedly hired Lazard
LAZ,
-2.17%
to weigh strategic alternatives.

All of these factors add to the uncertainty swirling around First Republic, giving investors little reason to go long on the stock for now.

Also Read: 24 bank stocks that contrarian bottom-feeders can feast on now

Related: Senate Banking Chair Sherrod Brown sees bipartisan support for changes to deposit insurance

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March 22, 2023
S&P 500 reclaims 4,000 mark, stocks end higher ahead of Fed rate decision

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The S&P 500 on Tuesday posted its highest close since the collapse of Silicon Valley Bank earlier this month, which sent shockwaves through financial markets and raised concerns about the stability of the U.S. banking system. The S&P 500 index
SPX,
+1.30%
closed up about 51 points, or 1.3%, ending near 4,003, according to preliminary data from FactSet. That was its highest close since May 6, four days before the failure of Silicon Valley, the biggest bank collapse since the 2008 global financial crisis. The Dow Jones Industrial Average
DJIA,
+0.98%
rose 1% Tuesday, while the Nasdaq Composite Index
COMP,
+1.58%
swept to a 1.6% gain. Banks and companies with heavy exposure to rate-sensitive assets, including property loans, have been under pressure since Silicon Valley Bank’s implosion. It drew attention to some $600 billion in paper losses at banks from their holdings of “safe” but low-coupon securities that have fallen in value in the year since the Federal Reserve began rapidly increasing interest rates to combat high inflation. Those older bonds end up worth less when investors have access to new securities with higher yields, with a similar low-risk profile in terms of credit risks. The failure of several regional banks in March, plus the sale of Credit Suisse
CS,
+2.46%
to rival bank UBS
UBS,
+11.97%
over the weekend, has reawakened fears of potentially broader problems in the banking system as central bank have increased rates and ended an era of easy money. Even so, stocks were rallying as the Federal Reserve at the conclusion of its 2-day policy meeting on Wednesday is expected to raise its policy rate by another 25 basis points.

See: The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

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March 21, 2023
What are CoCos and why are Credit Suisse’s now worth zero?

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The Swiss regulator on Sunday announced that it was writing the value of Credit Suisse’s additional Tier 1 bonds — also called AT1 bonds, or contingent convertible bonds or CoCos — down to zero, as part of the bank’s merger with UBS.

The news has spooked investors of the AT1 market, which is valued at about $275 billion.

For more: The $275 billion bank convertible bond market thrown into turmoil after Credit Suisse’s securities wiped out

But what are Cocos and why should you care? Here’s what you need to know:

CoCos, or contingent convertible capital instruments, to give them their full name, are hybrid capital instruments that are structured to absorb losses in times of stress. They were introduced after the 2008 financial crisis to help steer risk away from taxpayers and onto bondholders.

They are bonds that automatically convert into equity—shares in the bank—when a bank’s capital falls below a certain threshold.

If a bank is functioning normally, investors are paid a coupon, just like any bondholder. But if things go wrong, the bank can “bail in” the CoCo investor, converting debt into shares in what would then be a troubled lender.

Also read: Saudis, Qataris and Norway to see big losses on UBS deal for Credit Suisse

European banks liked to issue CoCos, because they are counted as additional Tier 1 capital. They’re a way for banks to improve their capital ratios, as required under rules put in place after the crisis, without issuing more shares.

U.S. banks don’t issue CoCos—they use a different type of preferred stock to boost their Tier 1 capital. But U.S. investors have been buyers of CoCos for the extra yield they have offered. That’s risky because the instruments can be converted to low-value shares, or entirely wiped out as has now happed with those issued by Credit Suisse
CSGN,
-55.74%

CS,
-52.98%.

CoCos are perpetual bonds, or bonds that have no set maturity date. They can be redeemed if a bank exercises an option to do so, typically after a five-year period. But regulators may block banks from redeeming them, if the cost of issuing replacement debt is much higher. And if a bank becomes highly stressed like Credit Suisse, they can simply be written off.

A call for Credit Suisse bondholders is expected to take place on March 22, according to law firm Quinn Emanuel Urquhart & Sullivan, which said on Monday it is exploring potential legal actions on behalf of AT1 bondholders.

The surprise for some investors on Monday is that the Swiss move has wiped out the bondholders but not the shareholders, even though bondholders typically rank above equity holders in capital structure.

Not the Credit Suisse CoCos, which were structured to allow for the Swiss regulatory move.

Under the terms of the deal with UBS, Credit Suisse shareholders will be able to exchange their shares for about 0.70 francs, which is below where the stock closed Friday, but more than the bondholders will receive.

Most of the demand for CoCos in recent years has come from private banks and retail investors, especially in Europe and Asia, along with big U.S. institutional investors who were attracted by the higher yields in the low-interest-rate environment that prevailed from the crisis until the Federal Reserve started raising interest rates last year.

To be sure, the Credit Suisse CoCos were showing signs of stress last week as the bank became more embroiled in crisis. The bank’s 9.75% coupon CoCo bonds due June of 2028 were trading at an average price of 36 cents on the dollar last Wednesday, as MarketWatch’s Joy Wiltermuth reported.

Now fund managers say investors are likely to avoid them, undermining their use for banks.

“The UBS-CS deal might have avoided an immediate risk event, but the AT1 write down has added an uncertainty which could persist for weeks if not months,” said Mohit Kumar, chief financial economist in Europe at Jefferies.

“Given the large amount of AT1s outstanding, this would also raise the prospect of losses for other investors and the ability of banks to use them as a funding source in the future,” he added.

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March 20, 2023
The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

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The Federal Reserve will meet on Wednesday and, for once, the outcome is unclear.

This is the most uncertain Fed meeting since 2008, said Jim Bianco, president of Bianco Research.

Fed officials, starting with former chair Ben Bernanke, have perfected the art of having the market price in what the central bank will do — at least regarding interest rates — at each upcoming meeting. That has happened 100% of the time, Bianco said on Twitter.

The Fed’s meeting this week is different because it follows the sudden collapse of confidence in the U.S. banking system following the government takeover of Silicon Valley Bank as well as the tremors around the world that have led to the shotgun wedding of Swiss banking giant Credit Suisse and its longtime rival, UBS.

At the moment, the market probabilities are 73% for a quarter-percentage-point move and 27% for no move, according to the CME FedWatch tool. The market seems to be growing in confidence of a hike, analysts said, based on movements on the front end of the curve.

The Fed’s decision will come on Wednesday at 2 p.m. Eastern and will be followed by a press conference from Fed Chair Jerome Powell.

“Depending on your perspective, the Fed’s decision will be seen as either capitulation to the markets or ivory-tower isolation from the markets,” said Ian Katz, a financial sector analyst with Capital Alpha Partners.

Here are the pros and cons for both a pause and a 25-basis-point hike.

The case for and against a pause

The main rationale for a pause is that the banking system is under stress.

“While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient. We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now,” said Jan Hatzius, chief economist at Goldman Sachs, in a note to clients Monday morning.

Former New York Fed President William Dudley said he would recommend a pause. “The case for zero is ‘do no harm,’” he said.

The case against a pause is that it could spark more worries about the banking system.

“I think if they pause, they are going to have to explain exactly what they are seeing, what is giving them more concern. I am not sure a pause is comforting,” said former Fed Vice Chair Roger Ferguson in a television interview on Monday

The case for and against a 25-basis-point hike

The main reason for a quarter-percentage-point rate increase, to a range of 4.75%-5%, is that it could project confidence.

“What you need from policymakers is steady hands, steady ship,” said Max Kettner, chief multi-asset strategist at HSBC. “You don’t need overaction … flip-flopping around in projections or opinions.”

The Fed should say that it has managed to contain confidence so far and that “we can press ahead with the inflation fight,” he added.

Oren Klachkin, lead U.S. economist at Oxford Economics, said he didn’t think “the recent bank failures pose systemic risks to the broad financial system and economy.”

He noted that “inflation is still running hot” and the Fed has better ways to alleviate banking-sector stress than interest rates.

The case against hiking is that doing so could further exacerbate concerns about the stability of the banking sector.

“A rate hike now might have to be quickly reversed to deal with a deeper, less contained recession and disinflation. Why would the Fed raise rates when it may be forced to cut rates so much sooner than previously hoped?” asked Diane Swonk, chief economist at KPMG.

Gregory Daco, chief economist at EY, said he thinks economic activity is slowing, which gives the Fed time.

“There is no rush to hike. We are not going to see hyperinflation as a result,” he said.

Stocks
DJIA,
+1.20%

SPX,
+0.89%
rose Monday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.485%
inched up to 3.46%, still well below the 4% level seen prior to the banking crisis.

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March 20, 2023
Fed to pause this week because of bank stress: Goldman Sachs

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In a note published Monday morning, Goldman Sachs economist David Mericle forecast the Federal Reserve will not lift interest rates at this week’s meeting due to banking system stress. “While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient,” he said in a note to clients. Mericle said the link between a single quarter-point hike and future inflation is “very tenuous” and that the Fed can get back on track with hikes very quickly. The bank is still expecting quarter-point increases in May, June and July. The yield on the 2-year Treasury fell 6 basis points to 3.77%.

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March 20, 2023
U.S. stock-market futures edge higher after historic deal to rescue Credit Suisse

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U.S. stock-index futures opened with modest gains Sunday evening as investors assessed a historic deal to rescue troubled Swiss lender Credit Suisse, the latest maneuver by authorities attempting to prevent a deeper loss of confidence in the global banking system.

Swiss bank UBS Group
UBS,
-5.50%
agreed to buy rival Credit Suisse
CS,
-6.94%

CSGN,
-8.01%
for more than $3 billion, a substantial discount to its Friday closing price, in a deal shepherded by Swiss regulators and closely watched by monetary and economic policy makers around the world.

Don’t miss: Here’s why UBS’s deal to buy Credit Suisse matters to U.S. investors

Also Sunday, the Federal Reserve and five other major central banks announced they were taking steps to ensure that U.S. dollars remained readily accessible throughout the global financial system.

Futures on the Dow Jones Industrial Average
YM00,
+0.64%
rose 123 points, or 0.4%, while futures on the S&P 500
ES00,
+0.65%
and Nasdaq-100
NQ00,
+0.42%
were also up 0.4%,

Oil futures ticked higher after suffering their worst week of 2023 and ending Friday at their lowest since December 2021, with analysts tying the plunge largely to rising recession fears. April West Texas Intermediate crude
CL.1,
+0.55%

CL00,
+0.55%

CLJ23,
+0.55%
rose 0.3% to $66.92 a barrel on the New York Mercantile Exchange, while May Brent crude
BRN00,
+0.52%,
the global benchmark, ticked up 0.1% to $73.05 a barrel on ICE Futures Europe.

The positive initial tone in markets late Sunday was reflected in a weaker tone for the Japanese yen, which has seen haven-related support this month on rising banking worries. The U.S. dollar was up 0.3% versus the Japanese currency
USDJPY,
+0.60%
at 132.18 yen. The ICE U.S. Dollar Index
DXY,
+0.08%,
a measure of the currency against a basket of six major rivals, was up 0.1%.

Futures on U.S. Treasurys
TY00,
-0.82%,
which also tend to serve as a haven during periods of crisis, were slightly lower. Treasurys rose sharply last week, dragging down yields, which move opposite to price, in volatile trading.

Read: Why bond-market volatility is at its highest since the 2008 financial crisis amid rolling fallout from banks

Credit Suisse’s 167-year run came to an end after a collapse in the value of its shares and bonds last week. Economists, investors and authorities worried that a collapse by Credit Suisse could amplify contagion fears in the global banking system after the demise earlier this month of California’s Silicon Valley Bank, or SVB.

Economists expect U.S. banks to significantly tighten lending standards in response to the upheaval, raising the odds of the economy falling into recession.

The Tell: ‘Hard landing’ in store for U.S. economy as bank crisis intensifies: economist

As a result, fed-funds futures traders abandon expectations for a return to a supersized 50-basis-point, or half-percentage-point, rise in the Fed’s benchmark interest rate when policy makers complete a two-day meeting on Wednesday. The market at the end of last week showed traders saw a nearly 75% chance of a 25-basis-point hike, and a roughly 25% chance the Fed would hold rates unchanged.

Traders also priced in the potential for significant rate cuts by the end of the year, signaling rising recession expectations. Those shifting expectations helped drive the Treasury rally, particularly for the policy-sensitive 2-year note
TMUBMUSD02Y,
4.003%.

Analysts said the Fed may be reluctant to hold off on a rate hike this week given still-elevated inflation readings and data so far that that shows the job market remains tight. Some economists see the Fed echoing the European Central Bank’s lead from last week, when it followed through with an earlier pledge to hike rates by 50 basis points while making clear that further rate moves would depend on future developments and data.

Don’t miss: What’s at stake for stocks, bonds as Federal Reserve weighs bank chaos against inflation fight

“While the Fed is obviously wary of contagion risks, it still views the banking sector as being well-capitalized, and it will want to stress that the inflation battle is not won, and it remains too high, so a 25-bps hike seems very likely, though like the ECB it will likely stress a high level of uncertainty, and offer no guidance, and emphasize data and financial conditions dependency,” said Marc Ostwald, London-based chief economist and global strategist at ADM Investor Services, in a note.

Despite efforts by the Fed and other U.S. regulators to ringfence SVB and a pair of other collapsed banks while moving to backstop deposits, other regional banks have faced significant pressure. While all depositors at those banks were made whole, calls have increased for the U.S. to formally remove a $250,000 cap on insured deposits.

Meanwhile, First Republic Bank
FRC,
-32.80%
saw its credit rating downgraded further into junk territory by S&P Global Ratings, news reports said. The ratings firm cut the bank’s credit rating three notches to B-plus from BB-plus and warned further downgrades were possible, according to Reuters.

First Republic has been a top concern for investors and regulators following the collapse of SVB. Last week a group of 11 large banks agreed to provide a combined $30 billion in deposits to First Republic in an effort to shore up confidence in the lender. Shares of First Republic have plunged more than 80% so far in March.

U.S. stocks ended lower Friday amid banking sector fears, with the Dow
DJIA,
-1.19%
booking back-to-back weekly losses.

The S&P 500
SPX,
-1.10%
rose 1.4% last week, while the technology-heavy Nasdaq Composite
COMP,
-0.74%
climbed 4.4% in its biggest weekly percentage gain since January, according to Dow Jones Market Data.

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March 19, 2023
U.S. economy is headed for trouble, leading economic index signals

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The numbers: The U.S. leading economic index fell 0.3% in February — the 11th decline in a row — continuing to signal an upcoming recession.

Economists polled by the Wall Street Journal had forecast a 0.4% drop.

The leading economic index, also known as the LEI, is a gauge of 10 indicators designed to show whether the economy is getting better or worse. The report is published by the nonprofit Conference Board.

Big picture: The economy has slowed due to the end of pandemic stimulus and the effects of high inflation, which has forced the Federal Reserve to raise interest rates.

Higher borrowing costs typically tame inflation, but at the cost of weaker economic growth.

Although the leading index has been signaling a recession for months, the economy is still expanding. A big question is whether the latest banking crisis ends up becoming a tipping point. So far, regulators appear to have contained the damage.

Key details: Eight of the 10 indicators tracked by the Conference Board fell in February.

A measure of current economic conditions, meanwhile, rose a scant 0.1% in February.

The so-called lagging index — a look in the rearview mirror — also increased by 0.1%.

Looking ahead: “The leading economic index still points to risk of recession in the U.S. economy,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators at the board.

“The most recent financial turmoil in the U.S. banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists,” she said.

Market reaction: The Dow Jones Industrial Average
DJIA,
-1.19%
and S&P 500
SPX,
-1.10%
fell in Friday trading amid nagging worries about the U.S. financial system after the failure of Silicon Valley Bank.

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March 17, 2023
Consumer sentiment falls for first time in four months — and that was before Americans knew about SVB

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The numbers: A survey of consumer sentiment slid to 63.4 in March and fell for the first time in four months, reflecting angst among Americans about high inflation and the health of the economy.

The preliminary reading in March was down from 67 in February, the University of Michigan said. Most of the survey was completed before the collapse of Silicon Valley Bank.

Consumer sentiment helps gauge how Americans feel about their own finances as well as the broader economy.

The index had fallen to a record low of 50 last summer before partly rebounding. Sentiment is still well below a recent peak of 88.3 in 2021, however, and a pre-pandemic high of 101.

Inflation expectations tapered off a bit but remained fairly high. Consumers expect prices to increase 3.8% in the next year, down from 4.1% in the prior month. That’s the lowest reading since April 2021.

Key details: A gauge that measures what consumers think about the current state of the economy dropped to 66.4 in March from 70.7in the prior month.

Sentiment fell the most among lower-income and younger Americans who tend to suffer disproportionately from high inflation. Some wealthier people with large stock holdings were also less confident in light of a recent decline in equities.

Another measure that asked about expectations for the next six months declined to 61.5 from a prior 64.7.

Americans think inflation will persist for some time. In the longer run, consumers believe inflation will increase about 2.8% a year, down slightly from 2.9% in the prior month.

That’s still well above the Federal Reserve’s 2% target, however.

Fed officials pay close attention to inflation expectations because they could be a harbinger of future price trends.

The rate of inflation over the past 12 months is 6%, based on the consumer-price index. It’s fallen from a 40-year peak of 9.1% last summer.

Big picture: Consumer sentiment is still far below levels associated with a healthy economy and it’s hard to see a big improvement anytime soon.

The Fed is raising interest rates to tame high inflation, a strategy that typically slows the economy.

Higher rates have also destabilized parts of the U.S. financial system as witnessed by the sudden collapse of Silicon Valley Bank. That’s adding new stress on the economy.

Market reaction: The Dow Jones Industrial Average
DJIA,
-1.19%
and S&P 500
SPX,
-1.10%
fell in Friday trades amid nagging worries about the U.S. financial system after the SVB failure

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March 17, 2023
U.S. industrial output was flat in February

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The numbers: U.S. industrial production was flat in February, the Federal Reserve reported Friday.

The unchanged reading was in line with economists expectations, according to a survey by The Wall Street Journal.

Output rose a revised 0.3% in January, revised up from the initial estimate of a flat reading, but there were deep declines in November and December.

Key details: Manufacturing output downshifted to a slim 0.1% rise in February after a strong 1% gain in the prior month.

Motor vehicles and parts output fell 0.3% after a 0.6% jump in January. Excluding autos, total industrial output was unchanged.

Utilities output rose 0.5% in February. Mining output, which includes oil and natural gas, fell 0.6% after a 2% gain in the prior month.

Big picture: The softness in manufacturing is expected to continue as interest rates have moved higher. Credit conditions are expected to tighten in the wake of the worries surrounding regional banks.

Market reaction: Stocks
DJIA,
-0.95%

SPX,
-0.63%
were set to open lower on Friday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.449%
fell to 3.47%.

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March 17, 2023
First Republic gets $30 billion in deposits from 11 major U.S. banks, but stock resumes slide as it suspends dividend

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Bank of America BAC, Citigroup C, JPMorgan Chase JPM and Wells Fargo WFC said Thursday that they are each making $5 billion in uninsured deposits into First Republic Bank FRC as part of a $30 billion backstop by 11 banks against the ravaged banking landscape of the past week.

However, First Republic stock fell 14.7% in after-hours trading after the bank said it would suspend its dividend to conserve cash. The bank last paid a quarterly dividend of 27 cents a share on Feb. 9 to shareholders of record as of Jan. 26.

It…

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March 16, 2023
U.S. bank stocks end with solid gains as 11 banks pledge $30 billon to First Republic

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U.S. bank stocks ended regular trading with solid gains on Thursday, as banks announced a $30 billion deposit capital infusion for First Republic Bank and as Treasury Secretary Janet Yellen cited the strength of the financial system.

The 11 banks confirmed a report from the Wall Street Journal and others about providing financial support for First Republic Bank FRC.

U.S….

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March 16, 2023
Philadelphia Fed’s manufacturing gauge remains deep in contraction territory in March

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The numbers: The Philadelphia Fed said Thursday its gauge of regional business activity inched up to negative 23.2 in March from negative 24.3 in the prior month. Any reading below zero indicates improving conditions. This is the seventh straight negative reading and the ninth in the last ten months.

Key details: Broad indicators in the data were all negative in March. The barometer on new orders sank to negative 28.2 in March from negative 13.6 in the prior month. The shipments index sank to negative 25.4 from 8. The measure…

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March 16, 2023
UBS buys Credit Suisse in rush deal

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FRANKFURT — Swiss banking giant UBS will buy the country’s second-largest bank Credit Suisse in a deal that will come as a relief to financial markets in Europe and across the world.

UBS said in a statement that the total price is 3 billion Swiss francs, or about $3.25 billion, in UBS shares.

The deal was pushed through in an effort to avoid further turmoil in global banking following the failure of Silicon Valley Bank and another regional lender in the U.S.

“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the Swiss National Bank said in a separate statement, noting that the deal was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank.

The central bank added that UBS and Credit Suisse can obtain a liquidity assistance loan of up to 100 billion francs.

Highlighting the urgency of securing a deal for the bank before markets open on Monday, Swiss authorities adjusted laws to allow further provision of liquidity by the Swiss central bank, while the government agreed to provide additional guarantees.

The expeditious rescue of Credit Suisse was welcomed by the European Central Bank as well as the Federal Reserve in the U.S.

The “swift action” by the Swiss authorities “are instrumental for restoring orderly market conditions and ensuring financial stability,” ECB President Christine Lagarde said in a statement.

The 167-year-old Credit Suisse has been involved in a series of scandals that have undermined the confidence of investors and clients. It has thus found itself in the eye of the storm when the collapse of Silicon Valley Bank sparked fears of a banking crisis.

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Johanna Treeck

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March 15, 2023