JPMorgan Chase’s acquisition of First Republic marks the end of the panic phase of the banking crisis, with the fallout expected to continue. The largest US bank by deposits reached a deal to take over the 14th-largest financial institution, averting a destabilising collapse in the sector. However, this does not solve all the banking problems likely to arise.
Broader Impact on Markets and Economy
The failures of Silicon Valley Bank, Signature Bank and now First Republic will reverberate in the $26.5tn US economy, with financial services covering a wide swath of activities. The takeover kicks off an important week on Wall Street, with a key decision on interest rates looming, along with earnings from Apple and a jobs report that is expected to show a further deceleration in hiring. Stocks nudged higher on hopes that the worst of the banking crisis has drifted into the rear view.
Gary Cohn, former chief operating officer at Goldman Sachs, predicts that crises do not end easily and other issues will arise in the banking world. He also believes that the unintended consequences of the Federal Reserve’s rate-hiking cycle will continue to be felt, with the commercial real estate market being an area to watch. As it relates to the banking situation, most experts see tighter credit conditions ahead that could weigh on spending, particularly as inflation and interest rates both remain elevated. Krishna Guha, head of global policy and central bank strategy for Evercore ISI, expects hundreds of smaller and mid-sized US banks to act more conservatively in the months ahead to minimise any risk of ending up in the same situation as First Republic or Silicon Valley Bank.
The chronic phase of the banking crisis has only just begun, with stresses still present in the banking system, putting pressure on the Fed to hold the line on monetary policy despite inflation that policymakers see as still too high. Markets expect the central bank will be forced to cut by at least half a percentage point before the end of the year to combat the possible contraction, according to the CME Group’s FedWatch tracker of futures pricing. Larry McDonald, founder of “The Bear Traps Report,” predicts that anything the Fed does on the hawkish side will cause much more financial instability.
Apple earnings are on tap this week, with the Silicon Valley bellwether on Thursday expected to post profit of $1.43 a share, down from $1.88 the previous quarter. The Labor Department’s nonfarm payroll report for April is projected to show job growth of 180,000, down from 236,000 in March and what would be the smallest monthly gain since December 2020. Policymakers could be more keyed on wage numbers and the impact on inflation. So, a soft payrolls report with softening wages might be greeted positively by a market looking for a less aggressive Fed.
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