Powell “Rug Pulls” Market Bulls

While it may seem like last year’s regional banking crisis is well behind us, investors were reminded today that many of the core risks remain. New York Community Bancorp’s earnings were horrendous, so let’s break down the key points. 📝

The New York-based bank reported a fourth-quarter adjusted loss of $0.27 per share, while analysts expected $0.26 in earnings. Revenues of $886 million and net interest income of $740 million missed estimates of $929.5 million and $788.1 million, respectively. 🔻

Net charge-offs rose from $24 million in the third quarter to $185 million, primarily due to two loans. The first was a co-op loan customized to pre-fund capital expenditures. The loan is not currently in default, but the company is choosing to sell it in the first quarter. The second was an office loan that went nonaccrual during the third quarter after its updated valuation. 

The bank said, “Given the impact of recent credit deterioration within the office portfolio, we determined it prudent to increase the allowance for credit losses coverage ratio…”  And given that roughly 46% of the bank’s loans are in the commercial real estate sector, investors are concerned that more nonperforming loans and “fire sales” are ahead. ⚠️

Also, the acquisition of Signature Bank last year was a double-edged sword. NYCB now meets the regulatory definition of a Category IV bank, forcing it to meet the regulatory capital requirements of banks with $100 to $250 billion in assets. As a result, it had to cut its quarterly dividend from $0.17 per share to $0.05 to speed up the process of meeting this requirement. ✂️

Overall, investors were not happy with what they heard. Obviously the dividend cut stings, but management’s inability to preannounce and communicate a clear forward operating plan really pushed shareholders over the edge. With $NYCB shares trading at 24-year lows, the Stocktwits community’s sentiment is in “extremely bearish” territory. 😡

One of the big themes we’ve discussed for the last four months has been the Fed cutting rates in 2024. However, there’s been a major disconnect between the market’s expectations and the Fed’s guidance since November. That disconnect made today’s Fed decision and commentary tricky for the market to digest. Let’s talk about why. 🤔

First off, going into this year, the Fed fund futures market was anticipating six rate cuts during 2024. Meanwhile, the Fed’s guidance in December suggested the central bank was estimating just three cuts during the year, as it believes there are still upside risks to inflation.

As a result, the Fed met expectations today by keeping rates unchanged. With that said, the red-lined version of its statement showed significant changes. 📝

In it, the committee signaled continued improvements in several factors it’s watching, ranging from the labor market to overall economic activity. But the line that cast doubt on a rate cut at its March meeting was, “The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving substantially toward 2 percent.”

And if that line left any doubt, Chairman Jerome Powell said this during his press conference, “I don’t think it’s likely that the committee will reach a level of confidence by the March meeting.” He clarified that by saying the committee is looking for a continuation of the good data we’ve been seeing, not better data.

During his press conference, Powell reiterated that risks remain, answering the economic “soft landing” question with the following: “No, I would not say we achieved that. We have a ways to go. We are not declaring victory at this point.

Overall, the hawkish tone continued as Powell and the committee attempted to temper the market’s rate cut expectations. They fear that the bond market could get ahead of itself and, in turn, loosen financial conditions. And if financial conditions loosen too much, that could stoke further inflation and start this whole darn cycle again. ⚠️

Nobody wants that. As a result, the Fed would rather accept the risk of keeping conditions too tight for too long, especially given the labor market and the economy’s overall resilience.

We’ll receive more labor market data later this week, but early indications from today’s ADP employment report and fourth-quarter employment costs show the labor market is continuing to cool. Nonfarm payrolls and initial jobless claims have been the wildcard, consistently coming in better than expected. So when those start to give way, we’ll really know that the economic slowdown is in full swing.

As for the market, today’s mixed reaction shows the next few days should be interesting. Stocks sold off on the news, but bonds rallied sharply. Fed Fund futures are finally moving in the right direction but still see a 36% chance of a rate cut at the March meeting. 📊

We guess hearing “no” directly from Powell wasn’t enough evidence to get everyone on the same page. We’ll see if that changes in the coming days and weeks. 🤷