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Major US equity indices ended last week positive on hope that the central bank is close to the end of its rate hiking cycle. The technology-heavy Nasdaq index gained 1.7% and the S&P 500 index increased by 1.39%. Most sectors within the S&P index had positive returns, except for utilities and real estate.
As widely expected, the FOMC meeting on Wednesday voted for another 25 basis points (bps) hike, to bring the Fed Fund target rate range to 4.75%-5%. According to the dot plot, which shows the policymakers’ projections for future rates, median projection indicates a final quarter point hike this year, and rate cuts in 2024.
In Fed chair Powell’s speech, he acknowledged that tensions in the banking system have tightened credit conditions, but also indicated it was too soon to tell how monetary policy should respond. Powell noted that Fed officials do not plan to cut rates this year. However, the futures market has priced in the first rate cut in September.
According to the CME FedWatch tool, there is a 98.2% chance that rates would end the year lower. Lower rates benefit high growth companies which tend to have larger amounts of debt, and thus technology and communication services have led gains so far this year on hope that rates will turn lower soon.
Since the second biggest US bank failure in history drove up volatility two weeks ago, the market has since found calm after the FDIC showed support for depositors. By law, bank deposits of up to $250,000 per account are insured by the Federal Deposit Insurance Corp (FDIC). The law also has a systematic risk exception that allows officials to lift the cap.
On March 12th, the government invoked this exception to fully protect depositors in Silicon Valley Bank and Signature Bank. The market speculated whether the US Treasury would leverage its emergency Exchange Stabilization Fund to broadly backstop all uninsured U.S. bank deposits. Treasury Secretary Janet Yellen denied the rumor, which has sent the stock market down briefly.
To assure the safety of the American banking system, Congressmen have started a conversation on lifting the quarter million insured cap. Meanwhile, the Federal Reserve has set up a new standing facility called the Bank Term Funding program that allows banks to borrow from the Fed by pledging government bonds and mortgage backed securities at the purchase price. Without having to post collateral at market price, banks are relieved of the pressure to realize losses on their bond portfolios if they are forced to raise funds. Small and medium sized regional banks should be able to withstand bank runs with the Fed’s support; however, their profits will take a hit as they boost deposit rates in an attempt to retain customers.
On Monday, First Citizens BancShares Inc. agreed to buy Silicon Valley Bank’s $72 billion of assets at a discount of $16.5 billion. The deal will make First Citizen into one of the top 15 US banks, from the 30th largest commercial bank by assets at the end of 2022. The bank’s stock jumped 54% following the news. Since the great financial crisis, First Citizen has acquired more than 20 FDIC assisted banks. After the deal, about $90 billion of SVB assets remain in the hands of the FDIC.
For this week, any new development on the banking sector, or hint of the Fed’s rate movement will continue to be major market movers. Key economic event to watch for include the US GDP and initial jobless claims on Thursday.
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