Live Markets: Would you like a rock or a hard place in bank stocks?

Pinnacle Financial Partners

02/06/2023 18:30

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      Main U.S. indexes up: DJI leads, up >2% 
    

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      All S&P 500 sectors green: materials lead, up >3%
    

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      KBW regional banking index up >5%, S&P banks up ~3.5%
    

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      Dollar, bitcoin gain; crude up >2%; gold down >1%
    

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      U.S. 10-Year Treasury yield jumps to ~3.68%
    

  
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        WOULD YOU LIKE A ROCK OR A HARD PLACE IN BANK STOCKS?
(1330 EDT/1730 GMT)
  
    Shares in the banking sector were outperforming the broader
market on Friday, but KBW managing director Christopher McGratty
suggests that investors watch the road ahead cautiously. 
    With non-interest-bearing (NIB) deposits declining for U.S.
banks, he concludes that 2024 EPS estimates could tumble by as
much as 24%.  
    And if the NIB deposit mix goes back to 2004-2008 levels,
which McGratty sees as "a fair lookback period given similarly
high rates at 5%", Return On Average Tangible Common
Shareholders Equity (ROTCE) could also fall by 300bps. 
    With this in mind, McGratty says "profitability is at risk,
particularly for smaller banks." NIB deposits were high before
the rate hiking cycle as there "wasn't a lot of incentive" for
bank customers to move deposits to another zero rate account.  
    But now that rates are around 5% "there's a lot more
incentive for you to move your money and get paid interest,"
said McGratty. 
    "There's a normalization that's going on with deposits. So
for the banks especially with all the stimulus from COVID,
that's all burning away ... the risk is that deposit costs for
the banks in the higher rate environment are going higher. " 
    So how do investors choose banks stocks in this landscape?
McGratty suggests three categories to be aware of.  
    His first list appears attractive because the companies'
price to earnings (P/E) ratios have declined and they are "most
disconnected from the fundamental outlook." These are: US
Bancorp  USB.N , KeyCorp  KEY.N , Webster Financial  WBS.N ,
Valley National  VLY.O , Pinnacle Financial  PNFP.O , Western
Alliance  WAL.N , Veritex Holdings  VBTX.O , Amerant Bancorp
 AMTB.O  and Coastal Financial  CCB.O .
    Then there's stocks that appear more risky as P/Es have
fallen less, but they "face potentially greater earnings risk."
These are: Regions Financial  RF.N , BOK Financial  BOKF.O ,
Texas Capital  TCBI.O , Hilltop Holdings  HTH.N , Park National
 PRK.A , NTB Bancorp  NBTB.O , Triumph Financial  TFIN.O  and
OFG Bancorp  OFG.N . 
    Then there's the group that look cheap with P/Es falling
disproportionately, but could be value traps as they "may
struggle to outperform given KBW’s estimated EPS risk." 
    These are: Truist Financial  TFC.N , Comerica  CMA.N , 
Zions Bancorp  ZION.O , Eastern Bancshares  EBC.O , Washington
Federal  WAFD.O , CVB Financial  CVBF.O , and Bank of Hawaii
 BOH.N .
    
    (Sinéad Carew)
     *****
        
     
    INDIVIDUAL INVESTOR BEARISHNESS ABOVE AVERAGE FOR 15TH
STRAIGHT WEEK -AAII (1235 EDT/1635 GMT)
    Pessimism decreased, but continued its run of above-average
readings in the latest American Association of Individual
Investors (AAII) Sentiment Survey. With this, both optimism and
neutral sentiment increased.
    AAII reported that Bearish sentiment, or expectations that
stock prices will fall over the next six months, dipped 2.9
percentage points to 36.8%. Bearish sentiment is above its
historical average of 31.0% for the 75th time out of the past 80
weeks. 
    Bullish sentiment, or expectations that stock prices will
rise over the next six months, rose 1.7 percentage points to
29.1%. "This keeps optimism within its typical range for just
the fourth time in the last 15 weeks." Nonetheless, bullish
sentiment remains below its historical average of 37.5% for the
78th time out of the last 80 weeks. 
    Neutral sentiment, or expectations that stock prices will
stay essentially unchanged over the next six months, ticked up
1.2 percentage points to 34.1%. Neutral sentiment is above its
historical average of 31.5% for the 19th time out of the last 22
weeks.  
    With these changes, the bull-bear spread narrowed to –7.8
percentage points from -12.3 percentage points last week, "after
being unusually low for the last five weeks." 
    
  
    In this week's special question, AAII asked its members how
they would characterize the current state of the economy. Here
are the responses:
    Strong: 6.3%
    Mixed with areas of strength and weaknesses: 72.8%
    Weak: 18.1%
    Not sure/No opinion: 2.0%
  
    (Terence Gabriel)
     ***** 
    
    
    FEARS OF MARKET MELTDOWN FROM TREASURY BILL SURGE MAY BE
OVERSTATED (1205 EDT/1605 GMT)
    The U.S. Treasury Department is expected to dramatically
increase its issuance of Treasury bills in the coming months as
it rebuilds its cash balance once the debt limit is increased.
    But that shouldn’t lead to any large market breakdowns,
according to Guy LeBas, chief fixed income strategist at Janney
Montgomery Scott.
    “There’s an incredible amount of misinformation about what’s
likely to happen after the Treasury Department begins refilling
the Treasury General Account,” LeBas said.
    While the Treasury is likely to issue around $1 trillion in
bills, “which is a lot… the vast majority of those funds are
going to be reallocated out of the Fed’s reverse repurchase
program,” LeBas said, adding that it “will not have a massive
impact on interest rates or other markets.”
    Large money market funds are also currently underweight
Treasury bills, and as such have a lot of room to absorb the
supply, LeBas added, noting that “right now among the five
largest money market funds, they only hold 10% Treasury bills,
they are way underweight in this sector so they have a lot of
room to add.”
    LeBas expects that Treasury bill yields may trade around 10
to 15 basis points above other short-term interest rates as a
result of the increase in supply.
    The U.S. Senate on Thursday passed bipartisan legislation
backed by President Joe Biden that lifts the government's $31.4
trillion debt ceiling.

    (Karen Brettell)
     *****
     
    
    THE GOOD, THE BAD, AND THE UGLY: A JOBS REPORT DRILL-DOWN
(1132 EDT/1532 GMT)
    Investors were greeted on Friday with a bucket full of
surprises in the form of the Labor Department's blow-out May
employment report.    
    First, the U.S. economy added a robust 339,000 jobs last
month  USNFAR=ECI , a 78.4% upside surprise.
    Monthly job adds have landed to the north of the 200,000
level every month since December 2020, and over the last 12
months, have landed north of consensus all but once.
    Additionally, April's payroll adds was revised 16.2% higher
to 294,000.
    The unemployment rate  USUNR=ECI  rose by a significant 0.3
percentage points, rising off half-century lows to 3.7%.
    A quick scan of the topline numbers suggests this report
poses a bit of a conundrum for the Fed. The economy's running
hot, but wages are cooling and unemployment is rising.
    Analysts seem divided.
    "Right now, if you're a Fed governor you're very happy with
this report," says Oliver Pursche, senior vice president at
Wealthspire Advisors. "It continues to demonstrate the economy
is resilient. We're not anywhere near a recession right now, and
for the FOMC, it means they have elbow room to do the things
they want to do."
    But on the other hand:
    "As for the Fed, this is a nightmare report," opines Ian
Shepherdson, chief U.S. economist at Pantheon Macroeconomics.
"Do they stick to incoming VC Jefferson's clear signal of a June
pause, just a couple days ago, or do they rewrite the script?"
    
    
    Taking a gander at the breakdown, the services sector was
responsible for a staggering 90.8% of all non-government job
adds. 
    On the other hand, the unemployment rate  USUNR=ECI  surged
30 basis points to 3.7%, bursting past the expected 10 bp
increase analysts expected.
    
    
    Wage growth, of course, was among the more closely watched
elements of the report, offering the first glimpse of last
month's inflationary landscape.
    Economists saw monthly and annual average hourly earnings
cooling down to 0.3% and 4.4%, respectively.
    The monthly figure stuck the landing, but year-over-year
wage growth arrived just to the south of consensus, at 4.3%.
    "The result is squarely within the Fed’s playbook, with the
result indicating a continuously growing economy coupled with
moderating wage inflation," writes Peter Essele, head of
portfolio management at Commonwealth Financial Network. 
    And given the service sector's disproportionate share of
May's job adds, average hourly earnings growth appears set for
further deceleration, as services jobs are generally at the
lower end of the pay scale.
    But before we pop the cork over the cool-down of annual wage
growth, it's worth remembering it's still more than double the
Fed's average inflation target. 
    And despite still-hot wage growth, it's still cooler than
consumer prices. Real wage growth has been in decline for well
over a year.
    Here's a look at major indicators and how far they have to
descend in their bumpy road back to that target:
    
    
    Next, we take a look at the tedious labor market
participation rate, which held steady at 62.4%, below historical
levels.
    Ordinarily, a rise the jobless rate hints that more folks
are jumping back into the labor pool.
    But that didn't happen, and that could be the first clear
sign that the labor market is starting to feel the bite of the
315% year-to-date surge in announced layoffs, per Challenger.
    
    
    A breakdown of total unemployed by duration shows the newly
employed account for a thicker slice of that pie.
    Layoffs are being felt, but a quick glance at the topline
payrolls number shows hiring is hot. Long-term unemployment is
inching lower.
    At any rate, the distribution of joblessness by length of
unemployment appears to have returned to its pre-pandemic
balance:
    
    
    There's some disheartening news in the report to be found in
data showing joblessness by race and ethnicity.
    Unemployment among Black Americans spiked, jumping nearly an
entire percentage point to 5.6% from 4.7%. White joblessness,
meanwhile, rose 0.2 ppt to 3.3%, still well below the national
average.
    Taken together, the Black/White unemployment gap yawned
wider, to 2.3 ppts from 1.6 ppts, which was the narrowest
reading since 1971.
    
    
    As for the divide between analysts regarding whether or not
this report is good/bad for the Fed, Charlie Ripley, senior
investment strategist for Allianz Investment Management believes
it's either/both:
    "Depending on how you slice it, today’s labor market data
provides a little flavor for everyone no matter what side of the
fence you are on," Ripley writes. "On balance, the employment
data is reflective of the divided views at the Fed and while
this provides some backdrop of uncertainty for Fed policy to
increase rates at the upcoming meetings, it most certainly means
there likely won’t be rate cuts any time soon."
     
    (Stephen Culp)
     *****
    
    
    POP BEFORE THE DROP? (1012 EDT/1412 GMT)
    U.S. stock indexes opened higher on Friday after data showed
a moderation in wage growth in May boosted bets that the Federal
Reserve will skip raising interest rates this month, while
investors cheered the country averting a debt default.
    That said, in the wake of its opening gap higher, the S&P
500 index  .SPX  jumped more than 1% and hit a high of 4,267.09
about 15 minutes into the session.
    With that thrust, the benchmark index nearly tagged weekly
Gann Line resistance which now resides around 4,275. The SPX has
since backed off slightly and is up around 0.8% on the day.
    The Nasdaq  .IXIC  also jumped more than 1% in early trade
and hit 13,252.075, which was its highest level since April 21,
2022. It has also since backed away and is now up just over
0.5%.
    Traders will be watching the S&P 500's weekly close vs the
Gann Line, as well as the Nasdaq's action throughout the session
for signs of an exhausted rise.
    Meanwhile, value  .IVX  is outperforming growth  .IGX , With
this, growth's four-week winning streak vs value is now at risk.
    Here is a snapshot of where markets stood about 40 minutes
into the trading day:
    
    
    (Terence Gabriel)
     *****
    
    
    U.S. STOCK FUTURES HOLD MODEST GAINS AFTER MAY JOBS DATA
(0900 EDT/1300 GMT)
    U.S. equity index futures are modestly green in the wake of
the release of the latest data on U.S. employment.
    The May non-farm payroll headline jobs number came in at
339k, which was well above the 190k estimate. The unemployment
rate was 3.7% vs a 3.5% estimate. Wage data, on a
month-over-month basis was in-line with the estimate. On a
year-over-year basis, it was cooler than expected:
    
  
    According to the CME's FedWatch Tool  FEDWTACH , the
probability that the Fed sits on its hands and leaves rates
unchanged at its June meeting is now around 63% from 74% just
prior to the data coming out. The chance of a 25 point rate hike
is now 37% from 26% just before the numbers were released.  
    E-mini S&P 500 futures  EScv1  are higher, gaining around
0.5%. In the wake of the Senate passing a bill late on Thursday
to lift the government's $31.4 trillion debt ceiling, avoiding a
catastrophic, first-ever default, the futures were up around
0.4% just before the numbers came out.   
    A majority of S&P 500 sector SPDR ETFs are higher in
premarket trade, with energy  XLE.P , up around 1.5%, showing
the biggest gain. Communication services  XLC.P  is the weakest
group, off about 0.6%.
    The SPDR S&P regional banking ETF  KRE.P  is up around 1.4%.
    Regarding the jobs data, Art Hogan, chief market strategist
at B Riley Wealth, said:
    "The average hourly earnings, which is probably the more
important piece of information which was estimated to be at
4.4%, came in at 4.3%. The Fed pays more attention to that
particular line in the report then they do to the headline
number."
    With this Hogan noted that the unemployment rate
surprisingly moved higher in what is the first significant bump
up and something that the market has been waiting for.
    Hogan added "This is a reflection of a labor market that
while still robust, is softening gently, not rapidly. That's
exactly what the Fed would like to see. The Fed wants to tame
inflation without crushing the jobs market, and this is another
piece of evidence that they're actually well along their way to
getting that accomplished."
    Hogan thinks the Fed has enough evidence in hand to take a
pass at the next meeting and remain data dependent for the July
meeting.   
    Here is a premarket snapshot just shortly before 0900 EDT:
 
    
    (Terence Gabriel, Shristi Achar)
     *****
 
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
LMNFP06022023    https://tmsnrt.rs/3IOm1hG
premarket0602023    https://tmsnrt.rs/3qpocBX
earlytrade06022023    https://tmsnrt.rs/43ESdvS
Nonfarm payrolls    https://tmsnrt.rs/3CftL8p
Services payrolls    https://tmsnrt.rs/3ISnVh8
Inflation    https://tmsnrt.rs/3ITRWNL
Labor market participation rate    https://tmsnrt.rs/3C8VAzj
Unemployment duration    https://tmsnrt.rs/45LN7zC
Unemployment by race and ethnicity    https://tmsnrt.rs/43Fb7CJ
AAII06022023    https://tmsnrt.rs/42kCfWv
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Terence Gabriel is a Reuters market analyst. The views
expressed are his own)