Author: Fan Zhijing

  Since December, the U.S. financial sector has suffered a sell-off. The S&P Bank Index has fallen by about 10% in the past three weeks, almost twice as much as the S&P 500 Index.

The net interest margin boosted by the Federal Reserve’s interest rate hike did not attract buyers. The market is worried that the risk of economic recession and the slowdown of the main business will further suppress the already fragile profit prospects. The temperature rises.

  Raising interest rates to impact economic alarm sounded

  As an important economic bellwether, the recent decline of the banking sector has accelerated significantly. This dragged down the S&P 500 Bank Index to a decline of more than 21% this year, the worst performance since the 2008 financial crisis.

  Concerns are growing that the Federal Reserve's most aggressive tightening of monetary policy in 40 years will hamper economic growth.

Data showed that the vitality of U.S. business activity continued to weaken, with signs of weakness in the services sector escalating while the manufacturing sector faced a demand-side shock.

Chris Williamson, chief business economist at S&P Global, said the Fed's rate hikes had the expected impact on inflation, but economic costs and recession risks also increased.

December PMI data showed that the U.S. economy will shrink at an annualized rate of 1.5% in the fourth quarter.

  With the monthly rate of retail sales in the United States falling by 0.6% in November, a new round of alarms has been sounded.

Consumer spending is the main driver of the economy, with sales likely to account for about 20% of total retail sales in the last two months of the year, according to the National Retail Federation.

There are signs Americans are cutting back on holiday gift spending, and credit card debt is climbing even as savings rates continue to fall.

The U.S. personal savings rate fell to 2.3 percent in October, the second-lowest level since records began in 1959, according to the U.S. Commerce Department.

  According to statistics from UBS, the excess savings of American consumers has dropped by US$1 trillion this year, and the pressure on the budget is gradually accumulating.

UBS chief U.S. economist Jonathan Pingle (Jonathan Pingle) analyzed to the first financial reporter that the U.S. private savings rate is now unsustainably low, and households are rapidly reducing the savings buffer built during the epidemic. Groups run out of liquidity and the impact on final consumer spending will start to be felt."

  A third of respondents to a Gallup poll last week said they will spend less this holiday season, while only 17% plan to spend more.

In the current context of high inflation and economic downturn, people are beginning to avoid impulse buying.

Wells Fargo CEO Charlie Scharf said earlier this month, “We’re seeing increasing pressure on lower-income groups. People have exercised a lot of freedom in discretionary spending over the past few years, and those purchases are Slowing down. The economy is expected to be quite weak for the next year.”

  Although Federal Reserve Chairman Powell and U.S. Treasury Secretary Yellen reiterated their confidence and hope for a soft landing in their recent speeches, Wall Street is not optimistic about this.

JPMorgan Chase CEO Jamie Dimon believes that high inflation and high interest rates will trigger an economic recession, and Bank of America predicts that the US economy will continue to experience negative growth in the first three quarters of next year.

Richard Clarida, a former Fed vice chairman and now Pimco's global economic adviser, also warned after the interest rate meeting last week that a mild U.S. recession looks challenging.

  The job market has become the hope of a soft landing for the economy.

As the labor supply and demand situation is still tight, companies are attracting job seekers by raising salaries, and personal income growth has driven consumption to a certain extent, but it has also become a potential resistance to pushing up prices.

Bob Schwartz, a senior economist at Oxford Economics, told China Business News that the growth in labor costs is still strong and cannot be in line with the Fed's 2% inflation target, indicating that monetary policy will focus on cooling the job market.

According to Schwartz, such risks are building up as interest rates continue to rise, and historically, unemployment in economic forecasts has often signaled the occurrence of deep recessions.

Therefore, the Federal Reserve has recently emphasized the need to consider the cumulative effect and hysteresis of monetary policy, and to observe the overall impact of the rate hike cycle on the economy.

  Short-term performance may continue to be under pressure

  Share price movements reflect investor concerns about institutional performance.

The economic cloud is bringing many uncertain factors, and many main businesses on Wall Street are facing major threats. Last week, Goldman Sachs even reported thousands of layoffs.

According to Pingle, the full impact of monetary policy is being unleashed.

The real estate market was the first to be suppressed, and then the impact of high interest rates on credit card consumption and corporate investment and financing demand will be further escalated in the next few months.

  Research by RBC Capital Markets found that the net interest margins of the 20 U.S. financial institutions it tracks hit a three-year high as the Federal Reserve raised interest rates aggressively.

RBC analyst Gerard Cassidy said investors are now concerned that net interest margins will peak next year, coupled with a significant increase in credit loss provisions due to an expected economic slowdown in 2023.

  The mortgage market continues to be under pressure, with rapidly rising interest rates squeezing some would-be homebuyers out of the market.

As the bank with the largest mortgage business in the United States, Wells Fargo’s related revenue fell by 70% in the first three quarters. Earlier this month, the bank announced the layoff of hundreds of employees in the mortgage department.

  The consumer loan business is also facing challenges.

Under huge inflationary pressure, many families are forced to take loans to make ends meet.

The Federal Reserve said last week that total consumer credit rose by $27.1 billion in October from $25.8 billion previously, with the growth rate of credit card-based revolving credit further accelerating to 10.4%.

The New York Fed notes that defaults on repayments are on the rise.

In a Deloitte survey released last month, more than a third of consumers surveyed said their financial outlook was worse than this time last year.

Schwartz analyzed to reporters that the consumer confidence index is still hovering at a low level, and the subsequent loosening of the labor market caused by the economic slowdown may further hit consumption, thereby causing the risk of bank credit losses.

  As another major profit pillar of the banking industry, the investment banking business is also precarious.

The scale of US IPO financing this year is US$24 billion, the lowest level since 1990, and a drop of more than 80% from 2021.

Affected by the cooling of the U.S. market, global IPO financing this year was only US$207 billion, a sharp drop of 68% year-on-year, the worst decline since IPO financing plummeted 73% in 2008.

Affected by this, in the first three quarters of this year, the investment banking revenue of the six major U.S. banks plummeted by more than 40%.

According to reports, institutions including Morgan Stanley and Citigroup are considering cutting bonus pools and even starting layoffs.

  It is worth mentioning that Buffett, the "stock god" who holds a large number of financial stocks, is continuing to sell this year. The recently released 13F report shows that after Berkshire Hathaway reduced its holdings of 42 million U.S. Bank shares in the third quarter, 10 In the month, it further reduced its holdings to 52.5 million shares. During the same period, the company also sold 10.1 million shares of Bank of New York Mellon.

In the first quarter of this year, Berkshire even liquidated Wells Fargo, which it had held for more than 30 years.

  But valuations for bank stocks may become increasingly attractive as share prices fall.

The S&P 500 bank index trades at about 9 times earnings, below its long-term average of 12 and well below the S&P 500 as a whole at about 17, according to Refinitiv Datastream.