Banks out of the woods … or not
This is my choice hunk of the day from the brain of economic analyst Ed Yardeni:
(1) The most bullish development is the record spread between Treasury note and bond yields and the federal funds rate. Historically this has been a big booster of net interest income for the banks. Another major positive is the narrowing of credit quality spreads in the bond markets.
(2) The relaxation of the mark-to-market rule on April 2 should continue to provide for positive y/y comparisons for bank earnings.
(3) The banks have raised lots of additional capital in the bond and stock markets and are meeting the requirements to shore up their balance sheets following their recently completed stress tests.
Now here is the downside:
(4) The bad news is that rising mortgage rates are already depressing mortgage refinancing activity, which was a major source of earnings during Q1.
(5) The jump in the unemployment rate means that bad loans to individuals could mount during the second half of the year.
(6) Residential and commercial mortgages are also likely to generate more bad loans over the rest of the year.