The First Republic deal comes at a critical point for markets and the economy


Traders work on the floor of the New York Stock Exchange on April 26, 2023 in New York City.

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JPMorgan Chase The takeover of First Republic is likely to end a period of banking crisis panic, with the fallout coming in a crucial week for markets and the economy.

Largest US bank by deposits after failed attempt to keep First Republic open reached a deal To acquire the 14th largest financial institution. In doing so, JPMorgan helped avert a volatile sector-wide collapse, but by no means solved all the banking problems to come.

“This is not the end,” said Gary CohnIn an interview Monday on CNBC’s “squawk box“I don’t think we’re going to finish three more. Crises don’t end that easily. There will be other issues in the banking world as well.”

With financial services covering such a wide range of financial services in a US$ 26.5 trillion economy, Silicon Valley Bank FailuresSignature Bank and now First Republic Bank will echo.

important week ahead

The takeover is kicking off an important week on Wall Street, with key decisions on interest rates as well as earnings Apple And a jobs report that is expected to show a further decline in hiring.

shares monday morning high On hopes that the worst of the banking crisis that began in early March has moved to the back view.

“The wall of concern may be coming down,” Mike Mayo, banking analyst at Wells Fargo, said in a note to clients. “Resolving the FRC should end the 7 weeks since the SVB Bank crisis.”

One of the first places markets could turn is to assess the big impact at this week’s Federal Reserve meeting. Traders stepped up their bets on Monday morning that the central bank would hike interest rates by another quarter percentage point as an earlier republican proposal provided some clarity on the question of regional bank health.

But Cohn, who was director of the National Economic Council under former President Donald Trumpsaid the cascading effect of Fed rate hike cycle Will continue to feel If the Fed follows through with the hike, it would mark a 5 percentage point rate hike over a 14-month period, the fastest cycle since the early 1980s.

“The unintended consequence of this on banks and balance sheets is quite significant. We will see something in the commercial real estate market,” he said. “But that’s what we’re talking about. What you learn about in the banking industry is usually the problem you’re not talking about.”

Kohn said one area he is watching is what happens to consumer spending, which makes up 68% of all economic activity.

As it pertains to the banking situation, most experts see tighter credit conditions ahead that could put pressure on spending, especially as both inflation and interest rates remain high.

“First Republic’s seizure and subsidized sales complete clear unfinished business from the initial rapid phase of bank stress,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a client note.

“But we think this is only the beginning of an earlier phase and for every First Republic or Silicon Valley bank there will be hundreds of small and medium-sized US banks that will act more conservatively in the coming months to at least .. there is a risk that they end up in the same position,” he said.

pressure to ‘get it down’

Stress is still present in the banking system, which will put pressure on the Fed to at least take control of monetary policy, despite inflation that policymakers still see as very high.

Gross Domestic Product grew only 1.1% annually In the first quarter, well below expectations and another sign that a recession or outright recession is ahead. Markets expect the central bank to be forced to cut by at least half a percentage point before the end of the year to deal with a possible contraction. CME Group’s Fedwatch Tracker for futures pricing.

Larry McDonald, founder of “The Bear Traps Report,” also speaking on “Squawk Box,” said, “The Fed will basically have to cut it a lot and probably project that this is the last hike.” “Whatever they do will actually cause a lot of financial volatility.”

A sign of more hikes on Wednesday isn’t something investors want to see, especially in the midst of a messy earnings season and ahead of a rising jobs report.

According to FactSet, S&P 500 earnings are tracking a 3.7% loss in the first quarter, even as 79% of companies beat Wall Street estimates. Apple’s earnings are on tap this week, with the Silicon Valley bellwether on Thursday expected to post a profit of $1.43 per share, down from last quarter’s $1.88.

“Apple is going to be important,” said Quincy Crosby, chief global strategist at LPL Financial. “The reason is it gives you perspective about global demand. Apple is in so many portfolios in so many different sectors. Obviously, it’s hugely important, probably the most important of all big-tech earnings.”

A day later, the Labor Department’s nonfarm payrolls report for April is forecast to show job growth of 180,000, down from 236,000 in March and the smallest monthly gain since December 2020.

However, policy makers may be paying more attention to the wage numbers and the impact on inflation. So a soft payrolls report coupled with soft wages could be greeted positively by markets looking for a less aggressive Fed.

“This is a market that is trying to understand where the economy is headed and whether we are heading into a recession, and if so what kind of recession,” Crosby said. “I think we’re still going to be a segmented market. I don’t think we’re going to get as direct an insight as the market would like.”

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