They Broke The Regionals. Sell The Last Hike
"Sell the last hike."
It's a familiar refrain from one popular sell-side strategist, and he reiterated it this week following what most believe was, in fact, the last Fed rate increase of the cycle.
"Fed hiking cycles always 'break' something," BofA's Michael Hartnett wrote. "This time [it was the] US regional banking system."
Hartnett's annotated Fed funds chart is a mainstay. Now, after a 14-month tightening campaign from Jerome Powell, the visual has a new annotation. And a new title: "The
Such a crazy world. Today no different. Markets will continue to swing, until post pandemic adjustment finishes. Not there yet.
Agree, Ria. And partially as a result of the pandemic, we’re swimming in a very large pool of money. Hope things evolve to a more even keel.
Walt’s got right. We know from long experience hot the rate hike cycle ends. Selling the last, as it seems to be so, is expected and welcomed.
Sorry. Typing on my phone isn’t the best idea.
I doubt the Fed is done breaking things. Fortunately their leader and most members are old enough to remember what a nasty bout of inflation can do to a country. I think CRE is next and residential market will follow. Then, when lots of regular people are out of work and all that magical equity in people’s homes has vanished, and watching Zillow for their home’s value is no longer a fun thing to do every day, and their credit card are maxed out, that is when inflation gets tamed.
I have employed several 22-25 year old kids from Argentina for the last 5 months. The stories they tell, with inflation running at 100%, are harrowing. Talk about changing your mindset when it comes to your money. Saving, and planning for the future are out the window for them if they stay in their country. They’ll have a leg up when they head back home this month, with USD’s in their accounts but are well aware how fast it will evaporate.
I am not so sure our leaders are actually old enough to remember the last big one. It had already started by the time of the oil embargo and the formation of OPEC in 1973. Fiftieth anniversary this year, yet that has not been mentioned which tells me memories are short. Don’t know how old Powell is, but if he’s 65, he was probably getting ready for his junior prom and not paying any attention to inflation. I was newly married and paying 9% on my mortgage. I do remember gas lines, rationing and the whole 9 yards. Forgotten memory for most.
Not by me. When we were trying to navigate the odd-even daily restrictions to fill our band’s truck, many Texans were proudly sporting bumper stickers which read “Drive 90, Freeze a Yankee.”
That was an eye-opener for me. I came to realize that southerners were still fighting the Civil War. Explains a lot, right to this day.
As one of the oldies, I feel I have to chime in. I do remember high inflation—my dad was collecting glass bottles and such, because the price of antique glass items kept rising at an increasing rate. I have to laugh when current homebuyers complain about mortgages getting north of 5%. I considered myself lucky to get a 12.5% adjustable. During gasoline rationing, I was one of those who had to travel by car on a weekly basis, so alternate-day filling was a constant nightmare for me. But as someone who decided a year or so before the pandemic set in that it would be cheaper to live in Georgia, derek’s observation is the most real and unsettling, because I feel like I’m living in one of those Paul Newman movies about the South that I found so chilling when I was in high school. Can’t wit to move back to civilization.
“wait”
I was young, but remember going from station to station trying to find one with gas, in the 70s. In the early 80s, I remember paying something like 14% (?) on my first house mortgage.
Anyway, my question is what benefit does having over a thousand banks (1,400) bring to the US?
Canada has only about 35 domestic banks, plus about 45 foreign banks with branches in-country. The big five (RY TD BNS BMO CM) dominate, their charts look like the US GISBs. Looking over the smaller Canadian banks on my screen they are mostly flat to up YTD, despite paltry deposit insurance (CAD 100K).
Is credit less available or more expensive in Canada vs US? And is that good or bad?
John,
I lived and worked in Vancouver for about 2 years roughly 12 years ago, right after the GFC. This might just be because I wasn’t Canadian (I don’t think so), but credit was much less available. The loonie had just surpassed parity with the USD and I believe Canadian banks held up much better post-crisis than almost anywhere else in the world. I believe they were just much better regulated.
Thanks for sharing Derek. As H might put it, that’s hilarious if you ignore the terrifying subtext
OSFI is the Canadian regulator of banks, insurance cos. and pensions. They are historically more conservative than their US counterparts if you have had the pleasure of working with them, but the Canadian banking system had less leverage going into the GFC as a result, which is why they fared better.
I worry about Canadian banks’ exposure to housing.
Canada’s pandemic house price bubble was bigger than the US by some measures, such as price-to-income, with the average house price around CAD 690K which seems awfully high to me. House prices have fallen significantly more from the early 2022 peak in Canada (-14% national average, but wide dispersion with BC, Manitoba, Ontario down double-digits and Alberta, Saskatchewan up slightly) than in the US. Volume is down a lot. Further price declines are generally expected (link below) but there’s a spring lift going on.
Inflation, employment, and policy seem on a broadly similar path in Canada as the US is getting to, with inflation at 4.3% from the high of 8%, job growth strong (a little softening but not much), and unemployment only 0.1% above recent lows. The BoC paused/stopped raising rates at 4.5% in Jan, after a rapid tightening from 0.25%, and as far as I know (and I don’t know much about Canada, honestly) is still on the “higher for longer” path, hoping for inflation to decline to 3% this year but not ruling out more rate hikes. As with the US, many forecasters have been expecting a recession but have been “disappointed” to date.
About a third of Canadian mortgages are variable rate, some with variable payments and some with fixed payments that shift to interest-only as rates rise and, when rates hit the “trigger rate”, either move to negative-amortizing or cease to be fixed. My understanding is that mortgages written in 2021 are mostly at or above the trigger rate now, as mortgages rates have about doubled since the 2021 lows. Not many Canadian mortgages are insured, about 20%.
Looking at RY (Canada’s equivalent of JPM), non-performing and delinquent mortgages are very low, for now anyway. LTVs are something like 74% for recently written mortgages, a good deal lower for older mortgages. The bank is raising allowances, the street is looking for signs of deterioration (in mortgages, deposits, CRE, all the same things that are being talked about in the US), but so far things are calm. I haven’t looked closely at other Canadian banks but, as noted, the charts aren’t “dramatic” and so far any damage seems mostly due to US exposure (TD, etc).
https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-market-outlook/2023/housing-market-outlook-spring-2023-en.pdf?rev=5c29bc91-2310-435f-b2c9-b801866d0ede
Hmm, just writing all this down makes me more cautious about Canadian banks.
The fomc could split the baby by ending qt and leaving the Fed funds rate alone for awhile. They should have done that already since the regional bank blow up anyway.