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Wednesday, July 24, 2024 | Back issues
Courthouse News Service Courthouse News Service

Banking crisis takes its toll on Wall Street as investors worry about liquidity

What should have been a week devoted to analyzing the latest round of inflation data was instead spent by investors watching liquidity issues surrounding several banks.

MANHATTAN (CN) — The stir on Wall Street caused by the collapse of Silicon Valley Bank, which had $215 billion in assets under control, and of Signature Bank, which managed $110 billion assets, made it impossible this week to focus on inflation data.

On Tuesday, markets plunged despite the intervention of U.S. banking regulators to protect the banks' depositors in an effort to make them whole and mollify investors. Things improved on Thursday after Swiss authorities said they would bail out Credit Suisse following its own liquidity problems and it was reported that beleaguered U.S. bank First Republic took in more than $20 billion from larger banks to keep it afloat.

But on Friday markets again turned south as concerns about the banking industry returned to Wall Street. By the closing bell on Friday, the Dow had lost 51 points for the week, with the S&P 500 declining 55 points. The Nasdaq, which had dropped more in recent weeks than the other two indices, actually pulled ahead this week, gaining 492 points.

“When a large bank gets hit, it causes a chain reaction down the food chain,” James Vogt at Tower Bridge Advisors wrote. “However, as we have been noting, this is nowhere near 2008.” He noted that the main issue will be how the Federal Reserve’s interest rate hikes impact the economy. “It is likely we see more defaults as over-leveraged companies learn that you cannot build an empire with debt alone.”

As to what the Fed will do going forward, the consensus before the banking crisis began was that the central bank would tend toward a 0.25% rate hike at its next meeting, with the slight chance of a 0.5% rate hike. Now, however, the Fed may be suddenly nervous about focusing solely on inflation, given the banking atmosphere.

“The Federal Reserve is going to have to pick its poison,” said Jamie Cox, managing partner for Harris Financial Group. “Tolerate some inflation for a bit to see if its current series of rate hikes takes hold and pause, or keep hiking and deal with the financial instability caused by their own policy decisions.”

Others believe the Fed will give only cursory nod to the banking situation. “This may not be the last point of stress in the economy as the Fed continues to raise rates,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in an investors’ note earlier in the week. “Monetary policy impacts the economy with a lag and we also anticipate rate increases in May and June. The Fed’s policy tightening risks exposing more fissures in the economy and financial system.”

If other central banks are a good guide for what to expect from the Fed next week, the European Central Bank voted Thursday to raise their interest rates by 50 basis points, double the 25 basis points that analysts had forecast. While the ECB has less flexibility in how it addresses interest rates than the Fed, experts note the current landscape could influence the Fed to shift its stance and match the ECB’s 0.5% hike.

“The implications for the Fed’s meeting next week suggests that the Fed will raise rates 25 basis points based on futures probability but will make it clear that the stability of the banking system remains strong,” said Quincy Krosby, chief global strategist for LPL Financial. “However, should be there be further deterioration within the regional banks, or another blowup, the Fed may consider a pause.”

The Fed is in its blackout period, during which its officials are not supposed to make any public comments hinting on what the central bank may do before its next meeting.

Before the banking crisis, investors were intent on seeing what this week’s inflation data would say about the Fed’s next steps. On Tuesday, the U.S. Bureau of Labor Statistics’ consumer price index showed inflation slowing slightly from 0.5% in January to 0.4% in February.

Housing costs accounted for nearly three-fourths of the increase last month, with shelter costs increasing 8.1% year over year, the biggest increase seen in that space since the early 1980s. Housing costs have been gaining at a steady clip of roughly 0.7% the last several months, with a 0.8% increase last month.

Once again, used car prices fell, with the year-over-year prices on them falling nearly 14%. Fuel oil also fell by nearly 8% last month, though that is still up 9% since this time last year. Apparel also saw a second consecutive 0.8% increase in prices despite remaining mostly level the few months prior.

The following day, the BLS’ producer price index also showed the Fed’s labors have not gone unrewarded, with a 0.1% decrease in prices last month and a 4.6% increase year-over-year. The data “should help assure the Fed that its campaign to quell inflation is moving in the right direction,” Krosby said.

Follow @NickRummell
Categories / Economy, Financial, National

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