Morning Report: First Republic is rescued, sort of…

Vital Statistics:

S&P futures3,972-22.5
Oil (WTI)68.25-0.12
10 year government bond yield 3.46%
30 year fixed rate mortgage 6.50%

Stocks are lower this morning as Credit Suisse is declining again. Bonds and MBS are up.

Treasury has cooked up a quasi-rescue of First Republic. A consortium of 11 banks have agreed to deposit $30 billion at the bank. “We would like to share our deep appreciation for Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, PNC Bank, State Street, Truist, and U.S. Bank. Their collective support strengthens our liquidity position, reflects the ongoing quality of our business, and is a vote of confidence for First Republic and the entire U.S. banking system. In addition, we want to share our sincerest thanks to our colleagues, clients, and communities for their continued and overwhelming support during this period.”

The company also suspended its dividend. That said, investors are cool to the measure and the stock is down 22% pre-market. Ultimately the banks are going through something similar to the the 1970s – disintermediation. People are pulling their money out of the banks because you can get better returns elsewhere. The short term Treasury market is a much better place to put your money than a bank right now, and money market funds saw $108 billion in inflows this week. There really isn’t a policy lever that can change that. We are re-experiencing the 1970s, when rising short term rates caused people to pull out their deposits for higher returns elsewhere, while the banks balance sheets were full of 3% mortgage loans that kept falling in value.

Meanwhile, Janet Yellen said that the banking system is safe.

The Conference Board’s Index of Leading Economic Indicators declined in February. “The LEI for the US fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Negative or flat contributions from eight of the index’s ten components more than offset improving stock prices and a better-than-expected reading for residential building permits. While the rate of month-over-month declines in the LEI have moderated in recent months, the leading economic index still points to risk of recession in the US economy. The most recent financial turmoil in the US banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists. Overall, The Conference Board forecasts rising interest rates paired with declining consumer spending will most likely push the US economy into recession in the near term.”

Industrial Production was flat in February, while manufacturing production rose 0.1%. Capacity Utilization fell to 78%.

Consumer sentiment fell in February, according to the University of Michigan Survey. Most of the survey was conducted prior to the recent banking failures, so the data doesn’t really reflect it yet. Importantly, inflationary expectations fell, which is good news for the Fed.

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