Financial News Digest May 5 2023: Another 0.25pp Hike Rate Raising Concern Over US Recession

Financial News Digest May 5 2023: Another 0.25pp Hike Rate Raising Concern Over US Recession

Attention is turning to the FOMC meeting on Wednesday this week. As expected, the Fed has raised the interest rate by 0.25 percentage points. Meanwhile, the US debt crisis is facing a deadlock due to disagreements between Republicans and the White House. First Republic banks fell on Monday and were taken over by J.P. Morgan, indicating that the banking crisis is far from over.

Another 0.25 percent hike rate was announced on Wednesday

The Fed raised interest rates by 0.25% on Wednesday, marking the tenth hike of the cycle and raising the benchmark funds rate to between 5% and 5.25%. It’s worth noticing Fed Chairman Jerome Powell’s phrasing, which suggests that the central bank appeared to moderate its stance for another interest rate hike in the coming year by removing a line on “additional policy firming” from the prior statement. In other words, the Fed is expected to maintain current interest rates for the rest of the year.

How did the market react to the rate hike?

Following the Fed’s press release, the Dow Jones Industrial Average fell by 245 points, while the Nasdaq dropped around 0.3% and the S&P 500 fell by 0.5%.

Investors had been anticipating that this would be the final rate hike of the year, which should be positive news. However, attention has turned to Powell’s comment that the rate-setting committee believes that inflation will not come down so quickly. This means that the economy will need to stay at high interest rates for some time, raising concerns that such high rates could lead to an economic recession in the US.

Federal Reserve interest rate hikes since March 2022

Here is an overview of the Fed’s interest rate hikes since March 2022. It is speculated that the rate hikes peak is over and we are now in the last phase of this rate-raising cycle.

Mar 2022 0.25%
May 2022 0.50%
Jun 2022 0.75%
Jul 2022 0.75%
Sep 2022 0.75%
Nov 2022 0.75%
Dec 2022 0.50%
Feb 2023 0.25%
Mar 2023 0.25%
May 2023 0.25%

When will be the next FOMC meeting?

The upcoming FOMC meeting on June 13–14, 2023, will be critical for the year as it will set the global investment landscape.

As per CME Group, there is an 82.7% chance that the Fed will stop raising interest rates and maintain their current Fed funds target range in June. Still, investors and central bankers have around six weeks to monitor economic data that could have a big impact on monetary policy.

(If you want to know more about FOMC meeting, you can check out the blog: FOMC: What Is It and What Does It Do? How Does It Affect The World Economy?)

How a US debt crisis standoff could cause a recession

The US debt crisis looms over the economy like a dark cloud. Recent reports from the Congressional Budget Office and the US Department of the Treasury suggest that the government is approaching the point where it will be unable to pay its bills, also known as the “X-date.”

Treasury Secretary Janet Yellen has stated that the “X-date” could arrive as early as June. If that happens, the government may not have enough money to pay its bills, including payments to investors in Treasuries, federal employees, contractors, and Social Security pensioners, leading to a full-blown recession.

While there is hope that a compromise will be reached between Republicans and the White House, the situation remains uncertain. The US government’s inability to pay its bills would deal an immediate blow to millions of Americans who rely on government money either directly or indirectly. This could result in dire consequences, including a significant market shift, investors losing confidence, and a resulting global economic slowdown.

Opinions from the trading sector suggest that investors are already pricing in the potential debt default, as shown by the recent downtrend movement in the market.

富途證券FUTU logo
MoneySmart Exclusive
Min. Commission Fee US Stocks
US$0.99
Commission Fee HK Stocks
HK$0
Min. Account Funding
HK$0
[Till 30 Sep 2023] Open account via MoneySmart can get extra HK$100 supermarket coupon! Get up to HK$1,500 welcome offer upon successful Futu account registration, opening and complete specified requirements. Open an account, deposit HK$10,000, and maintain the average daily assets of HK$10,000
for 30/60/90 days can get 1 out of 6 rewards:

Team up to earn an extra $200 cash coupon each.

1. 13 shares of HSBC Holdings Stock (00005.HK) OR
2. A share of Taiwan Semiconductor Manufacturing Stock (NYSE:TSM) OR
3. HK$800 Supermarket e-voucher OR
4. HK$1,200 Fund Cash Coupon(Distributed in 4 pieces, HK$400, HK$300, HK$300, HK$200) OR
5. HK Stock LV2 streaming quotation (4 months) OR
6. HK$1200 Options Offer (Option commission card USD88, US Opitons depth quotes 6 months, National quotation 6 months)

【Green Bond offer】 Enjoy 13 Fees Waivers with FUTU
Valid until 30 Sep 2023

First Republic Bank collapsed on Monday

The banking crisis in 2023 caused the biggest US bank failure so far: First Republic Bank.

On Monday, regulators arranged for JPMorgan Chase to take over the assets and deposits of First Republic Bank in California. This was the best solution in the circumstances because sharing First Republic’s loan losses with JPMorgan will limit the costs to the Federal Deposit Insurance Corporation to $13 billion.

US regional banks shares drop amid worries about the banking crisis

Regional banks are experiencing a sell-off this week as investors fear another potential bank failure. Western Alliance Bancorporation (NYSE:WAL) and PacWest Bancorp (NASDAQ:PACW) have both seen around a 50% drop in their stock prices, indicating that investor worries have yet to clear.

Despite the bearish sentiment, some analysts believe there’s currently a disconnect between the stocks and the underlying companies. Investors need to look past the market price and recognize the fundamental strengths of these banks, such as growing deposits and capital. They can consult the disclosures that these companies are putting out, including call reports, earnings releases, 10-K reports, and 10-Q reports, and some banks are even providing updates on deposit flows every two weeks in mid-quarter reports to restore investors’ confidence.

微牛證券 logo
MoneySmart Exclusive
🔥Highest offer in town
Commission Fee US Stocks
US$0
Commission Fee HK Stocks
HK$0
Min. Account Funding
HK$0
MoneySmart Exclusive:

New users who successfully open accounts via MoneySmart, passed account verification and make the first deposit at least HK$10,000 and no withdrawal for 60 days can get the exclusive HK$1,000 rewards:

  1. MoneySmart Exclusive:HK$1,000 Apple Gift Card / HK$1,000 PARKnSHOP Vouchers / Jollying Pebble 24 Foldable Suitcase  (Retail price:HK$1,499) (Colour randomly distributed) (distributed by MoneySmart)

^Terms and Conditions apply.

Valid until 31 Oct 2023

What’s the prospect for the banking industry?

The recent financial crisis has raised concerns among investors and the wider financial sector. The crisis is expected to cause credit losses due to liquidity and client confidence difficulties, which will not only affect banks but the entire financial system. Despite efforts to reassure the financial sector, this situation is projected to persist.

Despite the reassurance from the Fed stating that the US banking system is said to be strong and resilient, the rate hike has created further uncertainty for the US economy. Plus, with the potential debt crisis, the US banking industry’s prospects are far from optimistic.

華泰國際-漲樂全球通 logo
MoneySmart Exclusive
🔥Highest offer in town
Min. Commission Fee US Stocks
US$1
Commission Fee HK Stocks (V1 membership)
HK$0
Min. Account Funding
HK$0
MoneySmart Exclusive:

New users will be eligible to get up to HK$2,780 rewards after opening an account and submit the reward claim form via MoneySmart and fulfilling specific requirements.

  1. (Limited Time Offer) HK$1,500 Cash (delivered by Huatai, can be directly withdrawn to bank, need to submit reward claim form)
    /HK$1,500
     
    Apple Gift Card/ OSIM uGun X-Sports  (Retail price: HK$2,180) (Colour randomly distributed) / Jollying Pebble 30 Foldable Suitcase  (Retail price:HK$1,999) (Colour randomly distributed) (no transaction required)
  2. HK$0 commissions forever offer*on HK market, US market, A-Share Market, free platform fee & free HK stock IPO handling fee
  3. 3-months Hong Kong stock LV2 streaming quote (value at: HK$600)
  4. Enjoy 11 Fees Waivers with Huatai

*Terms and Conditions apply.

Valid until 30 Sep 2023

Looking for more personal finance tips? Let’s check out the MoneySmart blog!

Homepage: www.moneysmart.hk/en/