Treasury yields are leaking higher this morning despite more negative regional bank headlines. PacWest’s stock plunged more than 60% in after-market trading yesterday when news leaked that the bank was “weighing strategic options.” Western Alliance (WAL), considered the next likely domino should PacWest not recover, fell nearly 40%. This morning, First Horizon (FHN) and TD Bank announced that their $13 billion merger plan is now terminated, sending FHN’s stock down more than 40% in pre-market trading. Last night, WAL released a statement reaffirming its financial strength, noting that its deposits were up slightly following the First Republic failure, and PacWest issued a statement this morning saying it’s in talks with several potential investors, while also noting stable deposit activity this week and adequate cash and liquidity levels. As we noted yesterday morning, a crisis of confidence will overwhelm fundamentals, and to this point, government officials and lawmakers have been unwilling/unable to respond with any emergency efforts to proactively reassure depositors, such as temporary deposit insurance expansion.
Yesterday’s FOMC announcement was about as close as it gets to market expectations. A 25 basis point hike was coupled with an adjustment in the official guidance that signals a pause in future hikes if the upcoming data permits it. In the press conference, Powell continued to differentiate financial stability tools related to banking turmoil with the policy rate directed at achieving price stability. He also suggested the banking crisis was over following the arranged rescue of First Republic by JPMorgan, just before the PacWest headlines emerged that sparked a fresh sell-off in several regional bank stocks. As of this morning, the fed funds futures market is pricing 75 basis points of rate cuts by year-end, beginning with a 25 basis point cut at the September meeting. To start this week, only a 25 basis point cut in December was priced into the market.
Jason Haley
Chief Investment Officer
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