Wednesday was an eventful day in the markets.
The FED raised interest rates by another 0.25% to “approximately 5.1%”. It’s a target of 5 to 5.25%.
While this is not high by historic standards it is really an epic increase from the level of 0 to 0.25% that existed during the pandemic. The consequences of this are not yet known. Consider that home prices were driven way by ultra-low interest rates. Can home prices hold up in the face of far higher mortgage rates?
I’ve mentioned that in the case of RBC and Canadian Western Bank I have seen that their loans and other “interest earning assets” have already “re-priced” upwards substantially to the new rates. These banks (and most banks) are collecting far higher rates on loans and paying far higher interest on deposits.
Some people such as some seniors and some people with multiple properties are now in a position to sell at high home prices that still pretty much reflect a world of low interest rates. And they can invest the proceeds in safe GICs suddenly paying say 5%. Great for them! Meanwhile young people pay 5 to 7% on the mortgage to support the savings of these sellers. And the mortgages of young people buying now are still massive. I think young people should be up in arms about this. They get high how prices AND high interest rates. No previous generation has had that combination to the extent we see today.
These rate increases have already driven three fair sized U.S. banks into receivership. In good part these were poorly managed banks who bet that interest rates would not rise much. But the FED and FDIC is taking the wrong approach. They keep taking over banks and then having to sell them at a huge loss. This then spooks more deposit withdrawals at more small banks. It may have been far cheaper for the FDIC and government to declare that until further notice, ALL depositors at all banks would be fully insured. That would stop the bank runs. Some banks might still have struggled due to their locked in low loans but I think in most cases they would have limped along. The current approach is creating cascading bank failures. Apparently a fourth bank is teetering this evening. (PacWest).
There are other impacts from this huge increase in interest rates. Companies with too much debt will be struggling. Many consumers will be struggling too.
Apparently the FED will now likely pause. Picture going on on the battle field to see how the casualties look.
We have already seen that the transport company volumes are down. The cooling off of the economy, that the FED desires may very well be taking hold.
On Wednesday, the S&P 500 was down 0.7% and Toronto was down 0.3%.
Starbucks was down 9.2% after reporting earnings. And that’s after they claimed they had a great quarter. The market is skittish. Certainly a stock like Starbucks can decline more but in the long run it is a great company and probably a great long-term hold. I plan to update this company before the end of this month. I suspect it will look somewhat expensive.
After the close, Costco reported a lack-lustre same-store sales increase of 4.3% (adjusted for fuel price volatility and foreign excahnge impacts). This 4.3% may indicate a volume decrease given food inflation is higher than that. In Canada the same-store sales growth was stronger at 8.3% in Canadian dollars and adjusted for fuel price changes. In Canada, Costco has no other big warehouse store competitor. Surprisingly Costco shares were almost unchanged in after-hours trading. Costco had a long string of stellar growth starting prior to the pandemic and accelerating through the pandemic, so it’s not surprising to see it struggle to keep on growing same-store sales.
Also after the close, AutoCanada reported results. Most of the figures it appears were somewhat lower than Q1 last year but I think not too bad in the circumstances. We shall see how the market responds.