Deposit outflows to squeeze U.S. bank's near-term profitability - Fitch

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Deposit challenges are expected to pressure profitability for U.S. banks in the near term, as the industry contends with its worst crisis in 15 years, according to a report from Fitch Ratings on Tuesday.

To lure customers, banks will have to pay out higher rates on deposits, which would erode their profitability, analysts at the credit ratings agency said.

Three U.S. banks have collapsed so far in 2023, after a flight of deposits spiraled out of control.

To shore up their liquidity, banks will also tighten their lending standards, particularly for commercial, industrial and commercial real estate sector, Fitch wrote.

Bank's exposure to the commercial real estate industry has been in focus in the past few weeks as demand for office space craters, adding to the strain for regional lenders which have been languishing since Silicon Valley Bank collapsed in March.

The crisis has also engulfed seemingly healthy banks, with investors dumping stocks even of those banks that analysts have said are financially sound.

(Niket Nishant)



Consensus expectations call for Fed rate cuts by the end of 2023, but Saira Malik, chief investment strategist at Nuveen, expects rates to remain higher for longer.

"A Fed pivot may sound like a tailwind for risk assets, but such a shift won’t occur in a vacuum. In fact, what ultimately causes the Fed to cut — a slowing economy that devolves into a recession — is bound to be a negative for markets, " writes Malik in a note.

Until then, Malik believes continued tightness in the labor market, along with stubbornly sticky inflation and the on-going debt-ceiling debate, should cause volatility to pick up in the coming weeks.

Despite the challenges facing U.S. markets, Nuveen believes they’re generally a relative safe haven vs those of most other countries and regions. That said, Malik continues to see attractive pockets of opportunity outside the U.S., especially among certain emerging markets.

Two EM equity markets Nuveen finds attractive are Brazil and Mexico. Here is their logic:

In Brazil, consumer inflation continues to decline, and the Brazilian central bank’s key policy rate is 13.75%, which is just shy of a 15-year high. With inflation rapidly cooling, policymakers may need to cut rates sooner rather than later — potentially sparking a strong equity market rally.

Mexico’s story is similar to Brazil’s: high nominal and real rates, with decelerating inflation. With Mexico closely linked to the U.S., its central bank tends to change monetary policy according to Fed actions. This time, however, it may decide to front-run a Fed cut, especially with a real rate of 4.4%.

(Terence Gabriel)



The small-cap Russell 2000 .RUT significantly underperformed the blue-chip Dow Jones Industrial Average .DJI last year. So far in 2023, the RUT is just slightly off the Dow's pace.

That said, with the RUT/DJI ratio testing support, it may be time for a shift back in favor of small caps:

The RUT collapsed nearly 22% in 2022 for its biggest yearly decline since 2008. Meanwhile, the DJI lost 8.8% last year. So far this year, the DJI has risen just over 1%, while the RUT is slipping just shy of 1%.

The RUT put in a relative strength high vs the DJI in early 2021. This was around the time the meme-stock mania was its most intense.

Despite making a new all-time high in early-November 2021, the RUT/DJI ratio had already begun a pronounced decline highlighting a collapse in animal spirits. The Nasdaq .IXIC peaked later that month, and the DJI, and S&P 500 .SPX topped in early January 2022.

Last week, the RUT/DJI ratio hit a log-scale support line from its 1999 low. This line provides support just ahead of the ratio's 2008 and 2020 troughs.

Turns in the ratio can be violent, so there is potential for small caps to soon start outperforming the DJI, either by going up more strongly, or by experiencing less weakness.

That said, relative downside could still be severe in the event the ratio breaks the support line and then the 2020 trough gives way.

Of note, the RUT is about 6% above its bear-market low close, which occurred in June of last year. Additionally, as of the end of April, financials, at around 20%, comprised the largest weight in the IShares Russell 2000 ETF IWM.P.

Thus, for the RUT to outperform, it may be necessary for banking stress to calm.

(Terence Gabriel)



Owners of small U.S. businesses grew crabbier last month than they've been in over a decade.

The National Association of Independent Business' (NFIB) optimism index USOPIN=ECI shed 1.1 points in April to land at 89, the metric's most dour reading since January 2013.

The index has now spent 16-straight months below its historical average of 98.

Of note, 'labor quality' overtook 'inflation' as the most pressing problem for the first time since January 2022.

"Optimism is not improving on Main Street as more owners struggle with finding qualified workers for their open positions," writes Bill Dunkelberg, NFIB's chief economist. "Inflation remains a top concern for small businesses but is showing signs of easing."

Among other morsels of joy in the report, a net negative 9% reported increase in sales over the last three months, and expectations for gains in sales volume sank to a net negative 19%.

On the whole, survey participants reported a decrease in inventories - worrisome, considering the fact that the private inventories component of GDP was the biggest drag on the first-quarter headline, detracting 2.3 percentage points. Take away that component and the 1.1% quarterly annualized growth in the first three months of the year would have come in at a robust 3.4%, according to Commerce Department data.

As inflation gradually cools, the net percentage of respondents to have raised selling prices has also cooled, falling 4 percentage points to a net 33%.

Here's a look inflation concerns and price hikes compared with core producer prices (PPI):

Additionally, 56% reported capital expenditures in the last six months - down 1 percentage point from March - 40% of which was spent on machinery.

The capex decline "could be linked to the tightening of lending conditions by banks in the wake of regional bank failures, but that is hard to square with other details of the NFIB survey," says Michael Pearce, lead U.S. economist at Oxford Economics.

"Only 6% of firms reported credit as hard to get in April's NFIB survey, and a net 8% of firms say they expect credit conditions to tighten," Pearce adds.

It should be noted that the NFIB is a politically-active membership organization which skews heavily conservative, according to the Center for Responsive Politics/

(Stephen Culp)



While most of Wall Street is talking anxiously about when the recession will hit, and how bad it will be, Stifel market strategist Barry B. Bannister has raised his target for the S&P 500 .SPX by 5%.

Bannister is forecasting a target range of 4,200-4,400 by Q2/Q3 2023, the midpoint of which would have the S&P rising just under 4% from Monday's close.

His argument is that there are "encouraging signs of economic resilience in mid-2023 " and he expects inflation to slow sharply, but not to the 1-2% range found in 2009-2019.

With this in mind, Bannister likes cyclical over defensive industry groups as a solid economy tends to favor cyclicals.

As for the recession "it is only by late 2023 that we will become more concerned."

(Sinéad Carew)



The S&P 500 .SPX and the Nasdaq .IXIC are now slightly lower early on Tuesday with earnings season and debt ceiling worries adding to jitters ahead of a key inflation reading due on Wednesday.

After the latest crop of earnings reports PayPal PYPL.O is down 10% after it failed to impress, while Apple Inc AAPL.O supplier Skyworks SWKS.O is down almost 5% after issuing an underwhelming Q3 outlook.

Shares in electric vehicle (EV) maker Lucid Group Inc LCID.O are down 6% after it reported lower-than-expected first-quarter revenue and trimmed its 2023 production forecast as a price war sparked by Tesla, hurt sales.

In S&P sectors, real estate is falling most, while communication services .SPLRCL is now the sole gainer.

While investors are waiting on U.S. inflation data they were also watching anxiously for any progress in Washington on efforts to reach a debt ceiling agreement with the potential for a default as early as June 1, if Congress does not act.

U.S. President Joe Biden and top Republican lawmakers are expected declare their positions on the matter face to face in a 4PM meeting on Tuesday.

Here is your 1012 AM EDT snapshot:

(Sinéad Carew)



Like the S&P 500 index .SPX, the Nasdaq Composite's .IXIC strength continues to be capped by particularly thorny resistance:

Since hitting a high of 12,270.189 in mid-September of last year, and then falling to new lows, the Composite's recovery has been unable to surpass this level.

Indeed, the IXIC ran out of steam in early February at 12,269.555, before suffering another sharp retreat.

And for the past six weeks, the September 2022 high has continued to cap strength. The weekly highs over this period have been around 12,228, 12,225, 12,206, 12,245, 12,228, and 12,265. On Monday of this week, the Composite's high was at 12,264.988 before it settled back to end at 12,256.917.

Given that this week will bring highly anticipated CPI data on Wednesday, traders remain focused on whether the Composite can break through the ceiling, potentially clearing the way for further gains, or if it will once again fail, putting the index at risk for another significant downdraft.

The rising 10-week moving average, which has done a good job of supporting the IXIC since mid-March, is now around 11,980.

Meanwhile, in what may be of concern to bulls, on Thursday of last week, the Nasdaq's daily advance/decline line did dip to a fresh low. However, it has yet to see downside follow-through.

(Terence Gabriel)




Wall Street dips


NFIB inflation worries and price hikes


(Terence Gabriel is a Reuters market analyst. The views expressed are his own)


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