This Debt Ceiling Fight Is Truly Different This Time
Now that we’re post-FOMC and ECB we have a clear playing field for another 6 weeks. The US debt ceiling theater is now center-stage along with completing the transition away from LIBOR, which will become an anachronism at the end of Q2.
SOFR will be the law of the land in the US come July. The change over from LIBOR is effectively complete with LIBOR-based Eurodollar Futures now consigned to the dustbin of history.
Markets will have to do without central bank drama for a month… whatever will we talk about?
Bank runs, I guess. But, I’m getting ahead of myself.
Both Powell at the Fed and Lagarde at the ECB hiked 25 bps as the markets had ‘priced in’ this week. But, I need to remind everyone that Powell held serve in all of his communications from last meeting. While everyone screamed “PIVOT!” during the Silicon Valley Bank debacle, Powell gave the markets nothing.
We got 25 bps and neutral language that so many people wanted to believe was a dovish statement, even though it wasn’t. We got an equally neutral statement and presser this month which the “pivoteers,” as Danielle Dimartino Booth calls them, keep trying to read the statement the way they want to rather than look at the picture as it is.
Powell will raise again in June. LIBOR’s swan song is currently the 3 month rate over SOFR. It’s been signaling 25 in May and another 25 in June for nearly two weeks.
The LIBOR rate has to rise to anticipate the Fed’s policy action to minimize any rate shock. The 1-month LIBOR rate yesterday was 27 bps (5.08%) over the SOFR rate (4.81%). The 3 month LIBOR data is clearly signaling that the Fed has another rate hike in its arsenal despite what the pivoteers want or think they should do.
This is despite what the SOFR and Fed Funds Futures are saying as well. Those markets have been almost as volatile day-to-day as the oil and US Treasury markets. So, clearly, right now they aren’t good indicators of what’s likely to happen in six weeks.
Which brings me back to Lagarde and the ECB this morning. At the last meeting Chrissie was telling us that she had one more 50 bp rate hike in her back pocket because inflation was attenuating. And today she told us that 25 bps was appropriate because inflation is still stubbornly high.
And yet no one is calling her out for this.
To my conspiratorial mind it’s because we’ve been led to believe there is an incipient meltdown of the US financial system thanks to a whisper campaign in a concentration of California regional banks taking the focus and pressure off Europe.
It’s not like I shy away from making controversial statements or teasing out connections. By now, you know I really like it.
So, let’s play a little game shall we?
On Monday I published my thoughts about Blackrock and the threat of it becoming a SIFI to the US political system via pension nationalization. While I worked on that piece it came out that PNC, backed by Blackrock and Apollo Group, made an offer for First Republic Bank.
FRC ultimately went to JP Morgan Chase in what looks like a good deal for them AND depositors. You can feel free to disagree with me. But, correct me if I’m wrong, it looks to me like a major NY Fed regulated bank just took control over a major San Francisco Fed regulated bank.
And the next day, after the FOMC goes into blackout mode, a whole slew of California banks stocks got bitch-slapped, leading to PacWest is in the early stages of collapse.
Now, to me this screams coordinated attack by someone.
This isn’t to fully discount problems with these banks. It is to say once the jitters start they multiply based on fear, not rationality. Bank runs aren’t rational. They are a panic. Who benefits from a panic within the US regional banking system?
Um, could it be Davos and the ECB? Just sayin’.
The timing with the FOMC meeting and all the manufactured drama over the debt ceiling bill passed by the House is simply too convenient.
This is especially true when you look at the price JP Morgan paid for First Republic’s assets. It wasn’t a stink bid, folks. This wasn’t a shotgun wedding. This was a bank JP Morgan already pumped money into because it believed there was value there!
So why was First Republic in trouble? Good question. And one everyone should really be thinking about hard.
Look, I don’t know who began the whisper campaign against these California ‘banks.’ I can make a credible argument both for and against Da
Article from LewRockwell