Feb 7th Morning Note
Fed's Hawkish Tone Despite NYCB's Plunge
The S&P 500 opened higher this morning approaching the 5,000 level, however, over the last 48 hours we have been busy digesting Fed speak and NYCB’s latest stock plunge (more below). On the earnings front, Snap plunged more than 30% on a revenue miss and weak guidance, while automaker Ford gained nearly 6% after beating Wall Street’s fourth-quarter estimates and issuing higher-than-expected full-year guidance.
A robust earnings season, along with anticipation of interest rate reductions from the Federal Reserve, has bolstered equity markets. This positive momentum has been primarily driven by large-cap technology and artificial intelligence-focused companies, leading to a somewhat concentrated market breadth. However, amidst this resilience, there is growing skepticism regarding the extent to which the Federal Reserve will actually implement rate cuts.
Hawkish Tone from Fed Speakers
Cleveland President Loretta Mester struck a cautious tone, saying she if the U.S. economy performs as she expects it could open the door to rate cuts, but she's not ready yet to offer any timing for easier policy amid ongoing inflation uncertainty. Further she mentioned that “It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%”.
Minneapolis Fed President Kashkari noted that “there’s been very good news” on inflation though “we’re not all the way there yet”. He also noted that the current stance of monetary policy may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic. It is possible that the policy stance that represents neutral has increased. This morning he said “Sitting here today, I would say, two or three cuts would seem to be appropriate for me right now,” during a CNBC “Squawk Box” interview. “But again, I don’t want to prejudge things, but that’s, that’s my gut, based on the data we have so far.”
Philadelphia Fed President Harker struck a more balanced tone, saying that the Fed’s approach “has put us on the path to a soft landing” although he did not comment on rate cut prospects.
In addition to the previously mentioned points, the ISM Services index exceeded expectations, registering at 53.4 compared to the anticipated 52.0. Notably, the prices paid component reached an 11-month peak at 64.0, surpassing the forecast of 56.7. This indicates that inflationary pressures may still be present. Further encouraging news came from the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS), which indicated a moderation in the recent significant tightening of credit conditions in the fourth quarter. The survey revealed that the tightening of credit standards for commercial and industrial loans was at its most gradual rate in the past seven quarters. While credit conditions are still stringent, the risks to economic activity implied by the SLOOS appear to be diminishing.
The above comments led to partial recovery from the sharp rates sell-off seen post-NFP jobs report and Powell’s 60-minute appearance. Currently, the yield on 2-year notes stands at 4.42%, which is around 20 basis points higher than Friday, but below the peak of 4.48% observed in the past 48 hours. Similarly, the yield on 10-year notes is at 4.10%, up by 20 basis points since Thursday, yet below the high print of 4.17% recorded on February 5th.
What happened at New York Community Bancorp (NYCB)?
The regional bank has been in freefall since reporting a surprise fourth-quarter loss last week.
Poor earnings were reported due to significant increases in provisions. The bank has significant exposure to CRE at ~45% of tangible assets but had one of the lowest CRE reserve coverage ratios at just 0.6% last quarter before the big reserve build.
Management is not capable of managing the transition to a category IV status. Extending to poor communication on the outlook for 2024 during the earnings call
Dividend cut by more than 70%
The moves reignited concerns that some small and medium sized banks could be squeezed by declines in profitability and losses on real estate holdings.
After the closing bell yesterday, Moody's downgraded New York Community Bancorp's long-term debt rating by two notches from Baa3 to Ba2 and into HY territory. It remains on watch negative. “The downgrade reflects Moody’s views that NYCB faces high governance risks from its transition with regards to the leadership of its second and third lines of defense, the risk and audit functions of the bank, at a pivotal time,” Moody’s wrote. “In Moody’s view, control functions with strong knowledge of a bank’s risks are key to a bank’s credit strength.” NYCB said the downgrade isn’t expected to have a “material impact on our contractual arrangements.”
The bank is searching for a chief risk officer and chief audit executive and has managers serving on an interim basis in those positions, NYCB said in an overnight statement made hours after the Moody’s report. Former executives in those roles left the bank in the months before its disastrous earnings report last week, Bloomberg reported.
New York Community Bank’s shares jumped slightly early Wednesday after it promoted its chairman to help stabilize the company’s operations. The bank made Alessandro DiNello executive chairman effective immediately, promoting him from nonexecutive chairman, to work with CEO Thomas Cangemi “to improve all aspects of the Bank’s operations,” according to a statement released at 7:45 am.
For the year, the stock is down ~59%, so the situation remains precarious.
Other News:
US Commercial Real Estate Contagion Is Now Moving to Europe BBG
Fed’s Kashkari Sees Two to Three Rate Cuts as Appropriate in 2024 BBG
Target Weighs Paid Membership Program Akin to Amazon Prime BBG
China Replaces Top Markets Regulator as Xi Tries to End Rout BBG
Snap Reports Disappointing Revenue During Ad Slump; Shares Plunge BBG
NYCB Extends $4.5 Billion Stock Rout to Lowest Level Since 1997 BBG
Uber posts first full-year operating profit and boosts buyback hopes FT
McKinsey and BCG warn staff face jail if they reveal Saudi work FT
How the US became the world's biggest gas supplier NYT
Last year's most accurate forecaster sees another year of economic growth and job gains WSJ
Why Americans Are So Down on a Strong Economy WSJ
Eurozone governments rush to sell bonds to tap investor demand FT
Trump floats Chinese goods tariff exceeding 60% if elected BBG
China's $2tln stock rout leaves investors scarred FT