Attention has been focused on banks facing a run on deposits. Fed data released Friday suggested in the aggregate such is not occurring. Bloomberg writes “the Fed’s latest H.4 release suggested no real surge in demand for emergency liquidity…the aggregate level of deposit flight and the rotation from small banks to large banks is concentrated in firms primarily focused in banks concentrated to the technology and start up sectors.”
This begets the next question. Will the 2 year-Treasury snap back closer to the current and projected Fed Funds rate or is there really something more sinister occurring beneath the surface?
Will the yield curve continue to steepen? The collapse in the yield of the two yield Treasury is breathtaking and based upon this data point, rate cuts in the coming months are now priced as a virtual certainty. Two weeks ago, sentiment was the inverse.
In a rational world, I would think the former but given the environment we are living in, an environment that is more extreme than most fiction writers can imagine, I am prepared to keep my options open.
Speaking of which, St. Louis Fed Bank President James Bullard stated Friday that he has raised his forecast for peak interest rates this year amid ongoing economic strength based on an assumption the banking sector strains are indeed temporary.
Bullard commented “I had previously been at 5 3/8%, now I am 5 5/8% so a little bit higher in reaction to the stronger economic news.” Bullard further remarked “there could be a downside scenario where financial stress gets worse, but I did not make that my base case, believing this only has about a 20% chance or playing out.”
Bullard is regarded as one of the more hawkish members of the Fed.
According to Bloomberg, the Fed’s so called “dot plot” of rate forecasts indicated that two other officials shared Bullard’s estimate of 5.625%, and one was higher at 5.875%.
Such forecasts are roughly 2% higher than where the markets are suggesting Fed rates will be in January, with the first reduction occurring in June. As noted many times, the dot plot suggests a 5.1% year end Fed funds rate.
Commenting about Friday’s markets, led by the financials, equities rebounded from early morning declines amid assurances from authorities about the financial sector and speculation that the central bank will have to stop raising rates to prevent a recession.
Speaking of which, swap rates have “completely abandoned wagers on a May rate increase and ramped up bets on rate cuts beginning in June” as per Bloomberg. FRB Chair Powell has dogmatically stated that this is not his base case
The economic calendar is comprised of several housing statistics, sentiment indicators, personal spending and income data and trade data.
Last night the foreign markets were up. London was up 0.96%, Paris up 1.15% and Frankfurt up 1.38%. China was down 0.44%, Japan up 0.33% and Hang Seng down 1.75%.
Futures are up about 0.50% as the prospect of further support eased some concerns over the regional banking sector. The 10-year is off 24/32 to yield 3.52%. The two year Treasury is up 16 bps to yield 3.93%.
