Traders work on the floor of the New York Stock Exchange on April 26, 2023 in New York City.
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JPMorgan Chase The acquisition of First Republic is likely to end the panic phase of the banking crisis, with the fallout coming in a crucial week for markets and the economy.
After an unsuccessful attempt to keep First Republic afloat, the US’s largest bank by deposits has reached an agreement to acquire the 14th largest financial institution. In doing so, JPMorgan helped avert a destabilizing broader collapse in the sector, but by no means solved all the expected banking problems.
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“This isn’t the end,” Gary Cohn, a former chief operating officer at Goldman Sachs, said in an interview on CNBC’s “Squawk Box” Monday. “I don’t think the three of us will be done. Crises don’t end that easily. There will be other problems in the banking world.”
With financial services covering such a wide range of activities in the $26.5 trillion US economy, the failures of Silicon Valley Bank, Signature Bank and now First Republic Bank will reverberate.
Critical week ahead
The acquisition ushers in an important week on Wall Street that will see a major decision on interest rates alongside earnings Apple and a jobs report expected to show a further slowdown in hiring.
Shares rose Monday morning on hopes the worst of a banking crisis that began in early March has passed.
“The wall of worry may be fading,” Wells Fargo banking analyst Mike Mayo said in a note to clients. “The FRC’s solution should end the 7-week phase following the SVB banking crisis.”
One of the first places markets can turn to gauge the larger impact is at this week’s Federal Reserve meeting. Traders increased bets Monday morning that the central bank would make another 15 percent rate hike as the First Republic resolution brought some clarity on the health of regional banks.
But Cohn, who was a director of the National Economic Council under former President Donald Trump, said the broader impact of the Fed’s rate-hiking cycle will continue to be felt. If the Fed does the hike, it will hike 5 percentage points over a 14-month period, the fastest tightening cycle since the early 1980s.
“The unintended consequences of this for banks and balance sheets are quite significant. We’ll see something in the commercial real estate market,” he said. “But we’re talking about that. What you learn in the banking industry is that you don’t usually talk about the problem.”
Cohn said one area he’s watching is what’s happening with consumer spending, which accounts for 68% of all economic activity.
Regarding the banking situation, most experts foresee tighter credit conditions that could weigh on spending, especially as both inflation and interest rates remain high.
“The seizure and subsidized resale of First Republic complete what appears to be unfinished business from the initial acute phase of banking stress,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI, in a note to clients.
“But we think these are just the very early stages of the chronic phase and that for every First Republic or Silicon Valley bank there will be hundreds of smaller and mid-sized US banks that will act more conservatively to mitigate in the coming months no risk of them getting into the same situation,” he added.
pressure to tone it down
With the banking system still strained, this will put pressure on the Fed to at least maintain the monetary policy stance despite inflation, which policymakers see as still too high.
Gross domestic product rose just 1.1% annualized in the first quarter, well below expectations and another signal that a slowdown or outright recession is imminent. Markets anticipate the central bank will be forced to cut rates by at least half a percentage point before the end of the year to combat the potential fall, according to CME Group’s FedWatch tracker of futures prices.
“The Fed needs to basically dampen it really, really hard and maybe project that this is the last rate hike,” said Larry McDonald, founder of The Bear Traps Report, also in a speech on Squawk Box. “Anything they do on the side of the hawks is really going to create a lot more financial instability.”
A hint of more rate hikes on Wednesday is something investors don’t want to see, especially amid a muddled earnings season and ahead of a looming jobs report.
S&P 500 earnings are down 3.7% in the first quarter, according to FactSet, even as 79% of companies beat Wall Street estimates. Apple earnings are on the table this week, with the Silicon Valley pioneer expected to report earnings of $1.43 per share on Thursday, compared to $1.88 in the previous quarter.
“Apple will be critical,” said Quincy Krosby, chief global strategist at LPL Financial. “The reason for this is that it gives you an overview of global demand. Apple is in so many portfolios across so many different sectors. Obviously, it’s extremely important, probably the most important of all big tech revenue.”
A day later, the Labor Department’s payroll report for April is expected to show job growth of 180k versus 236k in March and the smallest monthly gain since December 2020.
However, policymakers could focus more on wage numbers and the impact on inflation. So a weak pay report with falling wages could be welcomed by a market looking for a less aggressive Fed.
“This is a market trying to see where the economy is going to go and whether we are headed for a recession, and if so, what kind of recession,” Krosby said. “I think we will still have a divided market. I don’t think we will have as direct an insight as the market would like.”