By Isabel Wang
Recession fears, bank failures and debt-ceiling concerns may bolster case for a Fed pause, after one last rate hike Wednesday, says market economist
Stock-market investors didn’t get much time to enjoy a brief period of relief for stocks following JPMorgan Chase & Co.’s takeover of First Republic Bank.
The seizure on Monday of troubled First Republic (FRC) and the subsequent takeover by JPMorgan Chase (JPM) failed to arrest a slide in U.S. regional bank stocks on Tuesday, as weak economic data and a fast-approaching U.S. debt deadline put renewed pressure on the economy.
Exchange-traded funds that invest in bank stocks tumbled on Tuesday, extending losses from the prior trading session. Shares of the SPDR S&P Regional Banking ETF (KRE) were down 6.3% and the SPDR S&P Bank ETF (KBE) dropped 5.2%. The Invesco KBW Bank ETF (KBWB) was 4.3% lower, while the Invesco KBW Regional Banking ETF (KBWR) tumbled by 5.5%, according to FactSet data.
Shares of regional banks PacWest (PACW) and Western Alliance (WAL)posted steep losses on Tuesday, down 27.8% and 15.1%, respectively.
See:How First Republic ended up as the second-largest bank takeover in history after Washington Mutual
Alexander Yokum, equity research analyst at CFRA Research, said the “prolonging of First Republic’s failure” has allowed the banking system to stabilize and investors to identify it more as a “company-specific problem.”
First Republic was tossed a lifeline in March after 11 of the biggest U.S. banks, led by JPMorgan Chase, deposited $30 billion in it in a bid to raise confidence in the lender, after the sudden collapse of Silicon Valley Bank and Signature Bank. But its final downward spiral began in earnest last week, after the lender reported larger-than-expected deposit outflows in the first quarter.
“Contagion risk seems to have come down,” Yokum told MarketWatch via phone. “First Republic last week dropped a very significant percent, but other banks weren’t selling off,” he said. “It does feel like the correlation there has definitely come down. People are viewing it more as a company specific problem.”
Peter Cardillo, chief market economist at Spartan Capital, said news of First Republic Bank’s seizure and sale to JPMorgan Chase briefly calmed the stock market on Monday morning, but that stocks couldn’t withstand broader concerns about the economy.
“This banking ‘crisis’ is certainly not comparable to 2008,” Cardillo said, adding that Tuesday’s selloff in stocks likely, “has more to do with recession fears than the banking ‘crisis’ itself, now.”
Recession concerns took center stage on Tuesday after oil prices tumbled following weak economic data from China, and after a surprise decline in JOLTS job openings, which suggest that demand for workers is cooling a year after the Federal Reserve began lifting interest rates to combat inflation.
Meanwhile, Cardillo said worries that the U.S. government could breach its debt ceiling as soon as June 1 also spooked the stock market. “One- and three-month bills are rising, while the rest of the yield curve is plummeting. That is a good indication that the market is beginning to worry about the debt ceiling.”
The 3-month Treasury yield jumped 13 basis points to 5.14% on Tuesday afternoon, while the yield on the 1-month Treasury bill shed 4 basis points to 4.35% at the close, according to FactSet data.
Stock-market investors wondered whether the continuing regional bank difficulties will create any last-minute issue for the Fed as the central bank officials kicks off a two-day policy meeting on Tuesday.
However, Cardillo said the growing concerns about financial stability, a potential economic slowdown and about the U.S. debt-ceiling may give the Fed permission to signal it will finally pause, after delivering one last rate hike on Wednesday.
“The Fed is poised to raise rates by 25 basis points, but I also think they will indicate that this is the last raise,” Cardillo said. “So, the pause is here, and I believe that will happen.”
U.S. stocks finished sharply lower on Tuesday with the Dow Jones Industrial Average down nearly 367 points, or 1.1%. The S&P 500 ended 1.2% lower, while the Nasdaq Composite slumped 1.1%.
-Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
05-03-23 0905ET
Copyright (c) 2023 Dow Jones & Company, Inc.
