Two of the major risks facing the U.S. economy–the debt ceiling and banking turmoil–are set to be tackled head on in Washington Tuesday.
There’s plenty of uncertainty around but markets will be hoping for some clarity on a potentially significant day ahead.
As the June 1 debt ceiling deadline, reiterated by Treasury Secretary Janet Yellen on Monday, looms ever closer, President Joe Biden meets with House Speaker Kevin McCarthy Tuesday in a bid to break the deadlock.
With a lack of progress so far, and Biden set to leave for a G-7 meeting in Japan Wednesday, markets will want to see positive signs from the meeting. Investors may not quite believe a debt default is coming, but there’s still nervousness around–the yield on the short-dated U.S. one month T-bill rose to fresh highs above 5.5% Monday.
If Republicans and Democrats remain “far apart,” after the meeting, as McCarthy says they currently are, market concerns may deepen.
Investors will also be watching events in Washington for insight into how the recent banking stress played out, and whether it is over. Former executives of Silicon Valley Bank and Signature Bank face questions from senators on the failure of those banks.
Ex-SVB Chief Executive Gregory Becker cited the rapid pace of interest rate hikes as a factor in his written testimony. Banking regulators will also tell the story from their point of view in front of the House Financial Services Committee.
The role of rate hikes in the collapses brings another uncertainty in focus–the Federal Reserve’s monetary policy path. A number of Fed officials made the case Monday for high-for-longer rates to bring down inflation, while traders now see a 20% chance of another hike in June.
Uncertainty on that front, at least, will stick around for a long time yet.
—Callum Keown
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Ex-Silicon Valley, Signature Bank Execs Face Senate Panel
Former Silicon Valley Bank CEO Gregory Becker will tell a Senate panel today that rapid interest-rate increases and media coverage played a central role in the bank’s collapse in March. He will say he never envisioned the velocity and magnitude of the run on deposits that caused its failure.
- Becker, along with Signature Bank’s co-founder and former chairman Scott Shay, and Signature’s former President, Eric Howell, are scheduled to testify to the Senate Banking Committee at 10 a.m. Eastern time. Lawmakers will likely question their risk management and business concentrations and actions before the failures.
- SVB was caught off guard by the Federal Reserve’s signals on interest rates, buying up government securities when rates were low then getting stuck with declining values on those holdings when rates began rising sharply starting last year, Becker’s written testimony said.
- The failures of SVB, Signature Bank, and later First Republic Bank sent shock waves through the banking sector and caused a sharp selloff in shares of regional banking companies considered vulnerable should depositors panic and move their money to bigger banks.
- Securities and Exchange Commission Chair Gary Gensler said Monday that the agency isn’t considering a temporary ban on short selling of stocks in troubled regional banks, because history shows that such policies don’t work to prevent panic selling.
What’s Next: Becker and Shay also testify to the House Financial Services Committee at 10 a.m. Wednesday, along with state banking regulators from New York and California.
—Janet H. Cho and Liz Moyer
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Wells Fargo to Pay $1 Billion to Settle Lawsuit
Wells Fargo
has agreed to a $1 billion settlement over a class-action lawsuit about its progress in recovering from its 2016 fake-accounts scandal, The Wall Street Journal reported.
- The shareholder lawsuit alleged Wells Fargo and former leadership misrepresented how quickly the bank had moved to tackle the scandal, subsequently weighing on its share price.
- A preliminary settlement was set out in a court filing Monday night and still needs to be approved in the coming months, the Journal said.
- A Wells Fargo spokeswoman told the WSJ the bank disagreed with the allegations but was pleased to have resolved the issue. Wells Fargo didn’t immediately respond to a request for comment from Barron’s.
What’s Next: The Federal Reserve put a $1.95 trillion limit on Wells Fargo’s assets in 2018, which leaves it lagging in size behind JPMorgan Chase, Bank of America and
Citigroup.
If Wells Fargo could clear the overhang of the fake-accounts scandal and get the asset cap removed, it could become a more active participant in banking industry consolidation in the U.S.
—Adam Clark
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Federal Reserve Officials See Rates Remaining High in 2023
In contrast to the market’s expectations that the Federal Reserve could cut its benchmark interest rate later this year, ahead of a potential sharp economic slowdown and possible recession, central bank officials signaled they see rates staying high and possibly even rising.
- Atlanta Fed President Raphael Bostic told CNBC he doesn’t foresee rate cuts this year, even in a recession. The Fed is determined to return inflation to the 2% target rate. The best policy is “wait and see” he said, to assess how well the actions to date have worked.
- Minneapolis Fed President Neel Kashkari said at a town hall discussion at the Minnesota Transportation Conference on Monday that with inflation remaining above target, “we need to finish the job.” Inflation rose at a 4.9% annual pace in April from 5% in March but is still “much too high.”
- Chicago Fed President Austan Goolsbee told CNBC that elevated uncertainty calls for more prudence and patience, and more data, saying officials are “watching the credit stresses, watching the craziness of the debt ceiling, and watching what’s happening in the labor market, and the prices.”
- Total consumer debt in the first quarter hit a fresh high above $17 trillion despite a major pullback in home borrowing as interest rates rose, according to the New York Fed. Total debt is up about $2.9 trillion the last quarter of 2019, just before the beginning of the pandemic.
What’s Next: Financial markets are anticipating only a small likelihood of another interest-rate hike at the Fed’s June 13-14 policy meeting, and interest rate futures contracts are anticipating the policy rate to end up around 4.25%-4.50% this year, below current levels, according to the CME FedWatch tool.
—Janet H. Cho
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Warren Buffett’s Berkshire Hathaway Shuffles Financial Holdings
Warren Buffett’s
Berkshire Hathaway
and big hedge funds including Appaloosa, Third Point and Pershing Square Capital Management revealed new positions. Managers snapped up financials and tech companies as of the end of the first quarter despite market volatility during the period.
-
Berkshire took on a new 9.9 million-share stake in
Capital One Financial
during the quarter and exited a 25.1 million-share stake in
Bank of New York Mellon,
according to a quarterly regulatory filing. The holdings are as of the end of March and could have shifted since then. -
Berkshire also showed a 16% increase in its holding of
HP Inc.
That growth was part of a combination of the holdings of General Re Corp., which Berkshire has owned since 1998 but had previously reported its holdings separately as part of New England Asset Management Inc. -
David Tepper’s Appaloosa revealed a new 150,000 share stake in
Tesla
and a new same-sized stake in
Nvidia Corp.
Daniel Loeb’s Third Point took a new 4.75 million-share position in
Alphabet
as well as new stakes in
Alibaba Group Holding
and
Advanced Micro Devices. - Bill Ackman’s Pershing Square scooped up nearly 10.3 million shares of Google-parent Alphabet. The position is made up of roughly 8.1 million shares of Alphabet’s Class C stock and 2.2 million shares of its Class A shares.
What’s Next: Buffett said at Berkshire’s annual meeting in early May that he has been a seller of bank stocks because he has grown less enamored with the industry. Berkshire also reduced its stake in
Activision Blizzard
by 3.3 million shares to 49.4 million shares in the quarter.
—Liz Moyer and MarketWatch
***
Memorial Day Air Travel Expected to Surpass 2019 Totals
Nearly 3.4 million Americans will fly over the five-day Memorial Day weekend, according to AAA estimates. That would be the busiest airport travel weekend since 2005 and set up the summer travel season as one for the record books.
- It would be a 5.4% jump in airline passengers over 2019 and an 11% jump from last year’s “revenge travel” trend despite higher ticket prices. An estimated 42.3 million people will travel 50 miles or more from home during the unofficial start of summer, up 7% from 2022, AAA said.
- More people will hit the road, with 37.1 million expected to drive to their destinations, up 6% from last year, but 500,000 shy of 2019. Gas prices are lower than last year, averaging $3.54 a gallon compared with more than $4 a gallon in 2022.
- TheVacationer.com expects nearly 165 million American adults to travel over Memorial Day weekend, with 61% of those surveyed planning road trips, and 60% planning a cookout. Two-thirds of respondents said inflation was affecting their travel plans, including 13% citing high airfares.
- Hayley Berg, an economist at the Hopper online travel booking platform, told ABC that last-minute domestic airfares average $275 per ticket, down $100 from last year, while round trip tickets to Europe average $1,300. Rental cars are about $44 a day, down 17% from last year, and hotel prices have dropped 6% to $208 a night.
What’s Next: Airfares costing 40% more this year haven’t cooled demand. International bookings are 250% higher from 2022, international car rentals are up 80%, International Driving Permits have nearly doubled, and RushMyPassport is seeing record applications for expedited services, AAA said.
—Janet H. Cho
***
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—Newsletter edited by Liz Moyer, Brian Swint, Rupert Steiner and Steve Goldstein
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