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Why the US Federal Reserve is finished raising rates in 2018, that's bad news for bank stocks

Publication Date: 05 Sep 2018 - By Michael J. Kramer By Michael J. Kramer
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Macro Equity Fixed Income/Credit USA Financial Services

Big Week For Data

The S&P 500 finished the day down about 20 bps, at 2,896. For the most part, it was a rather dull day on the surface. I think the setup for stocks continues to be very bullish. The Atlanta Federal Reserve's GDPNow is tracking the third quarter at 4.7%. That is a strong reading for this point in the quarter. It will be a big week make no mistake, with the jobs report this Friday. Expectations for this month is +195k with the unemployment rate of 3.8%.

Libor Flattens

If we take this one step further, the market may already be telling us rates are down rising for 2018. 3-month US dollar Libor has flatten out, and has stopped rising since the end of April! The TED spread, which is the difference between the US dollar Libor and the US 3 Month Treasury, has fallen to just 22 basis points through 28 August. The chart below also shows rather clearly, that Libor rates have risen well in advance of Fed rate hikes. The fact that Libor rates have stopped rising may even suggest the US Federal Reserve doesn't raise rates this September or the balance of the year.

Inflation is Tame

Again inflation is far from runaway, with trimmed mean PCE now at 1.99%.

While our real-time inflation gauge - oil, has fallen from its July highs of almost $75 to $69.50 currently. That falling oil price likely lowers the inflation reading for August CPI.

I can't help but think this would be terrible news for the financials, as the flattening yield curve has already hurt their stocks. The 5-year - 2-year treasury spread is just 10 bps, while the 10-2 year spread is less than 25 basis points.

2018 was the year the banks were supposed to see the significant upside as earnings growth surged. At least or the first nine months of the year it merely has not materialized. At this point it is likely not to happen.

(XLF data by YCharts)

If the Fed puts things on hold for the last four months of the year, and decide not to raise rates the banks may have plenty of room to fall.

I know my viewpoint is like a fish swimming upstream, but that is what I do best. Remember I'm the lunatic in December that said the 10-year would rise to 3%, GDP would grow at 4%, and Oil would rise to $75.

I guess we find out in a matter of weeks, whether I was dead wrong or right.

 

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.

 

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London, United Kingdom

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