Pro Perspectives 4/26/23

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April 26, 2023
As we discussed yesterday, there is renewed pressure on First Republic Bank – the still standing, but still troubled bank that was exposed in the banking shock of last month.
With that, when the Fed releases it's weekly report of securities holdings tomorrow, we'll find out if this renewed stress results in another impulse of Fed balance sheet expansion.  
Below is what the Fed's job of "lender of last resort" looks like when they have to provide liquidity to a banking system that's having or fearing a liquidity shock.  In this case, it was a depositor run on a few banks last month.    

The Fed stepped in and plugged the gap with "loans." And, in coordination, the Fed and Treasury implicitly assured the safety of deposits in the banking system, but stopped short of an explicit emergency guarantee of all deposits (to include uninsured depositors beyond the failed Silicon Valley Bank and Signature Bank).
But, while the two banks that failed last month, and the teetering First Republic Bank, share(d) commonalities of an unusually high percentage of uninsured deposits, and an industry high duration mismatch (between asset and liability maturities), the real culprit in this meltdown was the depositor panic.  Moreover, how quickly it spread through social media.
All of that said, arguably, the trigger was the Fed's tone-deafness to the stress it has created from this tightening cycle.  That said, the interest rate market is pricing in about a 75% chance of, yet another, Fed rate hike next week. 
But we have a Q1 GDP report tomorrow, which looks like it will come in lower than had been projected now, given the downgrade in today's updated Atlanta Fed model (was +2.5%, now +1.1%).  And this appears to be driven by the lower revisions to January and February retail sales data (revisions that were released on Tuesday).
So this sets up for a negative surprise tomorrow.  And then we have the Fed's favored inflation gauge, core PCE (monthly, March), on Friday
This, while First Republic will likely require more attention from the Fed, FDIC and Treasury.  This may all be setting up for a positive surprise from the Fed next Wednesday (i.e. a pause). 
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