The financial crises’ panic phase has likely been ended by JPMorgan Chase’s acquisition of First Republic, but the effects will still be seen in the coming week, which will be crucial for markets and the economy.
The largest American bank by assets secured an agreement to acquire the 14th-largest financial institution after an unsuccessful attempt to keep First Republic open.
In doing so, JPMorgan contributed to preventing a destabilizing wide sectoral collapse, but it did not entirely resolve all the banking issues that were likely to arise.
“This is not the end,” Gary Cohn, former chief operating officer at Goldman Sachs, said in an interview Monday on CNBC’s “Squawk Box.”
“I don’t think we’re going to get three and done. Crises don’t sort of end this easily. There will be other issues out there in the banking world.”
The collapses of Silicon Valley Bank, Signature Bank, and now First Republic Bank will significantly impact the $26.5 trillion U.S. economy since financial services cover such a broad range of businesses.
Critical Week Coming Up
The acquisition marks the beginning of a significant week on Wall Street, one that will include Apple’s results, a crucial interest rate decision, and a jobs report that is likely to reveal further employment slowdown.
On Monday morning, stocks slightly increased on expectations that the worst of a banking crisis that started in early March has now passed.
“The wall of worry may ease,” Wells Fargo banking analyst Mike Mayo said in a note to clients. “Resolving FRC should end the 7-week post SVB bank crisis phase.”
The Federal Reserve meeting this week can be one of the first places markets look to determine the bigger impact. Traders increased their bets on the central bank raising interest rates by another quarter percentage point on Monday morning as the First Republic resolution brought some clarity to the issue of the stability of regional banks.
The wider effects of the Fed’s rate-hiking cycle will nevertheless continue to be seen, according to Cohn, who served as director of the National Economic Council under former President Donald Trump.
If the Fed implements the rise, it will be the fastest tightening cycle since the early 1980s, with hikes totaling 5 percentage points over a 14-month span.
“The unintended consequences of that on banks and balance sheets is fairly substantial. We will see something in the commercial real estate market,” he said. “But that’s what we’re talking about. What you learn in the banking industry is it’s usually the problem you’re not talking about.”
Cohn said he is keeping an eye on consumer spending, which accounts for 68% of all economic activity. Most financial professionals anticipate tighter lending conditions in the future, which could impact expenditure, especially while inflation and interest rates continue to be high.
“The seizure and subsidized on-sale of First Republic completes the obvious unfinished business from the initial acute phase of the bank stress,” Krishna Guha, head of global policy and central bank strategy for Evercore ISI, said in a client note.
“But we think this is only the very early stages of the chronic phase and that for every First Republic or Silicon Valley Bank there will be hundreds of smaller and mid-sized US banks that will act more conservatively in the months ahead in order to minimize any risk that they end up in the same situation,” he added.
Pressure to ‘tone it down’
The financial system is still under stress, which will put pressure on the Fed to at least maintain its current monetary policy even while policymakers still believe inflation is too high.
A slowdown or outright recession is imminent as the first quarter’s gross domestic product growth was much below projections at only 1.1% annually.
According to the CME Group’s FedWatch tracker of futures prices, markets anticipate the central bank will be obliged to cut by at least half a percentage point by the end of the year to battle the potential downturn.
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“The Fed is going to basically have to really tone it down a lot and maybe project that this is the last hike,” said Larry McDonald, founder of “The Bear Traps Report,” also speaking on “Squawk Box.” “Anything they do on the hawkish side will really cause much more financial instability.”
Investors do not want to see any signs on Wednesday of further increases, especially given the chaotic earnings season and impending employment data.
Despite 79% of businesses outperforming Wall Street projections, the S&P 500 is tracking at a loss of 3.7% for the first quarter, according to FactSet. This week, Apple is scheduled to report earnings.
The Silicon Valley powerhouse is predicted to report a profit of $1.43 per share on Thursday, down from $1.88 in the prior quarter.
“Apple is going to be crucial,” said Quincy Krosby, chief global strategist at LPL Financial. “The reason is it gives you perspective on global demand. Apple is in so many portfolios in so many different sectors. Obviously, it’s extremely important, probably the most important of all the big-tech earnings.”
The following day’s nonfarm payroll report from the Labor Department is anticipated to show employment growth of 180,000, down from 236,000 in March and the weakest monthly gain since December 2020.
However, wage statistics and their effects on inflation might be of greater interest to policymakers. So, a market looking for a less assertive Fed might react favorably to a soft payrolls report with softening wages.
“This is a market trying to discern which direction the economy is going to go and are we headed for recession, and if so what kind of recession,” Krosby said. “I think we’re still going to have a split market. I don’t think we’re going to have insight as direct as the market would like.”
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