October 23, 2024 | Premium Service | This week in The Institutional Risk Analyst, we take stock of the global credit markets in the wake of last month’s half point interest rate cut by the Federal Open Market Committee. Since the Fed’s action, bond market yields have backed up more than in 1995, when a guy named Alan Greenspan also promised to engineer a “soft landing.” If this is how the Committee manages market “expectations,” then we definitely need a new plan.
The 10-year Treasury note was flirting with 4.25% at the close yesterday and the par contract for too-be-announced contracts for Fannie Mae MBS delivered in November is closing in on 6% vs 5% a month ago. Residential mortgage rates could be 7% by election day. The US markets are melting up despite the seemingly impending victory by President Donald Trump. You got to give Trump credit for great political instincts with the late campaign visit to McDonalds, complete with the Ronald McDonald yellow suspenders. The forward market for to-be-announced (TBA) Fannie Mae MBS is shown below.
Source: Bloomberg (10/22/2024)
As US markets inflate on a sea of endless liquidity, China’s communist leaders are struggling to slow the mounting debt-deflation in that nation’s financial markets. Xi Jinping mingles with the leaders of other failed communist states at the BRICS meeting in Kazan, but in Beijing authorities are making matters worse by selectively restructuring the country’s massive and mostly uncollectible debt. Restructuring the bad balance sheet of a private company is possible, but in China the debt often represents a state subsidy. There is no leverage in China, good or bad, just empty financial assets with no economic value. See our last comment (“Will BRICS Topple the Dollar?”).
JPMorgan (JPM) jumped more than 10% following the Q3 2023 earnings release, but the question is whether other financials will follow. In this regard, we note that a small bank in Oklahoma failed Friday and was sold over the weekend by the FDIC. Since there was no "systemic risk determination" as was the case with Silicon Valley Bank, Signature Bank and First Republic Bank, the uninsured depositors must await recoveries. The uninsured depositors of The First National Bank of Lindsay, Lindsay, OK, will get access to 50% of their cash, as was SOP pre-COVID. The FDIC stated last week:
“For uninsured deposits, the FDIC has announced it will make 50 percent of those funds available to depositors starting Monday, October 21, 2024, with the possibility of increasing that amount as assets from the failed bank are sold."
In a bank failure, the FDIC as Receiver represents all depositors and these preferred creditors go first in the waterfall, but large depositors must often wait for months to be made whole. It will be interesting to see how the markets react to a delay in payouts in the larger failures to come. The insured deposits and FHLBs will still be paid out 100%, as before COVID, but what happens when another member of Peer Group 1 rolls over?
Most people did not notice the small bank failure, but the fact that the FDIC is no longer willing to pay out uninsured depositors upon the close of a bank as it did with Silicon Valley Bank et al should be noted. “Unlike venture capitalists and crypto barons in California, these uninsured depositors didn't get bailed out,” notes our friend Alex Pollock.
Of course, neither of the presidential candidates have mentioned the budget deficit during the 2024 campaign. Whoever finds themself in the White House in January will be facing a fiscal policy mess and the prospect of more inflation. If the Fed and the banks have to start buying bigger and bigger portions of Treasury auctions, what does this say about the outlook for interest rates, inflation and financials?
Less rate rally means less excitement in the near-term, but we still expect the better names in financials to rebound from Q2 lows, as discussed below. Today we review the results from two of our favorite American Express (AXP) and Charles Schwab (SCHW) and talk about our expectations for interest rates and financials as 2024 grinds to a close. We’ll be rebalancing the WGA Bank Top Indices at the end of next week. Subscribers to the Premium Service get access to the constituents of the Indices and the Top 50 Banks.
American Express