Will the May FOMC be the “final rate hike”? Thinking about raising US interest rates based on Bankame's financial results

In the wake of the collapse of SVB (Silicon Valley Bank) management (3/10), monetary policy goals by the Fed (US Federal Reserve) were replaced from conventional responses to employment and inflation to responses to credit contraction and economic recession. Until the FOMC meeting in February this year, the Fed had been aiming to balance economic stability and calming down inflation. At the FOMC meeting held in March, financial system stability instead of employment was positioned as a new target for the Fed, along with the elimination of inflation. Based on the 23-1Q financial results data of BofA (Bank of America) announced on 4/18, I would like to consider the relationship with US interest rate increases based on current US bank trends and private consumption attitudes.

According to BofA's financial results, the total deposit amount for the first quarter of the year 23 was 1.91 trillion US dollars, down 20 billion dollars from the same period last year. By division, Global Wealth and Investment Management (GWIM) decreased by 22 billion dollars to 301 billion dollars. Retail banking fell 4 billion dollars from the same period to 1.45 trillion dollars, etc. Looking at the breakdown of GWIM, after 3/10, when SVB went bankrupt, the trend of decline in savings accounts (sweep accounts) continued in contrast to the trend where current accounts (bank accounts) remained flat. Also, looking at the breakdown of retail banking, while both current accounts (checking accounts) and savings accounts (non-savings accounts) showed a decrease in deposits from the end of 22/3Q onwards, current accounts almost recovered to the level at the end of 22-3Q from 3/10 onwards, while the declining trend in savings account deposits continued. From BofA's deposit trends, it became clear that the financial system unease that originated from SVB's management bankruptcy had almost no spread to major US banks. Although there was a transfer of funds from savings accounts at major banks to high-yield MMF, it looks like BofA was started as an acceptance destination for deposit evasion by small to medium banks, and as a result, major US banks increased their presence as a winning group.

It can be seen that the sentiment of private consumption has receded from credit card consumption by the bank. Both the transaction amount and number of credit card transactions associated with the bank in the first quarter of '23 increased 6% compared to the same period last year. Based on the fact that the transaction amount and number of transactions for 1Q credit in '22 increased by 14% and 11%, respectively, the sense of deceleration in private consumption is remarkable. Looking at the breakdown of credit consumption for the first quarter of '23, the amount of gas transactions and number of transactions decreased by 5% and increased by 1%, respectively, which confirmed the decline in energy prices. Also, the retail transaction amount and number of transactions increased by 0% and 4%, respectively. Despite an increase in the number of transactions, the fact that the total amount of retail transactions remained flat means that prices fell. It is a form where the peak out of inflation of goods was once again confirmed due to falling retail and energy prices. Also, if you look at the bank's credit card transaction amount on a monthly basis, there is a clear trend of decline, with a 5.1% increase in January, a 2.7% increase in February, and 0.1% in March. Credit card consumption by the bank entered the 2nd quarter, and it seems almost certain that it will begin to decline from the same period last year.

BofA pointed out that the slump in consumption of card transactions in March (0.1% increase from the same period) was due to a decrease in US household income. According to the report compiled by the bank on 4/12, it became clear that the increase in wages and salaries after tax in March (3-month average) remained at 2% compared to the previous year due to the effects of reduced tax refunds, etc., decelerated from the same 8% increase in 22/4, which was the peak, and reached a low level since 20/6. While BofA also mentioned that wages for high-income households of 125,000 dollars or more fell 0.5% from the previous year in 23/3 against the backdrop of personnel cuts by major US tech companies and major US banks, they turned to negative growth since 20/5, in response to a plateau in US household wages, and there are plans for a peak out of service inflation (wages).

The decline in the US retail business was conspicuous even in the March employment statistics. While the March employment statistics announced on 4/7 increased 236,000 people from the previous month, out of 11 industries, the retail business, which had the biggest drop, declined by 14,600 people, and it was the first decline in 4 months.

By deciphering the financial results materials for 23-1Q by BofA, it can be seen how all of the issues faced by the Fed, such as stabilization of the banking system, prices, employment, etc., are being resolved. If the policy interest rate forecast (dot chart) as of the end of 2023 is 5.0 to 5.25%, it seems almost certain that the interest rate increase cycle will come to an end with the implementation of a 25 bp interest rate hike by the Fed at the May meeting. Under such circumstances, with regard to the policy shift to interest rate cuts by the Fed, assuming 8 months, which is the average interval between interest rate hikes and interest rate cuts by the Fed, the market further incorporates the probability that the Fed will begin interest rate cuts as early as July, and the policy interest rate level as of the end of 23 will reach 4.25 to 4.50%.

Ahead of the May meeting of the Fed and ECB, prices in major countries remain high, and the market is at the mercy of the market. The UK's March CPI rose 10.1% from the same month last year, and continues to be at a high level for the first time in about 40 years. Canada's March CPI, where interest rate hikes were stopped, rose 4.2%, and it is not visible that the country's inflation target of 2% will be reached. Although the goal of interest rate hikes by the Fed has come into view, reaching the inflation target of 2% is still not visible, so it seems unlikely that they will switch to interest rate cuts within the year expected by the market. Under such circumstances, anxiety about the US financial system once again rose in response to the rekindling of management difficulties at First Republic Bank. In addition to extending bailouts by US regulators and US financial giants, as the G7 is on the same page and showing a posture to deal with the financial crisis, unless very bad news comes out, achievement of 2% of the price target that Mr. Powell has mentioned from time to time will surely be required. Based on interest rate forecasts for 23 by Fed members, it is likely that the US policy interest rate for the end of the year will remain unchanged at least at the level of the terminal rate.