- Fed, FDIC policies gain faith of market.
- First Republic Bank stock lost nearly 62% on Monday.
- CPI for February showed inflation in line with consensus.
- NASDAQ, S&P 500 futures rally on CPI figure.
It appears the banking crisis of March 2023 has ended. First Republic Bank (FRC) has exploded 59% higher in Tuesday’s premarket just one day after it lost about 62%. While a number of regional banks saw their share prices dive on Monday, largescale bank runs did not emerge as was predicted over the weekend by a number of amateur banking experts busy rending their sackloth in broad daylight on Twitter. While this was uncertain for most of Monday’s session, by Tuesday the consensus has drifted toward satisfaction that the banking sector was saved by the federal government’s intervention this past weekend.
First Republic stock is now trading at $49.50 after trading as low as $17.53 on Monday.
First Republic stock news: Saved by the Feds
The Federal Reserve put together something called the Bank Term Funding Program (BTFP) on Sunday. That blandly-named policy has a rather revolutionary reality however. It is a lending facility that buys long-maturity, low-interest bonds and other securities from banks at par, allowing these banks to reinvest in higher-interest, short-term securities.
This intervention seeks to halt the capital structure that led to the demise of Silicon Valley Bank last Friday. That bank held more than half of its securities in long-maturity bonds that paid the low interest rates that were common in 2020 and 2021. When inflation caused the Federal Reserve to begin raising rates at a furious clip last spring, Silicon Valley Bank decided to hold onto these securities until maturity, a plan that would have worked out if their deposits did not begin depleting at an equally furious clip. The startups and venture capital firms that made up a large cross-section of its clients decided to spend their own cash now that low-interest loans were not available. This forced Silicon Valley Bank to sell their low-interest securities at a discount to par. When these losses were reported, the news ended up causing a bank run.
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the US Treasury additionally said they would backstop all deposits when banks opened on Monday, not just up to the typical limit of $250,000 per account. This policy is most important to First Republic depositors as the bank largely focuses on high-net-worth individuals who often hold much larger deposits than the $250,000 threshold. The worry that these wealthy depositors would need to move their money to multiple banks – for instance, breaking $5 million up into 20 separate $250,000 accounts at 20 separate banks in order to be fully insured against default – led to the run on FRC stock.
For some reason the above interventions from the federal government did not work their magic immediately, and it took a full session for the realization of safety to reach acceptance. First Republic had already said last Friday that it had $70 billion in liquidity in addition to the Fed’s BTFP program. Some of this came from the largest bank in the US – JPMorgan (JPM) – which should have immediately squashed doubts. Alas, some lucky traders picked up RFC stock at its all-time low. This was below the previous all-time low of $21.88 in October 2011.
Consumer Price Index reported largely in line with consensus
The February Consumer Price Index (CPI), arriving at 8:30 AM EST on Tuesday morning, was largely in line with expectations. MoM core inflation was 0.5%, slightly higher than the 0.4% expected, but YoY core inflation was 5.5% as expected. Also, headline inflation of 6% YoY and 0.4% MoM was right on consensus. Alltogether, the news was a pleasant surprise for the market in that it did not show inflation getting out of hand as the most recent Personal Consumption Expenditures (PCE) data did.
The NASDAQ futures rose 0.3% on the news, and Dow and S&P 500 futures added on more than 0.4%. This means Tuesday will likely experience a large rally.
First Republic stock forecast
Theres is no need to get too specialized with the charts on FRC stock. Do not overthink this one. Just use pivots. It is no coincidence that First Republic stock is trading in the premarket right in line with the S5 support. Bulls will focus on pushing FRC stock up to the S4 support at $67.13 the rest of this week. Next week as worries subside, expect bulls to achieve the S3 at $84.67. From there it will be a slower road back to the $120s.
