Mini banking crisis ‘ultimately will help fight inflation,’ strategist says

Baird Managing Director and Market Strategist Michael Antonelli joins Yahoo Finance Live to discuss First Republic Bank’s $30 billion rescue by the big banks, U.S. bank failures, market sentiment, and the expectations for the FOMC meeting.

Video Transcript

BRAD SMITH: Also, let's break down this action this week and everything that has been. And discuss what's ahead with Baird Managing Director and Market Strategist Michael Antonelli. Michael, I think we just kind of take a sigh to start off this conversation. And now, with that deep breath behind us, how do you even start to describe what took place this week and where we go from here?

MICHAEL ANTONELLI: I was kind of listening to you two, thinking to myself, is what we're going through right now unusual? Is this a moment in history where what we're seeing is kind of revolutionary or new? And I keep thinking back to the fact that, you know, if you say we're in unprecedented times, you basically haven't read much history.

And you guys might know this, there's been 70 bank failures in the past decade. There's been over 500 bank failures since the end of the GFC. So it's not like bank failures don't happen.

Certainly, the timeline that we've been through has been raucous and it's kept all of us kind of glued to our screens, and glued to watching you guys, and glued to glued to our terminals. But where we go from here is interesting.

I will say that, I think this-- I'm calling this like a mini banking crisis. I don't this is the same level as the GFC. I agree with Julie on that. Is the mini banking crisis over? I think it's closer to ending than it is to beginning.

The things that the government and the regulators are doing makes sense to me. Ring fencing depositors makes sense to me. I would even argue, my friends, that this might actually be helping the Fed a little bit. At the margins, is this mini banking crisis helping the Fed?

It probably is, right? It's gonna send a deflationary impulse to the economy. credit conditions will tighten, lending will tighten. So they may not have wanted this to be one of the things that helped them. But I think this ultimately will help fight inflation, you know, maybe much more so than a rate hike.

JULIE HYMAN: I mean, that makes sense to some extent. What I'm curious to ask, Mike, is why we are still seeing these regional banks under such pressure, even with all of these lifelines being thrown out.

MICHAEL ANTONELLI: It's a great question, Julie. I was thinking about my answer when you guys were talking about it. Here's what I keep coming back to. This is what markets do. Markets probes stress. And they will find it sometimes. They'll find the weak points and they'll drive into the weak points.

Sometimes when they probe stress, they hit a roadblock and then that's it. But that's what's happening, right? The markets are gonna probe stress until this moment has passed. And like you said, the actions of regulators and the Fed make sense to me. The discount window lending makes sense to me.

What these big banks are doing makes sense to me. It might be creating a feedback loop of big banks giving money to small banks, which ends up in big banks. But this is what markets do. They test stress. And we're still in that testing period.

BRAD SMITH: OK. And so with that in mind, I mean, a lot of people are just looking for any type of clearance or a sign to say that we are in the clear. What would that sign even look like if we have any indication?

MICHAEL ANTONELLI: It's probably gonna come from credit markets. That would be my guess. I don't think it's gonna come from equity markets. Equity markets can be crazy. You know, the three of us realize that.

I would probably be watching things like the two-year note. I'd be watching things like high-yield credit, maybe some of those credit default swap indices. Those are gonna say when the funding stress, when the market stress is over much quicker than, say, the stock of FRC or the stock of another regional bank or something. Those are gonna still be probably volatile.

So what I would be doing if I was an individual or if I was a professional. Every day, I said I look at the two-year note. What is the market thinking about the Fed's, you know, near-term course? And then I look at some sort of credit index whether it's, you know, HYG, or LQD, or some sort of credit index that lets me know what the big, big markets are thinking about the stresses in the system.

And then I do think weekends help, as weird as that sounds. Weekends do help calm people down. Weekend headlines can help calm people down. So what I would do now, I would probably be looking at credit indices right now to really try to gauge what's happening in terms of stress.

JULIE HYMAN: Of course, the markets close over the weekend, but banks aren't. So we'll see what happens with maybe some flows-- deposit flows on Saturday.

Just quickly as we close out here, Mike, what are you gonna be watching then going into next week? I know you said you're watching credit. I mean, is this a situation where you don't make any moves in the market until we know what's going to happen next? Up to and including the Federal Reserve meeting next week.

MICHAEL ANTONELLI: So that is my number 1 thing to watch. Obviously, we want to see what they say. I think they're still going to hike. I would guess they're still gonna hike 25. I don't think 50. Earnings-- I've been watching earnings. Earnings estimates are still doing pretty well, 220 for the year. My friends, it's not like those are getting ratcheted much lower. So I'd watch earnings.

I'd watch the FOMC. I'd watch certainly the headlines over the weekend. I'd want to continue to watch what some of the big banks are saying because they are part of this, you know, system. They are part of helping their smaller brethren so I'd be watching what they're saying.

And look, it's just a really weird time right now. Thank God it's St. Patrick's Day. I mean, at least we get that, right? Like, you know, we do want to see like, what does the close look like today? That is what I would say. Come back to Yahoo Finance at, you know, 3:59. What's the close doing? I think that's really, really gonna be important today. It'll tell us a lot about people's views about going into the weekend.

JULIE HYMAN: Yeah, especially with all the witching action in between now and then, and that very big St. Patty's Day parade that's happening here in New York in just a couple hours.

MICHAEL ANTONELLI: Yeah.

JULIE HYMAN: Thanks so much, Mike. Good to see you. Baird Managing Director and Market Strategist Michael Antonelli, appreciate your time this morning.