Bank stocks got pummeled for a second straight day on Thursday on a combination of commercial real estate woes and the Federal Reserve's signal that rate cuts aren't imminent. The apparent flare-up of bank risk came as jobs data showed layoffs on the rise, sending Treasury yields sharply lower.
The bank sell-off began on Wednesday morning as New York Community Bancorp reported a surprise loss and announced it would cut its dividend by 70%. That's largely because the bank is preparing to meet higher capital standards after acquiring Signature Bank assets and liabilities from the FDIC. But credit deterioration is also part of the story. The bank recorded a $552 million provision for loan losses, citing office-sector weakness and risk related to its multifamily portfolio.
NYCB's multifamily issues appear at least partly related to rent-stabilized properties. Keefe Bruyette defended New York's Valley National Bancorp, which has sold off more than 10% this week, saying it has minimal exposure to New York City rent-controlled and office properties.
On Thursday, shares of Japan's Aozora Bank dived 21.5% related to its exposure to the U.S. office market, which the bank said "continues to face adverse conditions combined with extremely low liquidity."
Commercial Real Estate Exposure
The CRE sector "is not properly marked to market," Deutsche Bank strategist Jim Reid wrote Thursday. "With a large refi wave coming in the next couple of years, CRE will likely continue to create a lot of headlines."
The problem, he suggests, is big enough to wonder: "Will it be enough to derail the soft-landing thesis?"
Fed Letdown
Some bank analysts had anticipated that Wednesday's Fed meeting could be a negative for the group. Argus analyst Kevin Heal cut his rating on Comerica on Monday and Regions Financial on Jan. 23, saying that regional bank stocks had run up on expectations of a Fed rate cut early in 2024. But he saw potential for the recent strong economic data to push back the timeline.
Heal wrote that a lower federal funds rate would lower deposit costs and improve losses in bank investment portfolios. The lower deposit costs would come as high money market rates, which compete for funds with banks, trend lower. Also, as Treasury yields fall amid rate cuts, the banks that went on a Treasury-buying binge amid low rates early in the pandemic won't be as far underwater.
Jobs Slowdown
Yet Thursday also brought some more signs of a further job slowdown, which is one factor that could speed up rate cuts. The Labor Department reported that initial claims for jobless benefits rose to 224,000 in the week ending Jan. 27, up 9,000 from the prior week's revised total. The four-week average of claims climbed to 207,750 from 202,500. Ongoing claims in the week of Jan. 20 rose 70,000 to 1.898 million.
Also, the Challenger, Gray & Christmas outplacement firm tallied 82,307 announced layoffs last month, up 136% from December's 34,817 total.
Friday's January jobs report is expected to show that employers added 170,000 payroll positions last month, including 142,000 in the private sector, as the unemployment rate ticked up to 3.8%.
Fed Rate Cut Odds
On Thursday afternoon, markets were pricing in 38.5% odds of a rate cut at the Fed's March 20 meeting. But beyond March, the outlook for rate hikes is looking better, not worse. Markets are pricing in 68% odds of a full 1.5 percentage points in rate cuts this year, up from 58% a week ago.
The 10-year Treasury yield fell nine basis points to 3.88%, not far off a six-month low, amid dents in the growth outlook. The 10-year yield is down 28 basis points so far this week.
Bank Stocks Thrashed
NYCB stock fell another 8.4% after Wednesday's 38% plunge. Comerica fell 3.4%, after sliding 5.4% the prior day. Regions Financial lost 2.9%, following a 4.2% prior-day fall.
The SPDR S&P Regional Banking ETF slumped 2.9% after plunging 5.85% on Wednesday, though it came well off Thursday's intraday lows.
Bank stocks are down pretty much across the board, from regional banks to behemoths. Bank of America lost 2% on Thursday, Wells Fargo 3.1% and JPMorgan Chase slid 0.8%.
