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Moody’s [downgraded] the credit ratings of 10 banks and put others under review, or giving their ratings a negative outlook. Credit ratings are very important for banks, which fund themselves partly with deposits, but also by selling bonds.
But the ratings moves are a reminder that many of the core issues revealed by the crisis this year—such as the risks posed by higher interest rates—are only beginning to be addressed. And one risk that investors can’t afford to ignore is that longer-term interest rates could keep pushing higher, even as the Federal Reserve looks to be pausing its rate hikes.
However, Moody’s also wrote that it saw some key issues unaddressed by the Fed’s thousand-plus-page proposal.
Moody’s analysts acknowledged in their Monday report that the Fed’s tougher capital requirements for banks with over $100 billion in assets should be positive for their credit risk, [but also said] that interest-rate risk is “significantly more complicated” than that. For example, there is the diminished value of loans like fixed-rate mortgages—a huge problem for First Republic, for one. In its analysis, Moody’s applied a 15% haircut to the value of banks’ outstanding residential mortgages.
The bond market’s focus on worst-case scenarios may explain the gap between the performance of many lenders’ debts versus their shares. In theory, higher capital requirements coming for many banks ought to provide more comfort for bondholders, who focus more on existential risk, than shareholders, who should be worried about the drag on banks’ returns on equity from higher equity levels.
But this security cushion isn’t what markets appear to be reflecting. Across regional banks with A ratings, though their bonds have rallied in recent weeks, investors are still demanding a lot more return to own them than they were prior to SVB’s collapse. The gap between those banks’ senior bond yields versus Treasurys was still about 50% wider than on March 8 as of Monday.
It is a relief that banks have found a number of ways to stabilize their earnings and rebuild some capital, but bond market jitters show there is still a lot more work to be done.
+1To me, the point isn’t that CD yields can be marginally higher than money markets. It’s that interest rates will start dropping at some point, and then MM yields will drop quickly. With CDs, you can lock in high yields for as long as 10 years, and you will continue getting those yields even if interest rates drop (assuming you bought non-callable CDs).
Odds of a soft landing may have just gotten a little better.
The latest employment report from the Labor Department shows job growth held steady last month, boosting hopes that the Federal Reserve may be able to curb inflation without triggering a sharp jump in unemployment. U.S. employers added 187,000 jobs in July. While job growth has moderated, it hasn't come close to stalling, even after the Fed raised interest rates to the highest level in 22 years.
Here are five takeaways from the report.
Keeping up with population growth
Over the last three months, employers have added an average of 217,000 jobs per month. That's down from an average of 312,000 jobs in the first three months of the year, but it's still a healthy pace of growth.
Employers are still adding more than enough jobs each month to keep pace with population growth. Health care, hospitality and construction were among the industries adding jobs in July, while factories and transportation saw modest job cuts.
Historically low unemployment
The unemployment rate dipped to 3.5% in July from 3.6% the month before. The jobless rate has hovered in a narrow range for more than a year, hitting a half-century low of 3.4% in April.
Unemployment among African Americans hit a record low of 4.7% that month before rebounding to 6% in June — raising some concerns. In a relief, the African American jobless rate dipped again in July to 5.8%.
It's best to take those numbers with a grain of salt. The figures can be noisy because of the relatively small sample size.
People are earning more
Here's another bit of positive news: Wages are finally outpacing inflation, boosting workers' buying power. Average wages in July were up 4.4% from a year ago. Wage gains have moderated in the last year, but inflation has cooled as well, so workers' paychecks now stretch farther.
For the twelve months ending in June wages rose 4.4%, while prices climbed just 3%. (The inflation rate for the year ending in July will be released next week.)
Coming off the sidelines
The number of people working, or looking for work, increased by 152,000 last month. Importantly, the share of people in their prime working years (ages 25-54) who are in the labor force is growing. After hitting a two-decade high in June, it fell just slightly last month. That's important, because a growing workforce allows the economy to expand without putting upward pressure on inflation.
And it's good news for women
Before the pandemic, women briefly outnumbered men on U.S. payrolls. The ranks of working women fell sharply in 2020, when schools and restaurants were shuttered and many women were forced to leave work to look after family members or for other reasons. Women's share of jobs has been slowly recovering, however, thanks in part to job growth in health care and education — fields where women outnumber men. (In contrast, the male-dominated manufacturing industry lost 2,000 jobs last month.)
As of July, women held 49.9% of all payroll jobs, up from 49.8% the month before.
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