ALM First works with hundreds of financial institutions, sharing the team’s insights on the latest market trends and economic data. This article includes key takeaways presented by Jason Haley, Managing Director of ALM First’s Investment Management Group, during ALM First’s Financial Forum, which was held September 23-25 in San Antonio, Texas.
After an extremely volatile August driven by trade concerns,
markets remain most sensitive to U.S./China trade tensions. Even if a
comprehensive trade deal is reached in the near-term, will it be too late for
the global economy to avoid recession? That is a key question as we evaluate
current economic themes.
The current expansion is now the longest in modern history
with a strong labor market, higher wage growth and Core CPI at a current cycle
high. However, trade tensions continue to present great uncertainty for the
global economy. Late-cycle symptoms have also emerged recently with downward
revisions to estimates of economic growth, corporate profits, and employment
Potential for Negative Rates
Another question looming over the markets is whether the Fed
will commit to a new easing cycle and, if so, will negative interest rates in
the U.S. become a reality? Officials have said they will do what it takes to
support the current expansion. However, while Hawks focus on the domestic
economy (low unemployment, strong payroll growth, and solid consumption), Doves
are focused on global risks, particularly trade and manufacturing.
Fed leaders are under pressure from external sources, both
market & political, to provide additional stimulus. The European Central
Bank (ECB) has pushed the deposit rate more negative and European banks are
trying to adjust to the extraordinary environment. Former Fed Chair Alan
Greenspan said negative rates in the U.S. are “only a matter of time.” However,
current Fed leaders have been more critical of negative rates as a monetary
Implications for Financial Institutions
ALM First advised Financial Forum attendees to avoid
speculation and reactionary decisions. Several opportunities, along with
potential risks, were also noted. In general, financial institutions can expect
higher mortgage origination. While this leads to more reinvestment risk, it
also presents an opportunity to use excess capital to leverage current mortgage
production on a hedged basis at historically wide, risk-adjusted spreads.
Downward pressure on net interest margins and deposit
franchise values will make profitable risk management more critical as it
relates to asset pricing, funding mix, and liquidity management. Depositories
should also place greater focus on non‐interest items (fees, efficiency ratios,
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Jason Haley is the Managing Director at ALM First Financial Advisors, joining the firm in 2008. Jason is head of ALM First’s Investment Management Group and is responsible for leading the investment process and investment theme development for the firm, including management of the ALM First’s model portfolio strategies. He oversees all capital markets activities, including security selection & trading, market research & commentary, and execution of hedging and funding strategies for the firm’s depository clients. He regularly monitors the financial markets for cross-sector relative value opportunities within clients’ stated objectives. Jason provides daily and monthly market commentaries and presents regularly-scheduled webinars on those topics for ALM First and its clients.