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Regional Banks Expected to Rally Following Fed Pause
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A pause from the Fed is all but assured later this afternoon, putting at least a temporary hiatus in place following one of the most aggressive rate-hiking campaigns in history. Cooling inflation data over the past two days has reinforced this notion, as it gives the Fed a bit more room to maneuver and allow past hikes to work their way into the economy.
Earlier this morning, the Bureau of Labor Statistics reported that the Producer Price Index (PPI), which measures the change in selling prices by domestic producers, rose 1.1% year-over-year in May, easing sharply from the 2.3% increase from April. The figure marked the 11th consecutive decline in the annual rate of change and the lowest print since December 2020.
The softening producer statistics came on the heels of yesterday’s Consumer Price Index (CPI) data, which also showed cooling inflation figures. May headline inflation rose 4% year-over-year, the slowest since April 2021 and below the median 4.1% projection. Core CPI, which excludes the more volatile food and energy components, dipped to an annual rate of 5.3%, in line with estimates.
Fed Policy Impact
Leading up this afternoon’s 2 p.m. ET decision, markets are pricing in a roughly 99% chance of a pause:
Image Source: CME Group
Odds have increased significantly in recent days, and not just due to better-than-expected inflation numbers. Earlier this month, both Federal Reserve Governor Philip Jefferson and Philadelphia Fed President Patrick Harker signaled that the central bank will likely implement a pause at today’s meeting. The idea is that a pause could be temporary if future data supports further rate increases.
On a similar note, last week we learned via the Labor Department that initial claims for unemployment benefits totaled 261,000 for the week ended June 3rd, an increase of 28k from the previous week. The figure came in well ahead of the 235k median projection, and marked the highest weekly rate dating back to October 2021. The rise in claims also bolstered the case for a Fed pause this afternoon.
Fed Chairman Jerome Powell has stated that hiking rates by five percentage points since March 2022 now gives the Fed room to wait and see how future data develops. He will likely take somewhat of a hawkish stance during his normal press conference, ensuring market participants understand that a pause today doesn’t necessarily translate to the end of this hiking cycle.
Have Regional Banks Bottomed?
While banks are known to benefit from higher interest rates, the sheer pace of this cycle has placed many banks in an unfavorable situation. Waning loan demand and increasing funding costs have pressured these banks.
The swift rate hike scheme prompted a regional banking crisis, resulting in the failure of three major regional banks this year. Of course, mismanagement of deposits and a high level of commercial real estate loans didn’t help.
And while we may not have seen an absolute end to the debacle, the situation has clearly steadied for the time being. The Fed has another reason to pause today, and that is to provide stability to the banking sector.
We know that markets are forward-looking, and regional banks appear to have bottomed out in May. The SPDR S&P Regional Banking ETF (KRE - Free Report) has risen more than 20% off the lows.
Image Source: StockCharts
While the KRE ETF remains in a downtrend, the fund has regained its 50-day moving average and is trying to breakout of a multi-month base. A pause from the Fed may be just what the doctor ordered.
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Regional Banks Expected to Rally Following Fed Pause
A pause from the Fed is all but assured later this afternoon, putting at least a temporary hiatus in place following one of the most aggressive rate-hiking campaigns in history. Cooling inflation data over the past two days has reinforced this notion, as it gives the Fed a bit more room to maneuver and allow past hikes to work their way into the economy.
Earlier this morning, the Bureau of Labor Statistics reported that the Producer Price Index (PPI), which measures the change in selling prices by domestic producers, rose 1.1% year-over-year in May, easing sharply from the 2.3% increase from April. The figure marked the 11th consecutive decline in the annual rate of change and the lowest print since December 2020.
The softening producer statistics came on the heels of yesterday’s Consumer Price Index (CPI) data, which also showed cooling inflation figures. May headline inflation rose 4% year-over-year, the slowest since April 2021 and below the median 4.1% projection. Core CPI, which excludes the more volatile food and energy components, dipped to an annual rate of 5.3%, in line with estimates.
Fed Policy Impact
Leading up this afternoon’s 2 p.m. ET decision, markets are pricing in a roughly 99% chance of a pause:
Image Source: CME Group
Odds have increased significantly in recent days, and not just due to better-than-expected inflation numbers. Earlier this month, both Federal Reserve Governor Philip Jefferson and Philadelphia Fed President Patrick Harker signaled that the central bank will likely implement a pause at today’s meeting. The idea is that a pause could be temporary if future data supports further rate increases.
On a similar note, last week we learned via the Labor Department that initial claims for unemployment benefits totaled 261,000 for the week ended June 3rd, an increase of 28k from the previous week. The figure came in well ahead of the 235k median projection, and marked the highest weekly rate dating back to October 2021. The rise in claims also bolstered the case for a Fed pause this afternoon.
Fed Chairman Jerome Powell has stated that hiking rates by five percentage points since March 2022 now gives the Fed room to wait and see how future data develops. He will likely take somewhat of a hawkish stance during his normal press conference, ensuring market participants understand that a pause today doesn’t necessarily translate to the end of this hiking cycle.
Have Regional Banks Bottomed?
While banks are known to benefit from higher interest rates, the sheer pace of this cycle has placed many banks in an unfavorable situation. Waning loan demand and increasing funding costs have pressured these banks.
The swift rate hike scheme prompted a regional banking crisis, resulting in the failure of three major regional banks this year. Of course, mismanagement of deposits and a high level of commercial real estate loans didn’t help.
And while we may not have seen an absolute end to the debacle, the situation has clearly steadied for the time being. The Fed has another reason to pause today, and that is to provide stability to the banking sector.
We know that markets are forward-looking, and regional banks appear to have bottomed out in May. The SPDR S&P Regional Banking ETF (KRE - Free Report) has risen more than 20% off the lows.
Image Source: StockCharts
While the KRE ETF remains in a downtrend, the fund has regained its 50-day moving average and is trying to breakout of a multi-month base. A pause from the Fed may be just what the doctor ordered.