Global Courant
A major financial services CEO warns that the economy has not yet fully absorbed higher interest rates.
Thomas Michaud, who heads Stifel firm KBW, notes that there’s been a lag in the market’s reaction to the latest increase – calling a move of 25 basis points against 5% a very different situation than half a percent.
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“This is becoming the real deal right now because of the level of the rates,” he told CNBC’s “Fast Money” on Wednesday. “The bite of these higher rates is gaining traction almost every day.”
Michaud delivered the call hours after the Federal Reserve decided to leave interest rates unchanged. It comes after ten rate hikes in a row.
The Fed indicated on Wednesday that two more rate hikes are in the offing this year. Michaud expects one to take place in July. However, he questions whether policymakers will raise rates a second time.
“Trying to convey a new message with these dots is not what I’m willing to hang my hat on for what I see happening in the economy,” he said. “The economy is slowing down. So I think we’re almost at the end of this cycle of rate hikes.”
He lists interest-sensitive parts of the economy that are already in recession: office space in urban areas, residential mortgages, and income from investment banking. He sees the problems contributing to more pain at regional banks.
“Banks were already tightening in the fourth quarter of last year. It didn’t start until March. Credit growth was slowing down,” Michaud added. “There are elements like the global financial crisis that are now in bank stocks.”
According to Michaud, the regional bank rally is a short-term rally. The SPDR S&P Regional Banking ETF is up nearly 18% in the past month.
“The overall rally of the industry for all participants probably won’t happen until we get a little more stability in what we think earnings will be,” Michaud said. “Earnings expectations have not yet been set. They have not stopped falling.”
He sees a shift from adjustment to the new interest rate environment to credit quality in the second half of this year.
“For the first quarter, we lowered the banks’ estimates by 11%. After the quarter, we lowered them by 4%.” said Michaud. “My instinct is we’re going to cut them again.”
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