😱 The 10th Interest Rate Hike
Happy Wednesday all,
Today we got word that the Federal Funds Rate would increase another 0.25%.
That brings its benchmark Federal-Funds rate to a range between 5% and 5.25%, a 16-year high and marks the central bank’s 10th consecutive hike.
That means your mortgage rates are going to be higher, auto loans, and other loans may go up accordingly. At least high yield savings rates will be higher as well.
The Fed did mention that they will keep rates on hold for at the very least till the end of the year - so that is some good news, but we’ll see how the market reacts and more importantly how inflation numbers come in later this month before we get our hopes up that this tightening cycle is coming to an end.
Today we’re talking all about the US Debt Ceiling in our Hump Days Scoop, so I hope you enjoy that!
Hope you’re having a great week,
- Humphrey, Rickie & Tim
The Weekly Brief
First Republic Becomes Second Largest Ever U.S. Bank Failure (Bloomberg)
First Republic was seized by the FDIC on Monday and was forced to sell its assets including $173B of loans, $30B of securities, and $92B in deposits to JPMorgan Chase. First Republic overtakes Silicon Valley Bank at the number 2 spot just under Washington Mutual which collapsed in the 2008 financial crisis. This comes after SVB and Signature Bank collapsed in early March.
Why Does It Matter?
Three out of the four largest FDIC failures this century have occurred within the span of just a few weeks. With the Fed expected to continue to raise rates, this will put a lot of pressure on mid-sized and regional banks. The Fed has to tiptoe a very fine line between taming inflation and slowing the economy down too much that we see more banks potentially collapse.
The 80% beat rate is in line with a three-year average, according to data from The Earnings Scout. Tech was hit the hardest after earnings releases with Amazon down 4% even after beating revenue expectations, and Snap fell 17% after a revenue miss. Intel was a bright spot in the tech sector, however, beating revenue and earnings estimates and which sent the stock up 4%.
Why Does It Matter?
It seems as though that Wall St. was overly pessimistic about Q1 earnings. While many companies cited increasing concerns in the short to medium term, revenues and profits have not been hit nearly as hard as Wall St. originally believed.
IBM Freezes Hiring, Expects 7,800 Jobs To Be Replaced By AI in the Coming Years (Al Jazeera)
About 7,800 jobs are expected to be replaced by AI according to IBM’s CEO Arvind Krishna in the near future. Krishna went on to say that he could “easily see” nearly one-third of the company’s non-customer-facing roles, which amounts to roughly 26,000 workers, being replaced within the next five years.
Why Does It Matter?
Analysts fear AI could lead to mass layoffs while others argue that AI will boost productivity and create jobs in new industries. With how quickly AI tools are advancing, this new technology is likely going to be some of the most disruptive innovation we've seen in a long time.
Hump Days Scoop
Treasury Secretary Janet Yellen said on Monday that the U.S. could default on its obligations as soon as June 1 if Congress doesn’t come up with a solution before then. This week, we discuss why we’re in the position we’re in, how it could affect us, and how worried we should really be.
Why is the U.S. about to default?
Back in January when the U.S. hit the $31.4T debt ceiling, Yellen informed Congress that cash on hand and “extraordinary measures” would last until early June. This set into motion what became a drawn-out, back-and-forth saga of dealing with the debt ceiling.
The Treasury has been using its remaining cash to pay the federal government’s bills on time until Congress grants it the authority to resume borrowing beyond the $31.4T limit. Many were worried after April tax receipts came in weaker than expected, but a surge of tax revenue last week prompted analysts to push their forecasts back to the second half of July.
Within Congress, talks to raise the debt ceiling hit a stalemate after House Speaker Kevin McCarthy unveiled his plan to raise the ceiling by $1.5T which included a long list of demands that Senate Democrats and the White House strongly opposed.
The proposal included things such as a cut to federal non-defense spending, blocking student loan forgiveness, and repealing green energy tax credits.
What happens if the U.S. defaults?
The most interesting thing about this whole ordeal is that the U.S. cannot, constitutionally, default on its debt. According to Section 4 of the 14th Amendment,
“The validity of the public debt of the United States, authorized by law, … shall not be questioned.”
With that said, if a new debt ceiling is not agreed upon and the U.S. actually defaults on its debt, it would be “an economic and financial catastrophe,” according to Yellen. A U.S. default would lift interest rates indefinitely making future investments substantially more costly. Yellen continued to say that “it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”
For the average citizen, a U.S. default would have the following impact on everyday life:
A delay in social security programs which pay, on average, $1,827 a month (though it’s possible that Treasury could dip into the program’s trust fund)
A delay in federal employees and veteran’s benefits
A major hit to American investments. According to Moody’s stocks could shed as much as a third of their value
Higher cost of borrowing to compensate for the increased risk that bondholders won’t receive what they’re owed from the government on top of already rising rates from the Fed.
Spike in unemployment at an already delicate time of high rates and inflation. Moody’s predicts that for a default that lasts for a week, unemployment would jump to 5%, with close to 1M jobs lost.
What is most likely going to happen?
This is not the first time that the U.S. has hit the debt ceiling, but usually, a new ceiling is agreed upon well before the deadline. Markets have been growing increasingly concerned over a U.S. default, sending the cost of insurance contracts on U.S. debt to its highest level in a decade.
The risk is definitely there and increasing as we near the point of no return, but realistically, this would be a completely manufactured crisis if Congress were to decide not to raise the ceiling. From an optics point of view on a global scale, it would be extremely irresponsible to allow the U.S. to default and Congress knows that. They always end up raising the ceiling, it just usually does not take this long.
Chart of the Week
The US commercial property market is facing a potential crisis as remote working contributes to a record-high office vacancy rate of 12.9%. With tech giants like Meta, Lyft, and Salesforce shedding office space, the market could experience further declines in property values. This poses significant risks to American banks, which hold approximately half of the $5.6 trillion in debt owed by the commercial property industry in 2022.
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