Pause rate hikes? So what? The US stock market still has a "bomb": the banking crisis is far from over!
The Federal Reserve knowingly allowed regional banks to contract credit, further fueling concerns about the exposure of small and medium-sized banks to economic recession, which triggered the overnight drop in US bond yields and the main reason for the decline in US stocks before and after the meeting.
Overnight, the Federal Reserve continued to raise interest rates by 25 basis points as expected, and even hinted that the end of the rate hike was near, but the US stock market still ended with a decline.
Why? The US banking crisis is not over yet!
Guotai Junan Securities pointed out that the Federal Reserve's meeting statement pointed out that the tightening of credit conditions would bring uncertainty pressure to the economy.
Currently, once the crisis of regional banks in the United States is exposed, it will be quickly intervened by the Federal Reserve and the Treasury Department, but its impact continues to ferment within the US financial system:
On the one hand, it causes greater pressure on small and medium-sized banks, accelerating the loss of deposits;
On the other hand, it causes banks to raise credit standards, which can indirectly achieve the effect of shrinking demand and reducing inflation, but it may also lead to a rapid economic recession.
However, the Federal Reserve saw this phenomenon, but "allowed" banks to shrink credit, further catalyzing the market's concerns about the risk exposure of small and medium-sized banks in the United States and economic recession before and after the meeting. This is the main reason for the decline in US bond yields and the decline in US stocks.
Analysts Tan Han and Tang Yuanmao of Guotai Junan further pointed out that the increase in overseas safe-haven sentiment and the decline in US stocks during the May Day period are also related to the banking crisis: First Republic Bank, which "collapsed" on May 1, became the third regional bank to collapse in the United States since March. Currently, the risk of the US banking industry may continue to ferment in a high-interest rate environment.
From the liability side, the trend of deposit outflows caused by the inverted yield curve and the transfer of deposits to large banks by depositors based on deposit security considerations may continue, and small and medium-sized banks are forced to finance through high-cost channels such as interbank borrowing to alleviate liquidity pressure, which will continue to push up their liability costs.
From the asset side, with the continuous advancement of the Federal Reserve's interest rate hike, small and medium-sized banks' long-term government bonds, MBS and other bonds still have room for further devaluation, and the increasingly prominent liquidity pressure of small and medium-sized banks in the future will further increase the probability of long-term asset devaluation becoming actual losses.