Business
US regional banks plunge as investors worry crisis not over
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Uncertainty continued to pummel the banking industry, despite assurances from financial regulators and bankers such as Jamie Dimon that the worst of the recent crisis is over and the health of the banking system remains strong.
Shares of smaller regional lender PacWest Bank plunged nearly 50 percent Thursday after the company confirmed reports that it was considering “strategic options,” that may include the possible sale of the company.
PacWest, based in Los Angeles, said in a statement that it was not experiencing any out-of-the-ordinary deposit withdrawals and still plans on selling off some assets to free up cash on its balance sheet.
With $44bn in assets, PacWest is roughly one-fifth the size of the three regional banks that failed over the past two months — Silicon Valley Bank, Signature Bank and First Republic Bank. The bank experienced significant deposit outflows after Silicon Valley Bank failed in mid-March, but said deposits have increased since March 31, including in its venture banking division, which serves technology and start-up companies.
Still, investors feared that PacWest’s fate could mirror that of another California bank — First Republic — which spent weeks looking for a buyer before failing Monday. The regional banks that have run into trouble have seen heavy outflows of deposits and need to raise capital. Nearly all have large amounts of low-interest bonds and commercial real estate assets on their books, and would record losses if they sold them on the open market.
Healthier banks have been reluctant to step in to buy struggling lenders. All assets of Silicon Valley, Signature and First Republic were bought after regulators seized these institutions and their remnants were transferred to the Federal Deposit Insurance Corporation.
In another sign of potential trouble for the banking industry, a major deal was called off Thursday. TD Bank Group and First Horizon Corp said they called off a planned merger, citing regulatory hurdles. Toronto-Dominion Bank had said in February that it was buying regional bank First Horizon in a $13.4bn all-cash deal.
Western Alliance shares were among the most volatile and were down 39 percent when trading was halted. The Phoenix-based bank put out a statement overnight saying it has not experienced any unusual withdrawals and its plans to readjust its balance sheet were under way. Thursday morning, The Financial Times reported that the bank was also considering strategic options. The bank strongly denied the report.
“Western Alliance is not exploring a sale, nor has it hired an advisor to explore strategic options,” a bank spokesperson said.
Other regional banks come under selling pressure Thursday morning. Zions Bancorp dropped 10 percent, Comerica fell 12 percent, and KeyCorp fell more than 6 percent.
US officials at the federal and state level are assessing the possibility of “market manipulation” behind big moves in banking share prices in recent days, Reuters reported Thursday citing an unnamed source familiar with the matter.
‘Tumultous enviornment’
The Federal Reserve’s fight against inflation has played a key role in the banking turmoil. The Fed on Wednesday raised its key interest rate by a quarter-point to the highest level in 16 years as part of that campaign, its tenth consecutive rate hike.
The higher rates have prompted depositors to move money into higher-paying certificates of deposit and money market funds. They also played a role in the slowdown in the tech industry, which had major implications for West Coast banks such as Silicon Valley.
Chair Jerome Powell said the Fed would monitor several factors, including the turmoil in the banking sector, in deciding its next move on rates.
The Fed chair stressed his belief that the collapse of three large banks in the past six weeks will likely cause other banks to tighten lending, and that would help the Fed in its inflation fight. Powell also said the seizure of First Republic was an important step towards “drawing a line under” the recent bank stress.
But some analysts on Wall Street saw continued turbulence for the industry.
“Banks have weathered a tumultuous environment for the past two months and uncertainty lingers in the smaller regional bank segment,” JPMorgan told clients.
The firm anticipated bank stocks continuing to be pressured due to regulatory and economic uncertainty, among other factors.
“Regulatory concerns primarily would translate into how much banks need to add to capital, liquidity, and debt, all of which would strengthen them longer term but hurt [earning per share],” it said.
For the most part, drivers in the Maritimes are paying slightly less for gas Friday, but the cost of diesel is up.
NOVA SCOTIA
In mainland Nova Scotia, gas is down three cents to a minimum price of 152.9 cents per litre.
In Cape Breton, motorists are now paying a minimum price of 154.8 cents per litre for regular self-serve gasoline.
Diesel increased 2.5 cents, the minimum price is now 137.7 cents per litre.
The minimum price for diesel in Cape Breton is now 139.6 cents per litre.
PRINCE EDWARD ISLAND
On Prince Edward Island, gas increased 1.1. cents, the minimum price is now 165.6 cents per litre.
Diesel on the island increased 1.5 cents, the minimum price is now 157.5 cents.
NEW BRUNSWICK
Meanwhile, in New Brunswick, gas is down 2.4 cents, the maximum price is now 164.6 cents per litre.
Diesel is up slightly to 0.6 cents, the maximum price is now 158.6 cents a litre.
Statistics Canada says the unemployment rate rose to 5.2 per cent in May, marking the first increase since August 2022.
The rate for Newfoundland and Labrador rose slightly to 10.2 per cent from 10.1. In metro, the jobless rate in May hit 5 per cent, a slight increase from the 4.9 recorded in April.
The job report comes two days after the Bank of Canada raised its key interest rate by a quarter of a percentage point, citing concerns about a string of hot economic data, including low unemployment.
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Canada’s labour market showed minor signs of softening in May, but economists and other experts said the Bank of Canada likely wouldn’t read the numbers as a sign that its rate-tightening campaign aimed at bringing down inflation is working.
Unemployment rose to 5.2 per cent from five per cent, the first increase since last August, according to the Statistics Canada Labour Force Survey for May.
The numbers released Friday said the economy lost 17,000, though employment overall was little changed.
Randall Bartlett, senior director of Canadian economics at Desjardins, cautioned that job losses were concentrated among the youngest workers in Canada as they enter the summer jobs season, and “not necessarily characteristic of what we’re seeing in the underlying labour market.” He said the job losses can’t yet be seen as a “trend.”
“We need to see how this shakes out in the months ahead, and then we’ll decide what it means for monetary policy,” Bartlett told BNN Bloomberg in a television interview.
Dominique Lapointe with Manulife Investment Management noted “small loss” mostly among the younger age group of workers should be interpreted with caution, as seasonal adjustments can be challenging for that demographic. He also pointed out that employment rose among core-aged workers.
WHAT DOES IT MEAN FOR THE BANK OF CANADA?
The jobs numbers came days after the Bank of Canada resumed its interest rate tightening cycle, hiking its key rate by a quarter of a percentage point to 4.75 per cent after a string of unexpectedly hot economic data.
Lapointe said he is expecting another rate hike next month based on recent inflation and GDP readings. He said the jobs numbers aren’t significant enough to change the central bank’s path.
“I don’t think this morning’s (Labour Force Report) report would change what’s going to happen in July. We’d probably need to see way more weakness in other economic indicators before the next meeting for them to change their course,” he said.
Jay Zhao-Murray, FX Analyst at Monex Canada, noted that the data that went against economists’ expectations for job gains in May, but agreed that the numbers wouldn’t shift the central bank’s thinking.
“With employment cooling on the whole, this latest report does weaken the case for further hikes from the Bank of Canada, but given the details and composition of employment changes, we do not think it would materially change the Bank’s latest view on the economy,” he said in a written statement.
He said he is expecting another 25-basis-point rate hike from the Bank of Canada in July, “unless the subsequent data also confirm the negative signal from today’s report.”
Economist Tuan Nguyen of RSM Canada, meanwhile, said “there are reasons to believe that May’s decline in net jobs is not a fluke,” given that most of the job losses were in business, professional services, and trades.
Taken with an uptick in the unemployment rate, he pointed to signs that “a long-awaited softening of the labor market has finally arrived.”
“Following Friday’s job data, the Bank of Canada’s decision to hike the rate to 4.75 per cent … might be the last one in this cycle. Nevertheless, we continue to believe that rates should remain at that level at least until the end of the year to ensure substantial easing of inflation,” Nguyen said in a written statement.
WAGES
Wages, which the Bank of Canada has zeroed in on as a particular concern in its inflation fight, rose 5.1 per cent year-over-year in May.
Bartlett made the case that wage growth in Canada is more “subdued” than it might appear.
He noted that StatsCan’s monthly wage reading is one of several wage indicators that the Bank of Canada looks at, and others appear to be decelerating more quickly, meaning that “wages are not the concern we had anticipated” when it comes to the possibility of a “wage-price spiral” some economists fear could push inflation higher.
Regardless, Bartlett said he expects the Bank of Canada will interpret the labour force reading as a sign that Canada’s labour market remains “very tight.”
“It needs to see the unemployment rate move meaningfully higher (and) the job vacancy rate move meaningfully lower in order to be able to see wage growth come down to a level that’s consistent with two per cent inflation,” he said.
CONSUMER SPENDING CLUES
As for the sectors where people lost jobs in May, Bartlett said the data holds clues that Canadians are still spending money despite the high-interest rate environment.
“It’s not necessarily in sectors where you would think tight monetary policy and higher interest rates would be leading to job losses,” Bartlett said.
Accommodation, food services, arts and recreation were not hit particularly hard with losses, but those are areas where people generally cut back on spending in tough economic times, Bartlett said.
“We may see the consumer continue to be relatively healthy in the second quarter, and it may be maybe pointing to that still,” he said.
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