Please see the below update from EPIC Investment Partners about the current movements with the US Economy received earlier today:
As expected, the Fed left its policy rate unchanged at the 23-year high range of 5.25%-5.5%. However, the accompanying statement did acknowledge the more balanced risks to inflation, and the suggestion that whilst further rate hikes are off the table, the committee was not ready to cut yet. The statement said that the FOMC “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”.
Fed Chair Jerome Powell acknowledged that whilst progress has been made in reducing inflation, a March cut is unlikely. “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen,” Powell said. He added: “We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year”. “We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate”, he said.
However, the FOMC’s rate decision was overshadowed by renewed concerns in the US banking system. New York Community Bancorp, one of the big winners after the collapse of Silicon Valley Bank and First Republic Bank last year, saw its stock fall a record 46% after it cut its dividend, and massively increased its provision for loan losses to over USD550m due to its exposure to US commercial real estate.
Within hours a second lender announced huge losses due to its exposure to the sector. Aozora Bank Ltd, Japan’s 16th biggest bank by market value, said it expects to post a net loss of USD191m for the fiscal year, compared with its previous forecast of profit. Shares sank more than 20% (limit down) in Tokyo.
According to a report from the University of Southern California, Northwestern University, Columbia University and Stanford University, as of Q3 last year, US banks alone held about USD2.7tn in commercial real estate debt. Green Street, a real estate analytics company reported commercial property values have fallen over 20% since Q1 2022, with office prices down a massive 35% as demand for desk space weakened following the wide adoption of remote working.
So, the question now is whether New York Community Bancorp and Aozora Bank are canaries in the coalmine?
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Andrew Lloyd DipPFS
01/02/2024