Stocks week ahead: Bad news for banks: Rates are rising fast

Asset Management Giants black rock (BLACK) Y state street (STT)regional banking powers US Bank (USB) Y PNC (PNC)and online lender financial ally (ALLY) they are also ready to publish their latest results.
Investors expect financial stocks to benefit from rising interest rates. But it is a complicated calculation. If the Fed is serious about aggressively tightening monetary policy, that could backfire on big banks.

The Fed is no longer expected to raise rates gradually. The consensus view among economists is that a series of quarter-point increases will no longer be enough.

The Fed is behind the curve on inflation. It’s time for shock and amazement.

After cutting rates to zero at the start of the pandemic in March 2020, the Fed kept rates there until finally raising them to a range of 0.25% to 0.5% in March.

But, according to futures trading on the Chicago Mercantile Exchange, investors are now pricing in a nearly 80% chance of a half-point rise at the Fed’s May meeting and about a 55% chance of a another half-point increase in June. There is even a greater than 30% chance of a three-quarter point rate increase, to a range of 1.5% to 1.75%.

Further rate hikes could hurt corporate profits and lead to even more volatility in the stock market. Bank profits could also take a hit, because a slump on Wall Street could lead to less demand for mergers and new stock sales. Wall Street giants command lucrative advisory fees from deals, initial public offerings, and special purpose acquisition company (SPAC) listings.

The ripple effect of higher rates

An economic slowdown caused by substantially higher rates could also hit demand for mortgages and other consumer loans.
Mortgage rates are now approaching 5% and could continue to rise along with longer-dated Treasuries. The 10-year Treasury yield soared to around 2.7% this week, the highest level since March 2019.
Therefore, any increase in lending profit margins could be offset by a drop in lending activity. People would be less likely to buy new homes in a housing market that has already become prohibitively expensive for many Americans.
The yield curve inversion could also hurt banks. With rates on short-term bonds, particularly 2-year Treasuries, rising briefly above 10-year Treasury rates, that could also put a cap on profits for banks that need to pay higher rates. short term on deposits. .

“Recent curve inversion has been a stretch for bank stocks, with uncertainties around credit and revenue growth,” KBW managing director Christopher McGratty said in a preliminary first-quarter earnings report. He specifically cited “the risk of high deposit costs.”

It also doesn’t help that an inverted yield curve tends to be a fairly reliable predictor of an eventual recession. Needless to say, banks would not do well if the economy pulls back sharply.

All of these concerns are hurting bank stocks. Investors seem more nervous about an eventual pullback than excited about the potential short-term boost in credit earnings.

Two exchange-traded funds that own shares of most major banks, the Select financial sector SPDR (XLF) Y SPDR S&P Regional Banking (KRE) ETFs are down this year along with the broader market.

“Rising inflation and higher interest rates may lead to a US recession. The course of the pandemic may also change consumer behavior as we move toward a new normal,” said Kenneth Leon, analyst bank of CFRA, in a preliminary earnings report.

“US households could be more frugal and conservative with the use of their credit cards or consumer loans. Uncertainties remain about the outlook for business and consumer lending activity, as well as investment banking,” it added.

Inflation could get worse before it gets better

Rising prices remain a major issue for many consumers. The US government will make that painfully clear once again next week when it releases two key reports on inflation in March.
The consumer price index will be released on Tuesday morning. Economists forecast that CPI figures will show prices rose 8.3% in the last 12 months, according to Refinitiv. That would be higher than February’s year-over-year increase of 7.9%, which was already a 40-year high.

And experts aren’t yet predicting much relief on the horizon.

Inflation challenges are likely to worsen before prices begin to decline. Stifel’s chief equity strategist Barry Bannister forecast in a recent report that the annualized rise in the CPI will peak at 9% in the coming months, before finally starting to taper off in the third quarter.

Inflation is even more problematic at the wholesale level. The government’s producer price index, which measures the prices of raw materials sold to businesses, rose 10% in the 12 months ending in February.

The fact that the PPI is rising even more than the CPI could be a sign that companies are unable or unwilling to pass on all of their higher costs to consumers. That could hurt profit margins going forward.

Until next time

Monday: China inflation; UK manufacturing production

Tuesday: US consumer prices; earnings from Car Max (KMX) and Albertson
Wednesday: US producer prices; JPMorgan Chase Earnings, Delta (FROM)Black Rock and Bed bath and beyond (bbby)
Thursday: ECB interest rate decision; Weekly US Unemployment Claims: US Retail Sales; US Consumer Sentiment (U. of Michigan); earnings from Taiwan Semiconductors (SST), United Health (UNH), ericsson (Eric)Citigroup, Wells Fargo, Morgan Stanley, Goldman Sachs, helping ritual (RAD)US Bancorp, PNC, State Street and Ally Financial

Friday: Major world stock and bond markets closed for Good Friday

Leave a Comment