What the chairman of the Federal Reserve, Jerome Powell, said on Wednesday, January 31, 2024, after the two-day meeting of American policy makers, contained nothing comforting. Notably, he did not cut interest rates, or announce cuts and monetary easing next March – as the market predicted. As a result, markets skidded, the dollar rallied and bond yields moved accordingly.
On the other hand, some believe that, after all, the Fed may find itself stabbed in the back like Julius Caesar, who was assassinated on the Ides of March (15th of the month) – a date that coincides with the next meeting of the Fed’s Open Market Committee FED (FOMC). The alarm bells were sounded by the fall in the shares of regional banks, and in particular New York Community Bankcorp, which, incidentally, faced a severe crisis when Signature Bank went bankrupt.
And if then the fuse of developments was the interest rate risk, now the commercial real estate bubble is a risk.
The market
Indeed, NYCB is extending losses (well below SVB lows).
Western Alliance Bancorp is in freefall.
Shares of Zions Bancorp, Comerica and Webster Financial, Citizens Financial, Regions Financial, SouthState, Prosperity Bancshares, Schwab, PacWest and Huntington Bancshares… are on an extreme downward trajectory.
Why the fall?
The drop is possibly explained by the fact that the FED’s (BTFP) backstop for regional banks ends in March (hence the… March stuff), although many are reporting that there may be an extension – if necessary. Clearly, the FOMC is not biased toward tightening, and is considering when it can ease.
However, this does not mean that things are that simple as inflationary pressures are still strong. In any case, a lot of things will be settled depending on how things develop both in the economy and in inflation, which is now also determined in the arena of geopolitics. This is an uncertain process in very uncertain times.
But we have to wait for the commercial real estate bubble I’m suggesting to burst, given that it’s an asset class that never recovered after the pandemic. The market for commercial spaces and especially for offices is currently going through an existential crisis. The reason is the fact that employees do not return to their jobs and prefer remote work.
Fatefully, an asset class that was once worth $3 trillion is now probably worth $2 trillion. For that matter, what acronym will BTFP replace and how many trillions will it inject? The FED removed the following sentence from the FOMC statement: “The US banking system is sound and resilient.” Is it a sign for the economy or was he lying before and now that the banking dominoes are falling again Powell is removing the controversial phrase?
The Risks
- In the US, a key catalyst is fiscal policy: the House of Representatives has just passed a bill providing $78 billion in business-recipient funds.
- Of course, the US, Canada and Mexico are expected to hold elections soon that could shake up the policy framework even more.
- In Brazil, interest rates fell 50 basis points to 11.25%.
- Argentina is in the throes of Milei, while Venezuelan oil will be re-sanctioned due to the conflict with Guyana.
- In the UK, the picture is also bleak: the election is looming, the government looks doomed, yet the opposition will inherit so many problems that it is unclear what it will achieve. And the BOE has to deal with all of this.
- In Europe we have deflation and deindustrialization… And Macron, Scholz and Rutte insist that Europe must rearm to help Ukraine defeat Russia’s war economy.
- In the Middle East, the issue is a ceasefire in the Israel-Hamas war and the release of the hostages. However, the prevailing view, in general, is that the fighting will continue. It is noted that the crisis is spreading due to the involvement of Iran and the USA.
- In India, it’s federal budget day ahead of crucial elections as its economy grows steadily, stocks and bonds rise and foreign investors turn their heads to it.
- In China, the Caixin PMI was at 50.8 as the CCP again skipped setting a date for the already delayed Third Plenary Session where it is supposed to present its longer-term economic plans.
At the same time, the ghost of Evergrande looms menacingly over the markets.
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