It was supposed to be so beautiful. After Thursday’s strongly upward session, it seemed that the Fed, JP Morgan, together with the Swiss, saved the situation. Over the past week alone, the Federal Reserve pumped nearly $300 billion into the banking system, and the SNB added 50 billion francs to the collapsing Credit Suisse. In addition, a consortium of private banks led by JP Morgan Chase deposited 30 billion in First Republic Bank.
That seemed to be enough to stop the panic. Or at least pacify the mood at least until the end of the week. However, they were not able to hold them even for 24 hours. First Republic Bank shares fell 33% on Friday after its management suspended dividend payments. This is probably a clear signal what the market thinks about the chances of success of the whole action. It is already clear to the naked eye that the problem does not concern individual banks, but probably a large part of the US banking sector, since so many institutions have applied for support from the Fed.
Wells Fargo fell nearly 4% on Friday, Bank of America slid 4%, JP Morgan Chase 3.8% and Citigroup 3%. And yet we are talking about the largest banks in the United States – that is, companies that are “too big to fail” (but also too big to save if necessary). Shares of smaller, regional US banks fell even more. KBW Regional Banking lost over 20% in two weeks.
The scale of this banking panic is not reflected in the relatively small changes in the main New York indices. After all, the S&P500 gave back only 1.10% and ended the week at 3,916.64 points. The Dow Jones fell 1.19% to 31,861.98 points. Big tech stocks performed best, with the Nasdaq down only 0.74%. Over the week, however, the S&P 500 gained 1.4%, the Dow Jones lost 0.2% and the Nasdaq gained 4.4%.
The scale of the problems in the banking sector is also evidenced by the scale of demand for treasury bonds. Treasuries yields went down along the whole length of the forward curve. Changes ranged from over -20 bp. in the case of short- and medium-term papers -10 bps each. in the case of 20- and 30-year bonds. In my view, this shows a flight from bank deposits to the relatively safe Uncle Sam debt securities. Suffice it to say that just last week (i.e. before the SVB went bankrupt) 1-year US Treasury bills yielded almost 5.25% of their yield to maturity. Now they pay less than 4.3%.
At the same time, the futures market expects the Fed to raise the federal funds rate by 25 bp on Wednesday. However, the valuation of the chances of such a move decreased to 57% on Friday against almost 80% only the day before. This does not change the fact that in the second half of the year, contracts for the federal funds rate price cuts of 100 bps.
In all of this, macroeconomic reports took a backseat. As a chronicler’s duty, let us note that industrial production in February remained at the same level as in January, when it increased by 0.3% m/m (revised from 0.0%). An increase of 0.2% was expected, so taking into account the January revision, we are more or less at zero. Unexpectedly (maybe?) consumer sentiment deteriorated. The University of Michigan index in March fell to 63.4 points. vs. 67 points in February and the market consensus also at 67 points. It is hardly surprising that consumers are concerned, since they cannot be completely sure whether their savings in banks are safe and available at any time.
