Shrinking savings and rising debt leave consumers on shaky financial footing

 U.S. households have been winding down their savings and adding to their debts. This has put many households in a weaker position than the start of the year. Many have feared that the economy has slowed down and just recently those fears were brought back into the spotlight after Silicon Valley Bank was taken over by regulators just last week. The events have been compared to the 2008 financial crisis as this has been the largest US bank failure since 2008. This will likely cause banks to tighten up on lending which will put strain on consumers which will trickle down to people spending less and saving more. This will cause a decline in sales for firms. Those surveyed by Bloomberg put the odds of a recession happening at 60%. Many factors play into this percentage like inflation has hit its highest levels in decades, this has been able to be masked because consumers have been mostly able to keep up with spending.

This month has been an eye opening time for the U.S. After Silicon Bank was taken over many began to realize that the chances of a recession is more possible than what was thought. When labor markets start to show signs of cooling that will be a signal that household incomes have weakened.

https://www.nbcnews.com/politics/economics/shrinking-savings-rising-debt-leave-consumers-shaky-financial-footing-rcna75389

After Credit Suisse's Demise, Attention Turns to Deutsche Bank

Over the past few weeks, we have seen significant struggles from various investment banks, such as Silicon Valley Bank and Credit Suisse. After the recent struggles in America and Switzerland, attention is now turning to the German lender, Deutsche Bank. 

Disbelief has been on the minds of many euro-zone investors as banking turmoil is shifting toward European investment banks. The president of the European Central Bank, Christine Lagarde, has recently made comments ensuring that European banks were safe and had enough liquidity to withstand current market uncertainty. 

Recent market conditions have not benefited the German bank as investors have started selling the bank's stock at high rates, resulting in a decline of 14% in value. Additionally, the Euro Stoxx 600 has declined by 5%. The biggest difference between Credit Suisse and Deutsche was the insurance on deposits. Credit Suisse had no insurance on almost all deposits, resulting in a "lightning-fast" bank run. In comparison, Deutsche bank has insurance on roughly 70% of retail deposits. This is beneficial as the bank has access to highly liquid assets if needed. 

A big concern for Deutsche Bank comes from its significantly high holdings of commercial property. Currently, they own nearly $17 billion in assets, making them one of the most exposed banks in Europe. The bank has a lot of factors to consider moving forward. European banker, Corrado Passera, describes current market attitudes as "uncertainty that produces overreactions to weak signals". It will be very interesting to see how Deutsche Bank will move forward in an effort to not become another "Credit Suisse".

Source: After Credit Suisse's Demise, Attention Turns to Deutsche Bank

Concerns over Global Banking System decrease Treasury Yields

    Over the past month, U.S. treasury yields have been continuing to fall as the FED continues to worry many investors about the state of the U.S. economy and banking system. While this is a major issue in the U.S. it also has been effecting the rest of the world as places like the Deutsche Bank in Germany have been experiencing a reduction in its shares as well due to the same banking system concerns. The impact of these reduced treasury yields has caused prices in economies to fluctuate as they go hand in hand or in other words, are directly correlated with each other. To put it in perspective one basis point of a treasury yield is equal to a 0.01 percent change in prices of the yields and 10 year yields lowered 5 points and 2 year ones lowered 3 points. These are pretty substantial drops in hindsight even though they sound somewhat minimal at only a couple of a hundredth percents.

    Europeans don't seem to be as concerned about the issue as they believe to have a very liquid and strong economy that can correct the issues if need be by liquidating. The U.S. on the other hand is directly confronting the FED as they have been holding meetings about how to correct this yield problem. In their most recent meeting on 3/22/2023 they raised interest rates 25 basis points. While this could have an overall negative impact on the economy it is currently the best possible solution according to the FED. Hopefully, these basis point changes across the economy will slow down and the economy will be able to fully level out soon.

Article - https://www.msn.com/en-us/money/markets/treasury-yields-decline-as-investors-assess-economic-outlook-fed-policy-path/ar-AA191aum

Unexpected Decline in the Producer Price Index

    The PPI saw a 0.1% decrease for the month, which was unexpected, as compared to the 0.3% predicted increase in the Index. The PPI is simply an aggregate of all of the goods and services and the relative change in prices from the consumer's perspective. So, with the current pricing environment, it was quite a surprise that the PPI decreased. The article theorized that the cause of this drop is due to the 36% decrease in the price of eggs and chicken products. If this is the case, I am curious as to why the cost of poultry dropped so drastically 

    As a result, retail sales dropped by 0.4 percent. Some of that decrease is explained by the PPI drop but not all of it. There could be other factors involved like people saving more money because of the current economic fears due to pricing and banking issues. 

    This could signal a shift in the economy from the high pricing environment to decreasing inflation rates down the road. But, this might be too great of an assumption to make simply based on a slight decrease in the PPI. It was most likely a one-off due to extenuating circumstances.

   Regardless of the PPI shift, the FED will most likely be increasing interest rates this go around due to the silicon valley banking crisis. The banking crisis in silicon valley has caused much concern and is of higher importance than the PPI shift when weighing these events to determine the new interest rates.

 https://www.cnbc.com/2023/03/15/ppi-february-2023-.html

The Effects of a Year Long Fight to Curb Inflation

It’s been a year since the Fed began Open Market Operations to deal with high inflation. Through contractionary monetary policy, the  Fed has gotten inflation to decrease by 2.5% from 8.5% to 6%. This shows progress, but also indicates that inflation is still a problem because it’s still well above the target of 2%. It’s expected that the Fed will continue raising interest rates in an effort to continue curbing inflation. 

I wonder how the Fed’s response will change as a result of the SVB crisis. Will they still continue to increase interest rates, even though this is one of the main reasons the bank collapsed to begin with? Since inflation is still an issue, I think the Fed will just increase interest rates in smaller increments. The Fed should make sure that the hikes don’t cause prices to fall extremely low because that will affect the value of stocks and cause another panic in which people begin to sell and withdraw their money from the banks. I think that restoring consumer confidence will be beneficial in dealing with the aftermath of this banking crisis because that'll help along with whatever monetary policy the Fed decides to enact.

https://www.cnbc.com/2023/03/16/one-year-after-the-first-rate-hike-the-fed-stands-at-policy-crossroads.html

Russia and China working together - what could this mean for the global economy?

    This week, journalist Holly Ellyat wrote an article for CNBC entitled Nothing comes for free: What China hopes to gain in return for helping Russia. In this article, Ellyat discussed the meeting that is currently taking place between China's President  Xi Jinping and Russian president Vladimir Putin. 

    President Xi traveled to Moscow to President Putin this week. The two leaders are expected to come to some sort of agreement by the end of the week in terms of if they will work together moving forward. If they do create an alliance, that could send shockwaves throughout a multitude of global economies. 

    One of the most impactful ways would be in the war that Russia has begun against Ukraine. Currently, Russia is beginning to experience the economic repercussions of these actions and it is reported that the Russian government hopes to receive support in the form of military and economic assistance. 

    If this agreement does go through then China extend its dependency on Russia by receiving energy at a cheaper price. There is also the pressing issue that China may request Russia's help in the future with over-throwing Taiwan, which China does not recognize as a county. This similarity in this situation to what happened in Ukraine has many global leaders watching how the events of this meeting unfold with a watchful eye. 

https://www.cnbc.com/2023/03/21/what-does-china-want-from-russia-if-it-helps-it-with-ukraine.html

Mortgage Rates Fall as Uncertainty over Bank Failures Mounts

 In wake of several recent bank failures, mortgage rates have dropped this past week. However, continued uncertainty will likely dishearten many potential homebuyers and keep housing prices high. The current 30-year fixed-rate mortgage averaged 6.60% this past week, up 2.44% from one year ago. Rates had slowly begun to increase again since February, that is until the collapse of several banks over the past week, which has caused investors to place their bond in treasury bonds, generating lower yields, which mortgage rates have followed. Investors' recent turn to treasury bonds has led to a decline in its yields from 4% at the beginning of last week to 3.4% this week., which directly aligns with the drop in mortgage rates. While the Fed does not set rates that borrowers pay on mortgages directly, these rates act in accordance with yield on 10-year treasury bonds, which adjust in anticipation of the Fed's actions. 

    This slight drop in mortgage rates has caused some prospective homebuyers to act fast, leading to an increase in mortgage applications for the second week in a row. "Both home-purchase and refinance activity saw gains last week but remain below year-ago levels," said Bob Broeksmit, CEO of the Mortgage Bankers Association. "Anticipated further rate declines may spur additional application gains as the spring home buying season begins." A similar situation to what is currently transpiring happened back in December of 2022 and January of 2023, where lower mortgage rates spurred those quick on their feet to act fast and lock in lower mortgage rates. However, for a majority of prospective homebuyers, ongoing economic uncertainty stifles many from moving forward in the home buying process. 

https://www.cnn.com/2023/03/16/homes/mortgage-rates-march-16/index.html

The Fed Announces Its New Payment System "FedNow"

The Federal Reserve has recently announced the much-anticipated FedNow payment system is scheduled to launch July 2023. FedNow is a real-time payment and settlement service developed by the Federal Reserve System. It is designed to enable instant fund transfers between banks across the United States, operating continuously year-round.

Features of FedNow:

• Instant Payments: Probably the most significant advantage of the FedNow is the ability to process transactions in real-time. The system allows funds to be transferred between banks instantly, removing the need to wait for business days or delays due to weekends and holidays.
• Continuous Uninterrupted Availability: FedNow operates 24/7 year-round, ensuring that payments can be made or received at any time. This thereby provides greater flexibility/convenience for both businesses and consumers.
• Enhanced Security: FedNow incorporates advanced security measures to protect transactions, ensuring the highest level of safety and reliability.
• integrability: The system is designed to be compatible with existing payment platforms, facilitating seamless integration with other payment systems and services.
• Accessibility: FedNow aims to be accessible to all financial institutions, regardless of their size, enabling even small banks and credit unions to offer real-time payment services to their customers.

Overall, the FedNow system is expected to significantly benefit U.S. financial institutions. Specifically, it will help increase economic efficiency by allowing the easier flow of money, which will lead to greater productivity. Additionally, FedNow was designed with the aim of encouraging innovation by allowing financial institutions to build on the systems capabilities. What are your thoughts on the new payment system, do you think it’s as revolutionary as the Fed says? 

Article: https://www.federalreserve.gov/newsevents/pressreleases/other20230315a.htm

Reference: https://www.federalreserve.gov/paymentsystems/fednow_about.htm 

Home Sales Spike in February on a Dip in Mortgage Rates

 For the first time in 11 years, the median price of a home has dropped, according to the National Association of Realtors. On top of that the sale of existing homes has increased by 14.5% in the month of February, which is the largest monthly increase since July 2020. However, sales are still off by roughly 23% from 365 days ago.

In 2021, the median price of a home fell roughly 0.2%, which levels out to $363,000. Lawrence Yun, NAR Chief Economist states, "Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines. Lawrence also believes that the housing market is seeing the strongest sale gains in areas where home prices are decreasing and the local economy is adding jobs. 

It is important to note that the inventory of homes on the market for sale remains low, with less than a 3 month supply. Homeowners continue to sit on the low rate mortgages which is why they are not encouraged to sell their homes. This is because if they sell their home with an existing low-interest rate then the next home they purchase will be in line with current interest rates which are higher than they were 1-2 years ago. Any further drop in Interest rates will likely bring more buyers into the housing market.

Analyst Hannah Jones believes that there are two unknowns when coming into this spring housing market. One is the debate on what the Federal Reserve will do with IR (either increase or decrease). With an increase in the IR, homeowners are likely to keep their existing houses and people looking to enter the housing market will be hesitant. The second unknown is whether or not the job market will enter a period of slowdown. In this case, a decrease in the job market would also decrease the purchase of big-ticket items, including houses, cars, and college education. 

At this point in time, there are many things riding on the success of the economy, one of them being interest rates. The Federal Reserve must find a happy medium that continues its journey to 2% inflation but also take into consideration the many other factors that high-interest rates have on the economy.

https://www.usnews.com/news/economy/articles/2023-03-21/home-sales-spike-in-february-on-a-dip-in-mortgage-rates-though-prices-fall-for-first-time-in-11-years 

Senator Elizabeth Warren says she favors increasing FDIC’s deposit insurance cap

 With the recent crisis involving regional banks, there has been some discussion over the $250,000 coverage by the FDIC and if it is enough. Senator Elizabeth Warren is at the forefront of this discussion and believes we should look to increase the coverage provided by the FDIC. Warren is blaming the Federal Reserve, the Trump administration, and financial regulators for the crisis as she believes they laid the groundwork which made the situation possible. She specifically said that Jerome Powell "took a flamethrower" to banking regulations. 

       The government created this situation by coming out and saying that everybody who is a client of Silicon Valley Bank will be made whole, even if they are above the $250,000 threshold. By doing this, for every bank that fails from now on clients of said bank would point to SVB and say "If they were all made whole we should be too." Another conversation that ensues from limiting the coverage is how much will the level be raised, and also where would this money come from. 

    Wealthy people or companies who have more than $250,000 in a bank would try their best to make sure the bank they choose is safe so that they wouldn't lose their excess money. This in turn may make banks take on less risk so that wealthier people will bank with them, thus resulting in more deposits and ways to make the bank money. If the FDIC increases their insurance level, the risk banks take may increase as more people have over $250,000 than people who have $5 million for example. This may have an inverse effect where the FDIC will have to bail out more banks than they do currently.

https://www.bostonglobe.com/2023/03/20/business/senator-warren-says-she-favors-increasing-fdics-deposit-insurance-cap/ 

The $3B UBS & Credit Suisse Deal

 UBS has agreed to acquire its rival Credit Suisse for over $3 billion. This deal would dramatically change the global banking landscape and create one of the most powerful banks in the world. The combined market cap of these two companies would be over $60B. 

This UBS-Credit Suisse deal is seen as a move to restore confidence in the global banking system, which has been shaken by a number of recent scandals and crises (ex: Silicon Valley Bank). By creating a larger and more powerful institution, the acquisition could provide stability and reassurance to investors and customers. The deal is also expected to create efficiencies and cost savings that could improve profitability and strengthen the banks' financial position. 

This deal will almost certainly face regulatory hurdles as many people are concerned that the acquisition could lead to reduced competition and higher prices for consumers, particularly in the areas of wealth management and investment banking. 

Global banking crisis: What just happened?

 

    On March 10th, Silicon Valley Bank (SVB) collapsed and shut its doors. SVB falling makes it the largest US bank to collapse since Washington Mutual did in 2008. SVB had a liquidity crisis and was over-leveraged. To free up cash they decided to try and sell shares, but that ended up failing which then triggered a panic and customers were not able to get their deposits. The FDIC now has control of the bank and has ultimately considered it insolvent. 

    First Republic Bank has been struggling too over the last week and there have been aggressive efforts by other lenders and the U.S. government to avoid another bank run. So far other banks have lended out over $200 Billion to this cause. Jamie Diamond noted that banks still need a lot of money to solve their liquidity issues and that big banks like JPMorgan, Citi, and Bank of America will continue to lend money out to hopefully stop this issue.

    SVB got into this crisis by investing into a lot of long-term bonds when interest rates were super low. When inflation rose, the value of the bonds dropped and depositors wanted higher rates, so the bank was forced to sell off some bonds at a loss which caused them to lose liquidity. When this hit mainstream media, people panicked and SVB could not maintain the withdraws and a bank run occurred. Another part of it was that SVB also invested in risky Tech Venture Capital and the technology sector got crushed in 2022 which caused the bank to along with VC to get crushed. The bank managed the risks they had made poorly and their heavy involvement with technology ultimately hurt them in 2022 which caused SVB to collapse.

    In terms of the whole economy, this increases the odds of a recession because banks are supposed to have cash on hand and maintain a financial system. Customers are also afraid now due to them believing that they may not be able to collect their deposits. Most banks are over-leveraged with debt and GDP has gone down which can indicate a possible recession. Also the yield curve is inverted where short-term interest rates are significantly higher than the long-term interest rates. Contractionary policy and an illiquid economy make for a fearful situation. I think that we are guaranteed to enter a painful recession that will cause the banking system to rapidly change to avoid this issue again.  

Link: https://www.cnn.com/2023/03/17/business/global-banking-crisis-explained/index.html