First Republic’s shares jumped 25% before the bell on Monday, with the wider S&P500 stock futures up 0.3%. With few fresh weekend developments on the European bank stock rigor late last week, European bourses and bank stocks found a level too.
Deutsche Bank, whose stock lurched lower on Friday amid fears about rising bank funding costs, regained about 3% on Monday. UBS, in the middle of a shotgun marriage with failed rival Credit Suisse, edged 1% lower.
At the heart of the U.S. problem remains depositor flight from smaller banks toward their bigger and better regulated rivals – and to money market funds, which have seen an inflow of more than $300 billion in the past month to a record $5.1 trillion.
Deposits at small banks fell by $120 billion in the week to March 15, while borrowing jumped $253 billion.
Many analysts now see the only viable solution as either big rises in deposit rates at smaller banks – where deposit rates lagged sharp Fed rate rises before the crisis hit – or a severe cutback on lending that could seed a credit crunch in the wider economy, or both.
These sorts of moves to cash money funds have in the past prompted the Fed to ease monetary policy. And futures now show a two thirds chance the Fed stands pat in May, while a July cut is priced at about 90%.
U.S. two-year Treasury yields nudged higher 3.88% on Monday, but the yield curve between three months and 10 years briefly dipped to its most inverted level in 42 years – signalling heightened fears of recession ahead.
The conundrum for central banks is that inflation remains high even as the banking stress mounts. Fed officials will watch the release on Friday of core PCE inflation data for February while March numbers for the euro zone are due out this week too.
Economists polled by Reuters expect the headline year-on-year inflation rate to have cooled to 7.2% from 8.5% in February. But they see the core rate – which strips out volatile food and energy prices – hitting a new record of 5.7%.
Above-forecast German business activity readings for March only adds to the policy headache, as does waves of labour strikes across Europe’s biggest economy.
U.S. core PCE is expected to have stuck at 4.7% last month.
