Will the May FOMC be the "last rate hike"? Considering the Bank of America's earnings, let's think about the US rate hike.

Following the bankruptcy of SVB (Silicon Valley Bank) on March 10, the Federal Reserve Board (FRB) has shifted its financial policy objectives from traditional responses to employment and inflation to addressing credit contraction and economic downturn. Until the FOMC meeting in February of this year, the FRB had aimed at both economic stability and inflation containment. In the FOMC meeting held in March, financial system stability was positioned as a new goal for the FRB, replacing employment, along with the fight against inflation. Based on the 1Q financial data of Bank of America announced on April 18, let's consider the relationship between the current US banking trends, consumer attitudes, and the US rate hike.

According to BofA's financial statements, the total deposits in the first quarter of the 23rd year were 1.91 trillion US dollars, a decrease of 20 billion dollars compared to the same period of the previous year. By department, Global Wealth & Investment Management (GWIM) decreased by 22 billion dollars to 301 billion dollars. Retail Banking decreased by 4 billion dollars to 1.045 trillion dollars. Looking at the breakdown of GWIM, since the bankruptcy of SVB on March 10, the current account deposits have remained flat, while the sweep accounts have continued to decrease. Also, looking at the breakdown of Retail Banking, since the end of the 3rd quarter of the 22nd year, both current account deposits and non-checking savings accounts have shown a decrease in deposits. However, after March 10, while the current account deposits have almost recovered to the level at the end of the 3rd quarter of the 22nd year, the decreasing trend of deposits in the non-checking savings accounts has continued. From BofA's deposit trends, it becomes clear that the financial system concerns that originated from the bankruptcy of SVB have had almost no impact on the major US banks. Although there has been a movement of funds from the major banks' current account deposits to high-yield MMFs, the US major banks, including BofA, have ended up as winners as they have functioned as the recipients for deposit flight from small and medium-sized banks.

It is observed that sentiment towards individual consumption has declined from credit card spending at the same bank. In the 1Q of 2023, the amount and number of credit card transactions at the same bank increased by 6% year-on-year. Considering that the amount and number of credit card transactions in the 1Q of 2022 increased by 14% and 11% respectively, the slowing down of individual consumption is remarkable. Looking at the breakdown of credit card consumption in the 1Q of 2023, the transaction amount and number for gas decreased by 5% and increased by 1% respectively, confirming the decline in energy prices. In addition, the transaction amount and number for retail trade increased by 0% and 4% respectively. Despite the increase in the number of transactions, the total amount of retail trade remained flat, indicating a decline in prices. The decline in retail trade and energy prices confirms a peak out of goods inflation. Also, by looking at the monthly credit card transaction amount at the bank, it is clear that the growth is declining, with an increase of 5.1% in January, 2.7% in February, and 0.1% in March. It is almost certain that the bank's credit consumption will decrease year-on-year in the 2Q.

BofA pointed out that the sluggish consumption of card transactions in March (0.1% increase) was due to a decrease in US household income. According to a report compiled by the bank on April 12th, the average 3-month growth in after-tax wages and salaries in March (3-month average) was only 2% higher than the previous year, slowing down from the peak of 8% in April 2022 and reaching the lowest level since June 2020 due to the impact of reduced tax refunds, among other factors. BofA also mentioned the wage decrease of more than 0.125 million dollars for high-income households, which turned into a 0.5% year-on-year decrease in March 2023, marking a negative growth for the first time since May 2020. In response to the stagnation of US household wages, it is becoming increasingly clear that the peak of service inflation (wages) is also coming to an end.

The decline in US retail trade was evident in the employment statistics for March. The employment statistics for March, released on April 7th, showed an increase of 0.236 million in the previous month, with the most noticeable decline in the retail industry, which decreased by 14,600 people, marking the first decrease in 4 months out of the 11 sectors.

By deciphering BofA's financial results for the 1Q of 2023, it can be seen that the stability of the banking system, prices, and employment are all moving towards resolution of the challenges faced by the FRB. If the expected policy interest rate forecast at the end of 2023 (dot chart) of 5.0-5.25% is correct, it is almost certain that the rate hike cycle will end with a 25bp rate hike by the FRB at the May meeting. In response to such developments, the market is factoring in the possibility of an earlier rate cut by the FRB, with an average interval of 8 months between rate hikes and cuts. The market's view is that the policy interest rate level at the end of 2023 will reach 4.25-4.50%, assuming that the FRB could start cutting rates as early as July.

As the May meetings of the FRB and ECB approach, the lingering high prices in major countries are unsettling the market. In the UK, the CPI in March continued to rise by 10.1% compared to the same month last year, reaching the highest level in about 40 years. The CPI in Canada, where rate hikes have been halted, increased by 4.2% in March, with no sign of reaching the country's inflation target of 2%. While the goal of rate hikes by the FRB is becoming apparent, the market does not see a shift towards a rate cut to achieve the still unseen 2% inflation target. In the midst of these developments, renewed concerns about the management of First Republic Bank have resurfaced, causing renewed anxiety in the US financial system. With US regulatory authorities and major financial institutions extending a helping hand, and the G7 showing readiness to address financial crises in unison, the achievement of the 2% price target that Mr. Powell has occasionally mentioned will likely be demanded, unless very bad news emerges. Based on the FRB members' outlook for 2023 interest rates, it is highly likely that the US policy interest rates will remain at least at the terminal rate level by the end of the year.