Weekly Review & Outlook: March 11, 2024

The February payroll report topped expectations but prior months were revised substantially lower. Powell’s congressional testimony left the anticipated 2024 monetary path unchanged ahead of this week’s inflation data and next week’s FOMC meeting. The second high profile Private Equity bank capital investment of the last twelve months was inked.

BLS February Employment Situation report (March 8) found 275,000 net new jobs added since January. Gains were most heavy in the usual sectors of government, health care and hospitality. Job growth estimates for the two prior months were revised lower by -167,000 dampening the perceived strength of the February increase allowing Treasuries to continue their month to date rally.

Fed Chairman Jay Powell delivered his semi-annual congressional testimony. To my ears, nothing substantially new or different was opined. To paraphrase, while further rate increases are unlikely this cycle, economic activity, labor markets and elevated core inflation data keep the Fed sidelined from near term easing. Unsurprisingly, there was not much inquiry about the impact of ongoing fiscal stimulus to inflation.

Interest rate futures are slightly more dovish pricing an initial quarter point in June followed by another ¾ point reduction by year end. There is near universal consensus that the policy rate is unchanged following next week’s FOMC meeting. More interesting to observers will be the Summary of Economic Projections update and whether median Fed Funds for year end 2024 is adjusted from the current projection for 75 basis points reduction.

While the Fed describes their decision making as data dependent, I see large qualitative factors in their decision making. The rules based Taylor model suggest much lower policy rates are appropriate today by as much as 75 to 150 bps below the current Fed Funds effective rate.

Finishing my thoughts with events in the regional banks. The drama at New York Community Bank likely crescendoed last week. News reports of an ongoing capital raise crashed the stock further before an actual deal for more than $1B in capital investment was announced.

The phrase “history doesn’t repeat but it rhymes” is cliché for good reason. Lead investor on the NYCB deal is former Treasury Secretary Steve Mnuchin with his Liberty Strategic Capital fund. For those of us who were active in the banks during the Great Financial Crisis, we clearly recall March 2009 as the final wash out in bank equity prices. Mnuchin’s Dune Capital joined other high profile PE firms that month to recap the IndyMac assets from the FDIC to form OneWest. While the two deals are not exactly comparative and we all recognize risk assets never come with guarantees, there is a track record to consider. Ultimately, good outcomes in stressed banks are derived from maintaining depositor confidence and daily execution of sound strategy.