Reinhart Week in Review by Madison Investments 3.17.2023


U.S. BANKING STRESS

On the heels of the failure of Silicon Valley Bank regulators took over Signature Bank as well. Credit Suisse came under pressure following comments from its biggest investor that it wouldn’t invest more in the bank. First Republic Bank saw significant deposit outflows that caused concerns about its survival. In the case of both Credit Suisse and First Republic, the central banks worked to provide liquidity support. More broadly, the Fed also encouraged discount window borrowing and established a new bank lending facility that would lend for up to a year against par value of collateral rather than market value. The Fed announced significant usage of the new facility and a large increase in discount window borrowing as banks seek to access liquidity.

Our Take: Regulators and central banks are seeking to bolster confidence in the banking system as a whole and to allay depositors’ concerns about any individual bank. Adequate liquidity and depositor confidence are prerequisite conditions for a stable banking system, and it is encouraging that authorities are acting forcefully to ensure both.

EUROPEAN CENTRAL BANK (ECB)

As planned and signaled, the ECB went ahead with a 50 basis point increase in rates for the Eurozone. The ECB did not give as strong of a signal on the future path of rates as they did after the last meeting. Lagarde indicated that the ECB can continue monetary tightening while addressing stresses in the banking system.

Our Take: The ECB forcefully prioritized fighting inflation over any concerns about financial system stability. The time until the next meeting will indicate if stresses in the banking system tighten financial conditions enough to bring down inflation or if central banks will need to continue rate hikes.

INFLATION

Consumer prices rose 0.4% in February and have risen 6.0% year-over-year. Core Consumer Price Index (CPI) rose 0.5% and 5.5% respectively over the same time periods. February producer prices fell 0.1%, while core Producer Price Index (PPI) was flat. Over the past twelve months, PPI has risen 4.6% overall and 4.4% core.

Our Take: CPI was slightly higher than economist expectations while producer prices came in decidedly softer. While market focus shifted away from inflation this week, the Fed still has a fight on their hands. What remains to be seen is whether the current banking environment will lead to tighter lending standards, thus slowing the economy, or if the Fed needs to continue raising rates. Market expectations are currently split over the chance of a pause at the Federal Open Market Committee meeting next week or another 25 basis point hike.

RETAIL SALES

Retail sales fell 0.4% in February.

Our Take: Monthly retail sales reports have been very volatile, likely influenced by a variety of factors including weather and the seasonal adjustment process. Monthly sales have grown 0.3% on average over the last six months while the trend in real sales (adjusted for inflation) remains very flat.

MUNICIPALS

Moody’s Investors Service upgraded Illinois general obligation debt from Baa1 to A3 with a stable outlook. Moody’s cited tax revenue growth along with increased revenues and a decrease in liabilities as reasons for the upgrade. Governor J.B. Pritzker, pleased with the upgrade, stated that “we have undone decades of damage and ushered a new era of fiscal responsibility in Illinois.”

Our Take: Illinois has taken steps to improve its fiscal health including boosting its reserves and increasing payments to its underfunded pension plans. Despite the improvements, Illinois deservedly remains one of the nation’s lowest rated states.

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This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.