Morning Report: Regional Banks Rebound

Vital Statistics:

Stocks are higher this morning as the regional banks rally. Bonds and MBS are down.

PacWest cut its dividend to conserve cash, which has caused the stock to rally. Generally dividend cuts are not received well by investors, but PACW is up 21% this morning. Don’t see that too often. Western Alliance is up, along with Comerica and KeyBank.

The week ahead will be generally data-light, with the exception of the consumer price index on Wednesday. The Case-Shiller Home Price Index peaked in June of 2022, so we are pretty close to having the owner’s equivalent rent portion of the CPI fade into the background. The labor market remains super-tight however.

Charlie Munger warned that commercial real estate is going to be a growing problem. ” A lot of real estate isn’t so good any more. We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.” Office is clearly a problem, and I don’t see that going away. Apartment supply is elevated as well, especially in urban areas. While nobody is calling this another 2008 problem, valuations are collapsing in the office space.

The pain in the commercial real estate sector, along with the problems with the regional banks will have a further tightening effect on the economy. Credit will become more restricted, which gives the Fed more leeway to stand pat in June. The debt ceiling kabuki theater can also help if the Federal Government manages to actually cut spending. The Federal Government used a lot of fiscal stimulus during the pandemic, and that helped stoke the demand we are seeing now. This is an unappreciated contributing factor to inflation and while the Fed has been taking steps to reduce demand, the Federal government has not.

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