To The Moon

US banks in the spotlight once again!

I have shared 3 posts about the Fed, US interest rates, next FOMC meeting and US banks:

• 29 May - US Debt, Stock Market, Interest Hike In Coming Week/s.

• 31 May - US Fed's Interest Hike In June ? 3 Factors To Decide..

• 02 Jun - US Banks Not Out Of Woods Yet. Not By A Long Shot.

To read, click on the post’s title.

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As June, 13 - 14 draws closer by the day - the market is rift with a lot of uncertainties on whether the Fed will blindside it with a 0.25% interest hike.

The concerns became “valid” after the May 2023 Non-Farm payroll & Unemployment data were released on Fri, 02 Jun 2023.

May 2023 - Non Farm Payroll stronger than estimates

• Non-Farm payroll came in at 339,000 jobs for May.

• This is an increased of +15.3% from 294,000 jobs for April.

• This has vastly exceeded market expectations of 180,000 jobs.

• Summary: US labour market is resilient despite the 10 interest hikes.

May 2023 - Unemployment rate

• Unemployment rate came in at 3.7% for May.

• This is a marginal increase of +0.3% from 3.4% for April.

• It has a “negligible” exceed, with market expectation being 3.5%

• Summary: unemployment data is consistent with non-farm payroll in that when most people are employed, there will be little to no idle labour (resources) lying around.

US market performances on Fri, 02 June 2023

Market was elated with the “positive” data set when they were released on Fri, 02 June 2023.

All 3 indexes closed on a “high” by the time market called it a day (see above table).

While both corporate and retail investors rejoiced, the Fed is feeling the heat - whether it is time to (a) Pause or (b) Raise interest by another 0.25%.

• One of the Fed’s major heat source is the International Monetary Fund (IMF).

• In less than 7 days, the Fed has been openly challenged by IMF’s Kristalina Georgieva on 2 occasions - (a) 26 May and (b) 04 Jun.

• It the same consistent “warnings” of (1) raise interest rate, (2) hold interest rate longer and (3) hold back on lending (US banks).

• It is left to be seen whether the Fed will heed IMF’s advice. Afterall IMF “should know” better; given that it has a macro view of the world’s economies.

US interest rate - Predictions by Morgan Stanley

• Wall Street institutions have progressively flooded the market with their opinions on what they think the Fed will be doing on 14 Jun 2023.

• $Morgan Stanley(MS)$ has boldly claimed that the Fed will not hike interest this June.

While all this will be revealed in good time next week, I think there is a need to have a Plan A and Plan B depending whichever direction the Fed adopts.

When Fed Raises Interest.

Following US banks will benefit:

• $JPMorgan Chase(JPM)$.

• $Goldman Sachs(GS)$.

• Morgan Stanley.

Why Them?

• They are among the largest Investment banks in the US.

• They earn a significant portion of their revenues from trading activities, eg. securities underwriting, market making, & asset management.

• These activities tend to perform better when interest rates are higher. This is because they increase the demand for financial products and services.

• Higher interest rates also widen the net interest margin (NIM), which is the difference between the interest income and interest expense of a bank.

• A higher NIM means more profits for the bank.

When Fed Pauses Interest Hike.

Following US banks will benefit:

• $Bank of America(BAC)$.

• $Wells Fargo(WFC)$.

• Citibank (NA).

Why Them?

• They are among the largest Commercial banks in the US.

• They earn a significant portion of their revenues from lending activities, eg. mortgages, credit cards, and business loans.

• These activities tend to perform better when interest rates are lower. This is because they stimulate demand for borrowing & spending.

• Lower interest rates also reduce the cost of funding for the bank, which improves its profitability.

• Additionally, lower interest rates reduce the risk of default and delinquency for the borrowers, which lowers the provision for credit losses for the bank.

• Do you think the Fed will heed IMF’s advice?

• Do you think the Fed will (a) raise or (b) interest hike on 14 June?

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