A major financial services CEO cautions that the economy has not yet fully absorbed the impact of higher interest rates.
Thomas Michaud, CEO of Stifel company KBW, points out that there is a delayed reaction in the market following the last rate hike. He emphasizes that a 25 basis point increase at a 5% rate is significantly different from a half percent increase.
“Given the current level of rates, this is becoming a significant concern because the bite of these higher rates is gaining traction almost every day,” Michaud told CNBC’s “Fast Money” on Wednesday.
Michaud made this statement shortly after the Federal Reserve decided to keep interest rates unchanged, following ten consecutive rate hikes.
The Federal Reserve indicated that two more rate hikes are expected this year. Michaud anticipates one in July but questions the possibility of a second rate hike.
“I am not willing to rely solely on the Fed’s message conveyed through these projections, given the slowing economy. I believe we are nearing the end of this cycle of rate increases,” he stated.
Michaud highlights several areas of the economy that are already experiencing a downturn as a result of interest rate sensitivity, including office space in urban areas, residential mortgage originations, and investment banking revenues. He believes these issues will contribute to further challenges for regional banks.
“Bank stocks have been tightening since the fourth quarter of last year. It did not just start in March. Loan growth has been slowing,” Michaud added. “There are elements resembling the global financial crisis in bank stocks at present.”
According to Michaud, the recent rally in regional bank stocks is a short-term bounce. The SPDR S&P Regional Banking ETF has seen an increase of almost 18% in the past month.
“Overall, I believe a rally in the industry for all participants will only occur once we have more stability in terms of earnings estimates. The estimates are still decreasing,” Michaud commented.
He expects a shift from adjusting to the new interest rate environment to focusing on credit quality in the second half of the year.
“Before the first quarter, we reduced bank estimates by 11%. After the quarter, we lowered them by 4%,” Michaud stated. “My instincts tell me that we will be lowering them again.”
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