Live Markets: Bank M&A resuscitation in Q3

Burke & Herbert Financial Services

13/09/2023 17:45

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      U.S. equity indexes green: Nasdaq leads, up ~0.5%
    

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      Utilities up >1% lead SPX sector gainers; energy off most
at >1%
    

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      Dollar edges up; gold, crude slip; bitcoin rises ~1%
    

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      U.S. 10-Year Treasury yield edges down to ~4.25%
    

  
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    BANK M&A RESUSCITATION IN Q3 (1245 EDT/1645 GMT)
    The U.S. banking sector has certainly had its ups and downs
this year and yearly mergers & acquisition activity in the group
is still lagging behind historic numbers, according to the
latest data from S&P Global Market Intelligence. 
    But the data also show that there was a bit of a resurgence
in August. So far into the third quarter, bank deal values were
already at $2.08 billion by August 31 compared with just $197.1
million in the second quarter and $432.8 million in the first
quarter. 
    The third quarter numbers included 18 deals announced last
month, which is the most in a month since July 2022, when 19
deals were announced.  
    But versus history, the 72 U.S. bank deals announced YTD
through Aug. 31 compare with 164 deals announced in 2022, and
the total deal value YTD of $2.71 billion compares with $9.03
billion worth of deals in all of last year.
    The largest August deal was a $371.5 million merger of 
Alexandria, Va.-based Burke & Herbert  BHRB.O  and Moorefield,
W.Va.-based Summit Financial Group Inc.  SMMF.O .
    This was also the third-largest U.S. bank deal of the year
and the largest merger of equals since 2021, S&P Global notes.
     
    (Sinéad Carew)
     *****   
    
    
    PUT/CALL MEASURE STILL RELATIVELY ELEVATED (1215 EDT/1615
GMT)
    As the S&P 500 index  .SPX  sold off into its mid-August
lows, demand for downside protection once again spiked. Indeed,
the 5-day moving average of the CBOE equity put/call ratio rose
to 0.85 which was its highest level since early January:
    
    
    The put/call ratio measures demand for downside protection
with put options versus the upside optionality with call
options. The moving average helps smooth out the ratio's very
short-term volatility.
    Although, the recent high was no where near this measure's
late 2022/early 2023 peaks, the 0.85 level was within the
0.824-0.852 zone which accompanied SPX lows in mid-June 2022,
late-September/early-October 2022, and mid-March 2023.
    And at around 0.79 on Wednesday, this measure still has a
lot of room to deflate to fall back below 0.60, and hit the
"complacent" levels which accompanied SPX highs in late-March
2022, mid-August 2022, early-February 2023, and more recently
into late July.
    A thrust above 0.852, however, can suggest fear may be
intensifying again. The November 2022 highs were in the
0.908-0.958 area. 
    The 1.246 early-January spike was the record high for this
measure, and occurred just three trading days after the S&P
500's late December 2022 trough.
    
    (Terence Gabriel)
     *****
    
    
    RUNNING HOT AND COLD: CPI, MORTGAGE DEMAND (1125 EDT/1525
GMT)
    With a fanfare of trumpets and a few sad trombones, the
hotly anticipated inflation data pulled into the station on
Wednesday.    
    The Labor Department's hotly anticipated consumer price
index (CPI) report  USCPI=ECI  showed gasoline lit a fire under
inflation.
    CPI, which tracks the prices urban American consumers pay
for a basket of goods and services, heated up in August. It
accelerated to 0.6%, which was triple the prior month's print
and it rose 50 basis points year-on-year to 3.7%.
    But the increase can be largely blamed on a 10.6% monthly
jump in prices at the gasoline pump.
    Core CPI, which strips away volatile food and energy prices,
rose by 0.3% month-on-month - 10 basis points hotter than
consensus - and by 4.3% annually, inline with expectations and
marking a welcome 0.4 percentage point cool-down from July.
    Line-by-line, air fares surged 4.9%, the largest jump since
January, while owners' equivalent rent increased 0.4% and
new/used autos inched 0.2% lower. Services gained 0.4%.
    "While rising fuel costs could be considered transitory,
it’s a bit of a setback on a month-to-month basis," says Peter
Cardillo, chief market economist at Spartan Capital Securities.
    "But there were no major surprises in the report; the market
was looking for higher inflation and we got it," Cardillo says.
"But the general trend still looks favorable."
    Cardillo said he still believes the central bank will let
interest rates stand at next week's meeting. 
    Financial markets agree.
    At last glance, they've priced in a 95% likelihood of the
Fed's pause button being pressed, leaving the key Fed funds
target rate at 5.25%-5.50%, according to CME's FedWatch tool.
    Here's a look at major U.S. indicators, and their long,
meandering journey down to the magic 2% level: 
    Crucially, year-on-year core CPI and last Friday's annual
wage growth figures both hit 4.3% last month, hopefully closing
the book on a brutal 20-consecutive-months of negative real wage
growth.
    The intrepid American consumer, who carries about 70% of the
U.S. economy on their shoulders, would not have been able to
indefinitely withstand prices rising at a faster pace than
wages. 
    Recent signs, in fact - including soaring revolving credit
balances and a dwindling saving rate - hinted at cracks in
consumer fortitude.
    So this is a welcome development:
    In case you missed it, mortgage rates did some heating up of
their own, prompting a dip in applications for home loans,
according to the Mortgage Bankers Association (MBA).
    The average 30-year fixed contract rate  USMG=ECI  gained 6
basis points to reach 7.27% - marking its fifth straight month
north of the 7% level.
    Even so, applications for loans to purchase homes
 USMGPI=ECI  increased by 1.3%. This was offset by a 5.4% drop
in refi applications, resulting in a net 0.8% decline in overall
mortgage demand.
    Mortgage applications decreased for the seventh time in
eight weeks, reaching the lowest level since 1996," says Joel
Kan, MBA’s deputy chief economist. 
    "Given how high rates are right now, there continues to be
minimal refinance activity and a reduced incentive for
homeowners to sell and buy a new home at a higher rate."
    As illustrated below, home loan demand is down 28.5% from
the same week last year:
    (Stephen Culp)
    *****
    
    WALL STREET EDGES RED WITH INFLATION DATA UNDER ITS BELT
(1016 EDT/1416 GMT)
    Wall Street's major averages are slipping early on Wednesday
after August inflation data was roughly in line with
expectations. Since inve
    stors have talked about little else in recent days they
seemed happy it wasn't worse, and that the wait for the data was
finally over. 
    But of course the big question is what it all means for the
Federal Reserve's future interest rate decisions, even as
traders remain steadfast in their expectation that Chair Powell
would announce another pause next week.   
    Still, with core inflation heating up for the first time in
six months, Edward Moya, senior market analyst at Oanda suggests
another potential rate hike in November as "inflation is not
easing enough for the Fed to abandon their hawkish stance."
    Moya isn't the only one. Glenmede's chief of investment
strategy, Jason Pride, says "the pickup in inflation may
increase the chance of additional tightening before year-end, as
getting the inflation genie back in the bottle does not appear
as straightforward as some would have hoped." 
    So he expects investors to closely parse the dot plot next
week for an update on the FOMC's thoughts on additional hikes
and "perhaps how long monetary policy needs to remain on a
restrictive footing."
    Sector trading is a mixed bag with defensive utilities
 .SPLRCU  posting the biggest rise. Energy  .SPNY  is taking the
biggest hit.
    Under the surface, regional banks  .KRX  are among weaker
groups.     
    Here is a snapshot of where markets stood around 1000 EDT:
     
    
    (Sinéad Carew)
     *****     
    
    
    U.S. STOCK FUTURES CHURN WITH CPI (0900 EDT/1300 GMT)
    U.S. equity index futures are little changed in the wake of
the release of the latest data on U.S. inflation.
    The August headline CPI month-over-month was in-line with
the estimate. The year-over-year print came in above the
expectation. The core month-over-month number was above the
Reuters Poll. The core year-over-year reading was in-line with
the estimate:
      
 
    According to the CME's FedWatch Tool  FEDWATCH , the
probability that the FOMC leaves rates unchanged at its
September 19-20 meeting is now around 95% from 93% just prior to
the data coming out. The chance that the Fed lifts rates by
another 25 basis points is now 5% from 7% just before the
numbers were released.
    Looking out through the rest of the year, the FedWatch Tool
is still suggesting the most likely outcome is no change in
rates.
    E-mini S&P 500 futures  EScv1  are up around 0.1%. The
futures were around flat just before the numbers came out.
    A majority of S&P 500 sector SPDR ETFs are lower in
premarket trade, with industrials  XLI.P , off only about 0.3%,
posting the biggest fall.
    The SPDR S&P regional banking ETF  KRE.P  is off around
0.2%.
    Regarding the CPI report, Randy Frederick, managing
director, trading and derivatives at Charles Schwab said:
    "Overall I'd say it was very close to expectations. The
market reaction is kind of what happens a lot of times. You get
an immediate knee jerk reaction typically in the wrong direction
and the rebound goes back in the other direction."
    Frederick added "What the market needs more than anything
right now is for most economic data, including this to be pretty
close to expectations because if the data is strong, then it
implies inflationary pressures, which could lead (the Fed) to
tighten more. If the data is too weak, then it implies that
perhaps the Fed's already over tight."
    Here is a premarket snapshot shortly before 0900 EDT:
   
 
    (Terence Gabriel, Sinéad Carew)
     *****
 
    FOR WEDNESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300
GMT - CLICK HERE

     

    
    
    
    
    
    
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
CPI09132023LM    https://tmsnrt.rs/3sPcpOl
premarket09132023    https://tmsnrt.rs/3sZ5rpZ
Wall Street gains after inflation data    https://tmsnrt.rs/3EDoDwk
Inflation    https://tmsnrt.rs/3sPEncS
Real wage growth    https://tmsnrt.rs/3rbmLHR
MBA    https://tmsnrt.rs/3rcvERz
PCR5DMA09132023C    https://tmsnrt.rs/3ZnptqA
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Terence Gabriel is a Reuters market analyst. The views
expressed are his own)