All Things in Moderation

Vital Statistics:

Stocks are flattish this morning after First Republic Bank was seized by regulators over the weekend. Bonds and MBS are down.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. The Fed Funds futures are predicting about a 80% chance of a 25 basis point hike this week. Besides the FOMC meeting, the other big piece of data will be the jobs report on Friday.

First Republic Bank was seized by the FDIC over the weekend. JP Morgan will acquire the bank for $10.6 billion. JP Morgan will also get loss coverage from the FDIC of 80% on all acquired loans. The underlying assumption of the deal was that FRB’s loans were marked at 87.

Separately, the Fed’s review of the Silicon Valley Bank situation is here. It basically lays the blame on deregulation and limiting the regulatory burden on the banking system: “In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including pressure to reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory action,” the report says, adding that this may have “in some cases led staff not to take action.”

I still find the fact that the Fed didn’t even consider the scenario of rising interest rates in its stress tests to be the biggest surprise. Especially since their policies made that scenario happen. The assets that got the bank in trouble were Treasuries and MBS, but just because an asset doesn’t have credit risk doesn’t mean it has no risk.

The US manufacturing economy improved in April, according to the ISM Manufacturing survey. That said, it remains in contraction territory.  “The U.S. manufacturing sector contracted again; however, the Manufacturing PMI^® improved compared to the previous month, indicating slower contraction. The April composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period. Demand eased again, with the (1) New Orders Index contracting, but at a slower rate, (2) New Export Orders Index slightly below 50 percent but improving, (3) Customers’ Inventories Index entering the low end of ‘too high’ territory, a negative for future production and (4) Backlog of Orders Index continuing in strong contraction. Output/Consumption (measured by the Production and Employment indexes) was positive, with a combined 4.4-percentage point upward impact on the Manufacturing PMI^® calculation. The Employment Index indicated slight expansion after two months of contraction, and the Production Index logged a fifth month in contraction territory, though at a slightly slower rate. Panelists’ comments continue to indicate near equal levels of activity toward expanding and contracting head counts at their companies, amid mixed sentiment about when significant growth will return. Inputs — defined as supplier deliveries, inventories, prices and imports — continue to accommodate future demand growth. The Supplier Deliveries Index indicated faster deliveries, and the Inventories Index dropped further into contraction as panelists’ companies manage inventories exposure. The Prices Index moved back into ‘increasing’ territory, at a moderate level, after one month of marginally decreasing prices.

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