Too Big to Fail gets Bigger, ISM reminds us to focus on inflation

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•  ISM Manufacturing Report’s Prices Paid surged to 53.2 v 49.0 estimate
• Stocks mixed over banking takeover and inflation reminders

Wall Street is breathing a sigh of relief as the largest US lender, JPMorgan, will acquire First Republic Bank.  It is starting to look like a few major banking issues will not end up leading to a banking crisis.  In less than two months, the US has seen three of the top 30 banks fail. 

The collapse of First Republic saw JPMorgan step up to the plate and squash the biggest market risk on the table.  The second biggest banking failure since the GFC led to a rather impressive deal that makes it a win-win situation for the FDIC and other banks.  The other big banks will get their deposits back and the FDIC won’t have a bigger rescue bill they will need to fund. 

During the conference call, CEO Dimon noted that the FRC deal has not changed the odds of a recession, but that it will help to stabilize the system.  Adding that the US is getting near the end of bank failures and that he expects banking consolidation. 

It is looking like the stress for the smaller banks is over as we now have a playbook to help the next bank that runs into trouble. Congress will take a closer look at what happened to the banking system and regulation scrutiny will undoubtedly grow.  Senator Elizabeth Warren tweeted, “The failure of First Republic Bank shows how deregulation has made the too big to fail problem even worse.”   

The Fed will likely be confident banking jitters are fading, but given the recent boost of inflationary pressures, they might hold off signaling they are ready to hold rates steady after one more hike.  The Fed might choose to remain vigilant and that is something this market is not ready to price in. 

ISM

The ISM manufacturing report showed factory activity contracted for a sixth straight month while surging commodity prices sent prices paid prices. Employment rebounded above the 50.0 level, which means demand improving. Manufacturing activity is starting to pick up here and that could prove troubling for the Fed’s disinflationary process.  A slower pace of weakness indicates things are bottoming out and if that happens before inflation is back to target, that could keep some policymakers focused on making sure inflation continues to fall before pausing.

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