AE Wealth Management: Weekly Market Insights | 3/12/23 – 3/18/23
Weekly Market Commentary
THE WEEK IN REVIEW: March 12 – March 18
Are there cracks in the banking system’s foundation?
To say lots has been happening in the U.S. banking system over the past two weeks is quite the understatement. First Silicon Valley Bank and Signature Bank were closed by regulators. Then fissures appeared over at Credit Suisse, which reported in February that clients pulled $119 billion out in the fourth quarter and that in 2022 the bank realized its biggest annual loss since 2009. The Swiss central bank stepped in on Thursday, injecting $54 billion in the beleaguered entity in an effort to shore up its liquidity.
Not to be left out of the fray, San Francisco-based First Republic Bank also needed assistance to keep its doors open last week. The 14th-largest bank in the country, First Republic typically caters to wealthy clients on the West Coast. The cash infusion from 11 of America’s largest lenders was meant to keep the bank solvent after customer withdrawals, but by Friday, shares were still down by 25%.
The recent activity led to an overall decline for stocks in the financial sector last week, as investors looked for signs that we’re in for another 2008. But there are some distinct differences this time around. Most significantly, regulations and reforms passed on the heels of the Great Recession (known as the Dodd-Frank Act) have resulted in stronger balance sheets for most large banks. The act also brought about increased restrictions on how big banks can invest, limiting speculative trading and eliminating proprietary trading.
However, Dodd-Frank exempted smaller banks (those with assets under $10 billion) from stricter oversight, leading to consumer concern about the current stability of small- to mid-size banks. On Friday, the Mid-Size Bank Coalition of America (MBCA) asked regulators to extend FDIC insurance to all deposits for two years. They argued that doing so would slow the pace of customer withdrawals from smaller banks, shoring up the banking sector’s foundation for the time being.
Inflation dips again, but still a long way from the target
For once, inflation numbers weren’t the hot headline, coming in the shadow of banking news. The consumer price index (CPI), released last Tuesday, showed the price of all goods rose 6% year-over-year, only a 0.4% slowdown from January. Meanwhile, the producer price index (PPI) report came out on Wednesday, revealing producer prices rose 4.6% in the same period.
So how will the recent banking struggles plus latest inflation numbers impact this week’s Federal Reserve meeting? The Fed has two options. It can stay focused on its mission to bring down inflation with another rate hike, potentially putting more pressure on the banking sector. Or it can pause hikes and give the banking system some time to recalibrate. Raising rates may address the Fed’s official mandate to fight inflation, but it doesn’t fit the Fed’s unofficial task of making sure our financial system stays stable.
Even economic analysts are scratching their heads and trying to figure out what the Fed will do. Some think the Fed will pause rates altogether, while others think they’ll follow through with a hike of 25 basis points (0.25%). Most agree, however, that an increase of 50 basis points (0.50%) is off the table, at least for now.
Coming this week
- It could be another action-packed week for markets. The big news will be the Fed’s rate raise (or not), which will be announced on Wednesday.
- Otherwise, it’s a rather light week for data. Existing home sales (Tuesday) and new home sales (Thursday) will reveal what’s happening in the housing market.
- All eyes will remain focused on the banking sector, particularly unfolding events with Credit Suisse and First Republic.
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