Silicon Valley Bank and Signature Bank Fail, Federal Reserve and Federal Deposit Insurance Corporation Respond with Unlimited Deposit Insurance… The central bank board and regulatory board deemed the two banks, plus First Republic Bank, too important to fail, if not quite too big to fail.
What it means— These failures come down to a concentrated clientele and a failure by bank officials to hedge their interest rate risk in their bond portfolios. But now that the Fed and Federal Deposit Insurance Corporation (FDIC) have committed to bailing out uninsured depositors who are wealthy Democrat donors associated with venture capital funds, startups, and crypto currency firms, they will have a hard time not bailing out average Joes when the next bank is laid low.
Over the weekend, the Fed created a new program for this purpose, the Bank Term Financing Program (BTFP). Banks can borrow 100% of the purchase price they paid for their held-to-maturity securities, the ones that aren’t meant to be sold, even though those securities have lost significant value. This allows the banks to meet withdrawal requests.
Government officials claim that taxpayers and consumers won’t pick up the tab. But it’s a word game that doesn’t pass the smell test. We will pay through higher insurance and regulatory fees on deposit institutions reducing our interest income and returns on bank investments. Unfortunately, the BTFP and unlimited bailouts will encourage all bankers to take big risks. And why not? If depositors are covered anyway, why lower profits at all to mitigate risk?
Consumer Prices Rose 0.4% Last Month, Are Up 6% Over the Past Year… Core inflation, excluding food and energy, rose 0.5% in February and 5.5% over the past year.
What it means— The numbers were right in line with estimates, so they didn’t move investor sentiment. On top of that, the numbers were released during the turmoil of the Silicon Valley Bank and Signature Bank failures, which have been hogging the spotlight in the financial press.
One big thing of note is that shelter made up 70% of the inflation last month, with rents up 0.8% for the month and 8.8% for the year, a 42-year high. Private sources show that rents have been falling for almost six months and are just now stabilizing. We’ve been waiting for a break in the government’s shelter calculation, which should drive inflation lower.
Retail Sales Fall 0.4% in February, the Third Drop in Four Months… January retail sales jumped on a 7.1% increase in new auto sales and parts, a category where spending dropped by 1.8% in February.
What it means— With declines in auto sales and gasoline stripped out, retail sales look pretty flat, but that doesn’t mean they aren’t interesting. Restaurant and bar sales are the only services included in retail sales, and restaurant receipts sank 2.2% last month. That’s important, because it shows that consumers might be exhausting their budgets as prices move higher at a faster clip than incomes, which dovetails nicely with the falling real income data, down for 32 consecutive months, from the jobs report last week. This situation is not enough to move the Fed to neutral, but the totality of the week’s events might be.
The pressure on household budgets is still pressing through the economy. Inflation was up 6% while average hourly wages were only up 4.6%. As economist Herbert Stein said, “If something cannot go on forever, it will stop.” Consumers can’t spend more indefinitely as inflation outstrips their earnings.
Futures Traders Swing from Estimating 80% Chance of 50–basis point Hike Next Week to 70% Chance of 25–basis point Hike… the CME FedWatch Tool shows the big swing in the forecast, which also reveals an almost 30% chance of no rate hike.
What it means— As much as we’d love to think that futures traders are giving the Fed credit for deducing lower inflation in the CPI numbers and retail sales, it’s all about the banking industry. Several FOMC (Fed Open Market Committee) members have said they’d like to get a sense of how their policies are affecting the economy before pushing too much further. Well, bank failures caused by rising rates (and incompetent bank management) definitely fit the bill as one way that Fed policy is showing up in the economy.
The central bankers likely are leery of heaping more losses on banks through higher rates, which push down the value of existing, long-term, fixed-income investments, so they might stand pat just to let things calm down. That should be good for investors, because it will give the central bankers more time to review economic data ahead of the May meeting. If the data shows weakness, then a small rate hike next week could be the last one in the current cycle, if there’s a hike at all.
However, the European Central Bank didn’t let the problems with Credit Suisse delay a 0.50% rate hike. The ECB didn’t need to intervene to save Credit Suisse because the Swiss National Bank ponied a up $50 billion loan.
Housing Starts Are Up 9.8% for February, Down 18.4% Over Past Year… Housing starts were expected to be flat, at an annualized rate of 1.31 million units, but instead jumped to 1.45 million.
What it means— It’s all about apartments. Single-family housing starts rose a modest 1.1% last month, whereas multi-family housing starts soared by 24.1%. It was the same story in permits; single-family permits increased 7.6% last month and multi-family permits expanded by 24.3%. As builders complete the multi-family units, it should take some pressure off of the single-family housing market because consumers will have more choices. This is one more thing that suggests housing prices could go sideways for some time as we establish balance at current prices.
Man Robs Bank of One Dollar, and Then Waits for Police… On Monday, March 6, 65-year-old Donald Santacroce entered the Wells Fargo bank at 300 South Main Street in Salt Lake City, UT, and handed the teller a note that said, “Please pardon me for doing this, but this is a robbery. Please give me $1.00. Thank you.” The teller complied and told the robber to leave, but he didn’t. Instead, he waited in the lobby for the police and even complained that it was taking them a long time to respond. When the cops arrived, Santacroce showed that he knew the law. Bank robbery is a federal crime, and he wanted to go to federal prison. He went so far as to tell the police that if he gets out of jail, he’ll just rob another bank. Perhaps this is his personal retirement plan: three hots and a cot after age 65.
Data supplied by HS Dent Research
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