All Things in Moderation

Vital Statistics:

Stocks are higher this morning on speculation that First Republic will get a capital injection. Bonds and MBS are down.

First Republic might get a capital injection. The Wall Street Journal reported that the consortium of banks that deposited $30 billion at the troubled bank are looking at converting those deposits into a capital infusion. The news (along with the Credit Suisse merger) has improved sentiment in all of the regional banks, including Western Alliance, PacWest and US Bank.

Janet Yellen is speaking at a banking conference today and is expected to reassure bankers that the Treasury is ready to protect depositors in the event of a system-wide bank run. The punch line is she will tell the American Bankers Association that the US banking system is “sound” and the situation is “stabilizing.” Additional measures to protect depositors “could be warranted.” “The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized.”

That is good news, but ultimately deposit rates are low and people have better options with their money. Banks can either stand pat and watch deposits run away of raise rates and watch net interest margins collapse. Pick your poison.

The FOMC starts its two day meeting today. The Fed Funds futures are forecasting a 80% chance of a 25 basis point hike. Overall, the Fed Funds futures are getting more hawkish as the market bets the banking crisis is over. That might be wishful thinking, but so far the markets are in a risk-on move.

Borrowings at the Federal Home Loan Bank increased by $304 billion last week, while borrowings at the Fed’s discount window increased to $150 billion. It is amazing how close to the bad old days of the 2008 crisis we are. That said, the 2008 crisis was a sea change in how accessing the discount window was perceived. Prior to 2008, accessing the discount window was considered to be an act of desperation, and a bank’s Board of Directors would think long and hard about accessing those funds. It was a signal to the markets that things were unraveling and most bank executives would avoid doing that like the plague. In 2008, we had a slew of investment banks convert to commercial banks in order to gain access and the stigma is now gone. History will judge whether that was a good thing or not.

The dot plot will probably matter way more than whether the Fed hikes 25 basis points or not. The markets see the Fed cutting rates this year, and if the dot plot doesn’t confirm that I think we could see a major sell-off in stocks and bonds.

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