FT : ‘Firefighter and policeman’: Fed faces rate rise dilemma amid banks turmoil

‘Firefighter and policeman’: Fed faces rate rise dilemma amid banks turmoil
US central bank’s next move complicated by uncertainty over efforts to shore up sector

The Federal Reserve must make one of the most consequential decisions of its rate-raising campaign this week as it considers whether to implement another increase without knowing if efforts to shore up the banking sector will work in the long term.

Central bank officials will gather on Tuesday for their latest two-day meeting, at which they must decide whether to press ahead with another quarter-point rate rise or forgo an increase.

The dilemma comes as global authorities have acted swiftly to support the financial system in the wake of Silicon Valley Bank’s collapse earlier this month, with the Fed rolling out a new facility to aid lenders and the Swiss government brokering a hasty takeover of a faltering Credit Suisse by UBS.

However, it remains unclear whether these actions will be enough to stem the fallout from the crisis. The share prices of most regional US banks are languishing well below the levels seen before the implosion of SVB, while First Republic Bank’s stock is still plummeting following a second downgrade of its credit rating on Sunday.

As a result, the Fed is to some extent flying blind as it decides whether to pause its aggressive campaign to curb persistent inflation in an effort to help stabilise the financial system.

“It’s a tremendously challenging time,” said Ellen Meade, who served as a senior adviser to the central bank’s board of governors until 2021. “In this case, [Fed chair Jay] Powell has to be both a firefighter and a policeman.”

Further complicating the high-stakes decision, due on Wednesday, is that it will be accompanied by fresh projections not just for the trajectory of interest rates, but also for growth, inflation and unemployment, at a time when the economic situation is changing rapidly.

“This whole thing is a disinflationary event . . . but it’s very difficult to know at this point how disinflationary it is,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, referring to the turmoil in banking.

Fuelling the uncertainty is the fact that regional banks are expected to sharply curtail their lending in response to the recent ructions. Torsten Slok, chief economist at Apollo Global Management, estimates that banks holding roughly 40 per cent of all assets across the sector could retrench, which would lead to a sharp recession this year.

“What we do know is that the combination of both the lagged effects of monetary policy slowing things down and now magnifying that with this downside risk is just making things more complicated,” he said.

Slok estimates that the combination of tighter financial conditions and lending standards following the recent bank failures has in effect raised the federal funds rate — the rate at which banks lend to each other — by 1.5 percentage points from its current target range of between 4.50 per cent and 4.75 per cent.

As a result, he now expects the Fed to forgo a rate rise on Wednesday. Economists at Goldman Sachs, who also project a pause this week, estimate the equivalent of roughly a quarter-point to a half-point increase in the fed funds rate following recent events. Other economists argue it is still too early to make a precise estimate.

Pausing the rate-rising campaign altogether would mark an abrupt U-turn for the central bank, which had as recently as this month raised the prospect of accelerating the pace of rate rises with a half-point increase after last month shifting down to a more typical quarter-point cadence.

In congressional testimonies before the release of February’s jobs and inflation figures, Powell said the decision would hinge in part on those closely watched pieces of data, neither of which showed much sign of a cooling economy. He also said that the Fed would ultimately need to lift its benchmark rate higher than the 5.1 per cent projected by officials as recently as December.

Most economists have since revised down their expectations for the so-called “dot plot”, which aggregates individual forecasts for the fed funds rate through to 2025.

Before the implosion of Silicon Valley Bank, many thought the median estimate for the so-called “terminal” rate would rise by half a percentage point to between 5.5 per cent and 5.75 per cent. Now, some expect that to remain unchanged while others expect only a quarter-point increase.

Traders in fed funds futures markets are even more hesitant, suggesting the Fed will only raise rates another quarter of a percentage point before reversing course and implementing cuts.

“The Fed has got some more to do,” said Vincent Reinhart, who worked at the US central bank for more than two decades and is now at Dreyfus and Mellon, though he said officials are “less sure where they’re headed”.

Economists polled in the latest Financial Times survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, said recent events had led them to scale back their expectations for the fed funds rate at the end of the year by a quarter of a percentage point. However most still see the Fed raising the rate at least to 5.5 per cent — and keeping it there until 2024.

Reinhart warned that if the Fed were to pause its rate rises in an attempt to shore up financial stability, especially as further tightening is warranted by the economic data, it would face increased criticism for having failed to manage the banking sector sufficiently to prevent such a problem in the first place.

Moreover, Meade cautioned that such a move could call into question Powell’s commitment to fighting inflation, adding she supports a quarter-point rate rise.

“It preserves the notion of credibility that he’s gone to great lengths to restore over the past year,” she said. “I wouldn’t think he would want to let that go at this point.”

>>> US After Hours Summary: Reasonably quiet after-hours; HLIT +7.6% after partn

After Hours Summary: Reasonably quiet after-hours; HLIT +7.6% after partnering with Charter Communications; AG -16.5% on mining suspension announcement

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: None

Companies trading higher in after hours in reaction to news: HLIT +7.6% (partners with Charter Communications), GRIN +4.2% (appoints new CEO and CFO), NNDM +3.9% (shareholders approve Murchinson's proposals), CDAY +1.8% (selected by Orica for HR and payroll), VNT +1.5% (new segment structure), GLDD +0.8% (awarded $138.8 mln in contracts), IAA +0.1% (Ritchie Bros completes IAA acquisition)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: None

Companies trading lower in after hours in reaction to news: AG -16.5% (suspending mining at Jerritt Canyon), KRTX -3.6% (commences $400 mln public offering), FMC -2.3% (to introduce long-range growth plan), TTEC -2.1% (CFO leaving; appointed interim CFO), CTRE -1.7% (increases quarterly dividend), SRE -1.5% (launches LNG project), SI -1.5% (delaying 10-K filing), SO -1% (hot functional testing started at Vogtle Unit 4), AFCG -0.7% (appoints new CFO), PARA -0.7% (files mixed shelf), TSLA -0.1% (assigned Baa3 rating)

>>> US Close Dow +1,20% S&P +0,89% Nasdaq +0,39% Russell +1,11%

Closing Stock Market Summary

The stock market kicked off the new week with a reversal of the money flows that occurred last week. Banks showed nice resilience today following news over the weekend that the Swiss National Bank brokered a UBS (UBS 18.80, +0.60, +3.3%) acquisition of Credit Suisse (CS 0.94, -1.06, -53.0%) for a "takeunder" price of $3.2 billion.

Additionally, the Federal Reserve announced a coordinated central bank action with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to enhance the provision of U.S. dollar liquidity while offering assurances that "the capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient."

Still, some angst around the banking industry persists, evidenced by the material decline seen today in shares of First Republic Bank (FRC 12.18, -10.85, -47.1%). The SPDR S&P Bank ETF (KBE), which was up 4.5% at its high this morning, closed with a slimmer 1.6% gain and the SPDR S&P Regional Bank ETF (KRE), which was up 4.9% at its best level of the day, had a 1.2% gain by the close.

Shares of First Republic Bank continued to suffer sharp losses today after FRC's debt was downgraded at S&P to B+ from BB+. There was a short-lived recovery attempt in FRC when The Wall Street Journal reported that JPMorgan Chase's (JPM 127.14, +1.33, +1.1%) Jamie Dimon is leading talks with executives at other banks about a deal that could involve converting the previously announced $30 billion in deposits into a capital infusion. Ultimately, however, FRC closed near its worst levels of the day. 

Mega cap stocks, which enjoyed a leadership role last week, were relative underperformers today, which translated into some relative underperformance for the Nasdaq Composite and the information technology (+0.2%), communication services (+0.5%), and consumer discretionary (+0.4%) sectors. The Vanguard Mega Cap Growth ETF (MGK) was up a modest 0.2% versus the Invesco S&P 500 Equal Weight ETF (RSP), which rose 1.3%. The market-cap weighted S&P 500 advanced 0.9%, pushing above its 200-day moving average (3,935), which pivoted from resistance to support.  

The outperformance of small and mid cap stocks today was helped by some rebound action in the bank and energy stocks. The Russell 2000 rose 1.1% and the S&P Mid Cap 400 rose 1.7%.

All 11 S&P 500 sectors closed with gains ranging from 0.2% (information technology) to 2.1% (energy). 

The 2-yr note yield rose 10 basis points today to 3.92% and the 10-yr note yield rose nine basis points to 3.48%, as market participants anxiously await the FOMC decision on March 22. 

  • Nasdaq Composite: +11.6% YTD
  • S&P 500: +2.9% YTD
  • S&P Midcap 400: -0.7% YTD
  • Russell 2000: -0.9% YTD
  • Dow Jones Industrial Average: -2.7% YTD

There was no U.S. economic data of note today.

Looking ahead to Tuesday, market participants will receive the February Existing Home Sales (consensus 4.16 million; prior 4.00 million) at 10:00 a.m. ET. 

WSJ : Ukraine Warns of Further Fall in Grain Harvest

Ukraine Warns of Further Fall in Grain Harvest
Russia’s invasion deepens disruption of agricultural exports, prompting some farmers to switch to other crops

Ukraine expects its farmers to harvest up to 15% less grain this year than last, showing how the war is further hindering one of the world’s largest agricultural exporters.

With Russia’s invasion continuing to disrupt exports, some farmers have switched to crops that are easier to get out of the country, like sunflower seeds and soy, Mykola Solskyi, Ukraine’s minister of agrarian policy and food, said in an interview.

The war severely curtailed Ukraine’s globally important agriculture industry throughout last year, contributing to a rise in food prices, and Kyiv expects disruption to continue.

Russia on Monday threatened to pull out of a deal that allows Ukraine to ship agricultural products via the Black Sea from three ports around Odessa earlier than expected. Both countries had agreed to extend the United Nations-backed pact on Friday.

Amid the difficult and uncertain export environment, Mr. Solskyi said farmers had chosen to shift to crops that yield fewer tons per hectare. That means the farmers have less to export in terms of amount and weight. To avoid relying on Black Sea ports, Ukraine has pivoted to export more of its goods via land borders, though this is more expensive and time consuming.

“You have less logistics (issues) because you have less to export,” Mr. Solskyi said.

In Ukraine, corn typically yields 7 metric tons per hectare and wheat is about 4 tons, but sunflowers and soybeans both yield 2.3 tons per hectare, according to Mike Lee, owner of Green Square Agro Consulting, a crop forecasting company that specializes in the Black Sea region.

Corn also uses more fertilizer and energy than other crops, both of which are in short supply.

The shift among farmers means that, allowing for normal weather, production of corn, wheat and other grains are forecast to be 10% to 15% less in 2023 than last year, Mr. Solskyi said.

Ukraine’s grain harvest last season was 53 million metric tons, a 20% reduction from the average over the past five years, according to the Ministry of Agrarian Policy and Food. The country’s combined harvest of all grain, sunflower seeds and soya came in at 63 million metric tons, a 52% drop compared with the previous year’s output.

Ukraine’s grain exports had picked up toward the end of last year to near prewar levels, partly thanks to the Black Sea export deal with Russia. Both countries on Friday agreed to extend the deal, which had been due to expire at the weekend.

On Monday, Russia’s Foreign Ministry said that it would suspend its participation in the grain deal on May 18 if no progress is made on easing obstacles to its own food exports resulting from sanctions imposed on Moscow in response to the invasion.

Ukraine had announced a 120-day extension, the standard period articulated under the deal first signed last year, but Russia said the deal was only extended for 60 days.

“In this agreement it was stipulated that it would be extended for 120 days,” said Mr. Solskyi. “These terms were approved by all the sides that signed the agreement.”

The text of the agreement says it can be automatically renewed every 120 days unless one party triggers an exit clause.

Russia, which has threatened to back out of the agreement before, said it wants to see progress on reconnecting the state-owned Russian Agricultural Bank, Rosselkhozbank, to the SWIFT global financial messaging system, the resumption of supplies of agricultural machinery and the restoration of a pipeline that ships ammonia, often used as a fertilizer, from Russia through Ukraine, among other requests.

“Without progress in implementing said requirements, which are absolutely not new and should be settled within the framework of the Russia-U.N. Memorandum, our participation in the Black Sea initiative will be suspended,” the Foreign Ministry said.

While the war initially spurred the cost of grain, prices later eased. So far this year prices have fallen partly because of large wheat harvests in Russia and Australia.

An up to 15% fall in the grain harvest, and an increase in sunflower seed and soy production, could impact prices again.

Less corn would be costly for the Chinese and European buyers who are dependent on Ukraine’s crop, said Masha Belikova, a grains analyst at price-reporting company Fastmarkets. Given that Ukraine exports up to 70% of the world’s sunflower oil, any change in that crop would have an impact, she said.

FT : Checking in on SoftBank

Checking in on SoftBank
Shall the sins of Credit Suisse be visited upon the Son?


Won’t somebody please think of Masayoshi Son?

As the tide goes out and we learn who has been mauled by sharks, SoftBank — perhaps the most totemic financial group of the waning zero-rates era — is bound to be on many financial-accident bingo cards.

Citi analysts say their clients have been “increasingly querying the investment performance of the SoftBank Vision Fund and the vulnerability of SoftBank Group to fundraising market changes” over the past fortnight, as banks flop on both side of the Atlantic.

Their takeaway: yeah it’s pretty bad. Mitsunobu Tsuruo and Tailai Qui write:

We think the uncertain credit situation is a pressing issue for SBG . . . SBG is now in a tough position, sandwiched between the possibility of a margin call on the margin loan on President Masayoshi Son’s SBG shares and the need to keep LTV below 25%.

Readers may remember Son’s IOU headaches from a Robert Smith piece in November 2022. Just over a third of Son’s SoftBank shares are currently posted as collateral for margin loans. From Rob’s write-up for Alphaville:

To summarise, SoftBank is extending credit to its CEO to invest in a fund it manages. The loan is secured on a) his equity in the fund b) a bunch of SoftBank shares and c) his personal wealth. Just try to wrap your head around what would happen in a scenario where massive investment losses at SoftBank trigger a share price slide that wipes out most of Masa’s net worth.

Is that doomsday scenario beginning to emerge? Kind of, reckons Citi (with our emphasis below):


Driven by Internet/AI expectations, the so-called unicorn bubble is one of the bubbles created by the excessive liquidity that central banks have been competing to provide in response to the pandemic. SBG—and its SVFs—could be hard hit by the collapse of the unicorn bubble. The longer economic stagnation and elevated interest rates persist, the tougher funding conditions get for unlisted companies, generally.

Moreover, financial institutions could become more cautious about lending to these unicorns, as SVB, which had a track-record of funding unlisted firms, went bankrupt, and unease has been mounting about similar banks following the SVB bankruptcy. While the percentage of SVF portfolio companies that are set to deplete their funds in the next twelve months is a mere 1% at SVF1, it is 10% at SVF2 and 21% at the LatAm Fund, and these percentages are rising. Additional valuation losses look likely at end-March (Q4) results, given the recent operating environment changes.

Also notable in this story is the role of WeWork, which is currently restructuring debt that SoftBank holds. The tl;dr, via Citi:

The situation is clearly fluid and it is hard to estimate SBG’s NAV accurately.

They estimate the red line for #drama would be a share price of ¥4,300, at which level Son pledged some 6mn shares as collateral for a 2020 loan.

So, how does SoftBank look at the moment?

FT : Deliveroo accused of hitting earning power of riders

Deliveroo accused of hitting earning power of riders
Company blocks third-party app that lets gig economy workers compare fares across rival delivery platforms

Deliveroo has been accused of damaging the earning power of riders by preventing access to online systems that allow gig economy workers to more easily see if rival companies are offering better fares.

Rodeo, an app that lets riders track earnings across different delivery platforms including Just Eat and UberEats, told its almost 10,000 users on Sunday that Deliveroo had blocked its access to the platform, in an email seen by the Financial Times.

Many couriers work for several different delivery companies, juggling jobs between Deliveroo and its competitors. With a rider’s consent, Rodeo allows them to see their earnings data in one place and identify which jobs pay the best rates.

Deliveroo has blocked Rodeo, payroll provider Argyle and other third-party technology from accessing its platform in recent weeks as part of a security update of its rider app.

Shaf Hussain, a rider for delivery apps, said the move would take power away from riders. “The data that Deliveroo collects on us belongs to us,” Hussain said. “[But] it’s data that they don’t want getting out.”

Alex Marshall, president of the union IWGB, which represents gig economy workers and is challenging Deliveroo in the Supreme Court next month to gain collective bargaining rights, said: “It’s an example of them blunting the tools workers have to make informed decisions.”

In May, Deliveroo signed a voluntary agreement with the GMB Union that classed its riders as independent contractors. Alfie Pearce-Higgins, the co-founder of Rodeo, said the move showed Deliveroo’s “inconsistency” towards rider independence.

“Independence when it works for their business is great,” he said. “When riders exert that independence, taking control of their data or sharing with another service, it seems to be looked at slightly differently.”

The move comes after Deliveroo released full-year results last week that showed sluggish growth in 2022, with gross transaction value, a measure of orders placed on Deliveroo’s platform, growing by just 9 per cent, compared to a 70 per cent increase in 2021.

Deliveroo is under pressure as consumers cut back on spending on non-essential items such as takeaways, and it faces pressure to increase wages with inflation.

Rodeo published data in January showing that the average Deliveroo fare per order fell by 0.3 per cent in 2022 compared to 2021. UberEats pay per order fell 1.3 per cent and Just Eat fares dropped 6.1 per cent in 2022.

“Deliveroo supports Rodeo’s objectives of supporting riders and providing insights into how they work. However, Rodeo and its partner Argyle accessed Deliveroo’s rider app without authorisation,” Deliveroo said.

“Our concerns have been communicated to Rodeo and, despite this, they have continued to attempt to gain unauthorised access. A planned security update has prevented this . . . Riders themselves remain free to access their data via our platform, which is unchanged.”

Pearce-Higgins said: “The authority to access a rider’s account is given by the rider, whose data it is.” Argyle did not respond to a request for comment.