The news early Monday that JPMorgan Chase is buying First Republic Bank is both a relief and worry for the Federal Reserve in a key week. It makes its latest interest-rate decision on Wednesday.
It’s a relief in that it offers hope the crisis of confidence in First Republic won’t spread to other regional lenders and it potentially heads off a fresh banking crisis.
The worry is that First Republic’s failure is merely the latest symptom of the pressure caused by the Fed’s interest-rate increases. The move from a near-zero policy to restrictive has taken place at breakneck speed, and the economy’s only just seeing an impact.
On Friday, a review of Silicon Valley Bank’s March collapse showed that the Fed found it was itself partly to blame. While it’s welcome that it takes responsibility for its shortcomings, it also raises the question of what else regulators are failing to foresee.
For example,
Berkshire Hathaway’s
Charlie Munger is pointing out that banks are loaded with bad loans on commercial property, whose value has fallen as rates have risen.
Inflation is another obvious problem. While it’s coming down, it’s still nowhere near low enough for the Fed. That’s why another hike is seen as a near-certainty this week.
At the same time, recession is a distinct possibility after first-quarter growth came in cooler than expected. A busy earnings week that includes Apple, CVS and Anheuser-Busch InBev will add more color to the outlook. So will the fresh jobs report due out Friday.
Milton Friedman famously said that the lags in monetary policy can be long and variable. Well, now the Fed is seeing that its past rate hikes have yet to quell inflation, while the effects are probably more variable than it imagined. One thing’s for sure, there will be plenty more headaches ahead.
—Brian Swint
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JPMorgan to Take Over First Republic Bank
JPMorgan Chase will assume all deposits of First Republic Bank after the San Francisco-based bank was closed by the Federal Deposit Insurance Corp.
- In a statement early Monday, the FDIC said First Republic’s 84 offices will be taken over by JPMorgan. It had been collecting final bids with potential buyers including JPMorgan and also PNC Financial Services Group, a person familiar with the matter had told Barron’s.
- The FDIC had been working quickly to gather bids after a lifeline of $30 billion in deposits made in March by a group of bank institutions appeared to have been insufficient. First Republic had planned to cut its workforce by as much as 25% amid a flood of exits by its wealth advisors.
- The FDIC said JPMorgan also will “purchase substantially all of First Republic Bank’s assets.” JPMorgan said the assets included approximately $173 billion of loans and $30 billion of securities, while it also was acquiring about $92 billion in deposits. The FDIC and JPMorgan will share in losses on single family, residential, and commercial loans.
What’s Next:While bank stocks were down Monday, the swings were fairly muted as markets digested the development. JPMorgan said it’s not assuming First Republic’s corporate debt or preferred stock, and it expects the deal to add more than $500 million to incremental net income per year.
—Carleton English,Janet H. Cho and Rupert Steiner
***
As Fed Meets This Week, the Risk of a Misstep Grows
The Federal Reserve heads into its latest interest rate policy meeting on Tuesday and Wednesday with strong expectations in the market that it will raise by another quarter of a percentage point, pushing rates to their highest levels since 2007, amid signs the economy is cooling. Its work gets trickier after that.
- Tighter credit conditions after March’s bank failures, plus the looming federal debt limit fight on Capitol Hill, might encourage an end to rate increases. Some 79% of futures traders expect a rate increase on Wednesday and nearly 64% expect a pause in June, according to the CME’s FedWatch tool.
- Investors will be monitoring the Fed’s forward guidance when Chair Jerome Powell holds his press conference Wednesday afternoon. Already, the economy’s growth slowed more than expected in the first quarter, but the Fed’s preferred inflation gauge is still more than double its 2% target.
- Unemployment claims are 45% higher than a September low. Factory activity has slowed for five straight months. Tuesday’s job openings report is expected to show 9.6 million available positions, down from the prior month. ADP’s private payrolls report on Wednesday is expected to show 150,000 jobs added in April.
- Public comments from Powell and other top officials in recent months suggest that they would rather keep rates high and weather the economic pain than lower rates only to have to lift them again in relatively short order.
What’s Next: The Fed will be making its decision this week without input from the April jobs report, which is due out on Friday. Analysts expect the economy added 185,000 jobs last month, down from 236,000 in March, with the unemployment rate ticking up to 3.6%.
—Liz Moyer and Megan Cassella
***
Apple, Anheuser-Busch, Starbucks, and Ford to Report Earnings
Apple, Anheuser-Busch InBev, Ford Motor, and Starbucks are among this week’s most anticipated earnings reports. Investors are watching to see if Apple, which reports results on Thursday, will report better-than-expected earnings, as tech giants
Microsoft
and
Amazon.com
have.
-
Despite
Apple’s
disappointing December-quarter earnings, Berkshire Hathaway’s Warren Buffett still loves the stock and the loyalty of iPhone users. Analysts’ consensus is that Apple, which opened its first stores in Mumbai and Delhi last month, will report $92.9 billion in revenue for the quarter. -
Anheuser-Busch InBev
will report results after facing a boycott of its Bud Light brand that was expected to dent sales. The brand was promoted in April by transgender social-media influencer Dylan Mulvaney. Sales are expected to be $14.06 billion, down from the December quarter. -
Ford Motor
will report on its auto sales, after saying in March that it expects to lose $3 billion on its electric vehicles business this year. New car price hikes contributed to the nearly 16% jump in the consumer price index from 2019 to 2022, the Bureau of Labor Statistics reported. -
On Tuesday
Starbucks
will report its first results under new CEO Laxman Narasimhan and amid ongoing unionization efforts.
Kraft Heinz,
reporting Wednesday, and
Kellogg,
on Friday, will also shed light on how consumers are navigating higher prices.
What’s Next: When Apple reports earnings, investors will be closely listening for any news related to India, where the market share of iPhones remains low. Apple has ramped up production there amid challenges in China.
—Karishma Vanjani and Janet H. Cho
***
Hollywood Girds for Writers Strike Amid Streaming Shift
Writers Guild of America members are prepared to picket studio headquarters and production sites as early as Tuesday if the Alliance of Motion Picture and Television Producers can’t reach a deal with them by 11:59 p.m. tonight, when WGA’s current contract expires.
- Deadline said a strike in New York could first affect late-night talk shows. NBC’s Saturday Night Live, ABC’s Jimmy Kimmel Live, and HBO’s Real Time with Bill Maher could go dark, The Wall Street Journal reported. Fall television shows could be delayed if a strike lasts into the summer.
-
The Guild, representing 11,500 writers, wants fair pay but says they are being short changed, the Journal reported. Contracts for directors and actors are also set to expire soon. AMPTP represents studios such as
Walt Disney
and Warner Bros, broadcast and cable networks, and streamers such as
Netflix. - WGA says half of TV writers are paid minimum rates of $4,154 to $9,888, depending on their level and weeks of guaranteed work. TV shows have fewer episodes in the streaming era and don’t start production until the scripts are written or mostly mapped out.
-
Separately, Universal Pictures’ The Super Mario Bros. Movie has grossed more than $1 billion in worldwide box office sales since opening April 5, making the PG-rated animated adventure the top 2023 movie, according to BoxOfficeMojo.
AMC Entertainment Holdings
reports first-quarter earnings on Friday.
What’s Next: The writer’s guild also wants to set up a framework for policy on artificial intelligence and authorship, especially if the technology takes a writer’s ideas to generate work, but those talks are less of a priority than pay, the Journal reported.
—Janet H. Cho and Liz Moyer
***
—Newsletter edited by Liz Moyer, Steve Goldstein, Joe Woelfel, Rupert Steiner
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