Latest on global markets and banking crisis

Shares in Deutsche Bank closed down 8.6% Friday, paring earlier losses.

The bank’s stock had sunk as much as 14.5% earlier in the day as investors fretted over whether turmoil in the financial sector had spread to Germany’s biggest lender.

The cost of buying insurance against a possible default by Deutsche Bank has soared in recent days. Its five-year credit default swaps surged to 203 basis points Thursday, according to data from S&P Market Intelligence. That’s the highest level since early 2019. The swaps continued to climb Friday, trading at 208 basis points at midday ET.

Analysts told CNN that rising interest rates, as well as an announcement by Deutsche Bank Friday that it would pay back one of its bonds five years early, had rattled investors.

Repaying bonds before their maturity is usually an indication that a bank's balance sheet is in good health. But some investors may have interpreted the move as a sign Deutsche Bank is nervous about the banking sector, Jonas Goltermann, deputy chief markets economist at Capital Economics, told CNN.

Deutsche Bank's decision to pay back the bond ahead of schedule was pre-planned and not a reaction to recent market developments, a source familiar with the matter told CNN. The bond would have gradually lost its eligibility as a form of regulatory capital according to rules brought in after the 2008 financial crisis, the source said.

The bank replaced the bond by issuing another bond of the same type in February, they added.

The recent string of bank collapses are more likely one-offs than "harbingers of poor US macroeconomic performance," St. Louis Fed President James Bullard said Friday.

"It's true that when you raise rates, you're talking about affecting all these financial entities and all these different corners of the financial markets," he said. "Not every single one of them is going to adjust appropriately to the higher rate environment."

Bullard cited a handful of examples from recent history, including: in 1984, when Continental Illinois National Bank and Trust Company became the largest ever bank failure in US history; the Mexican peso devaluation in 1994; and the demise of the Long-Term Capital Management hedge fund in 1998.

Silicon Valley Bank, which took on billions of dollars of deposits from the cash-flush tech industry during the pandemic, is very likely another "unusual case" versus a sign of broader macroeconomic weakening, he said.

"If you're in a forest and then you come to a place on the road and there's a stop sign, and you're not sure if you're supposed to take a right turn at the stop sign or if you're supposed to go straight; you don’t want to split the difference and drive into the forest," he said. "You've got to make a decision about which way you're going to go."

And Bullard's decision hinged on what he viewed as his greatest probability scenario:

"The most likely case is that this is a quirky bank that had a special problem and we have taken actions to mitigate this and probably financial stress will abate," he said. "If it doesn't, I will have taken a wrong turn, but I think that's a lower probability here."

St. Louis Federal Reserve President James Bullard said Friday that he's putting an 80% probability on financial turmoil easing but also is anticipating additional rate hikes from the central bank in response to a stronger-than-expected US economy.

"What I actually think will happen in the 80% probability scenario that the financial stress abates and that we're left dealing more with a more rapidly growing economy and higher inflation is that we'll be forced to ratchet [the Fed's benchmark rate] up somewhat higher as we go through 2023," Bullard said during a call with reporters following a speech at a Greater St. Louis event.

Bullard's base scenario presumes that the focus would return to the economy itself, which continues to show strong labor market readings and inflation dialing back as a slower pace than expected.

"If it doesn't abate, that's a completely different world where financial stress gets more intense, and I would be willing to react to that," he said.

The latest Fed economic projections, which were released Wednesday, include an expectation for an additional quarter-point increase by the end of this year. Bullard said he raised his personal expectation beyond that by another 25 basis points, putting his projections for the Fed funds rate at 5.625%.

The Federal Reserve faced a particularly vexing decision this week: Should it raise interest rates during a bank crisis?

For Tom Barkin, the decision wasn’t especially challenging. Inflation, he says, remains public enemy No. 1.

“Inflation is high. Demand hadn’t seemed to come down. And so, the case for raising was pretty clear,” Barkin, the president of the Federal Reserve Bank of Richmond, told CNN in an exclusive interview on Friday.

Barkin, who participates in the Fed’s debate but doesn’t have a vote this year, conceded that every decision is “hard” and fully debated.

But the economic reports heading into this week’s Fed meeting suggest the economy remains too hot. The Fed ultimately reached a unanimous decision to raise interest rates for the ninth meeting in a row.

“The labor market is tight. Historically tight,” Barkin said. “Inflation, unfortunately, has stayed too high.”

Some experts, including former FDIC Chair Sheila Bair and Moody’s Analytics Chief Economist Mark Zandi, urged the Fed not to exacerbate turmoil in the banking system by raising interest rates following the failures of Silicon Valley Bank and Signature Bank.

“For me, the question was: Do you see such stresses happening that you felt like you really had to pull back and learn more?” said Barkin. “It felt very stable by the time we got there. So, the conditions were right to do monetary policy the way we want to do monetary policy.”

Read more

EU leaders are trying to calm fears about Europe’s banking sector after bank shares slumped Friday.

“Our banking sector is resilient, with strong capital and liquidity positions,” the European Council of EU heads of state and government said in a statement after a summit in Brussels.

Dutch Prime Minister Mark Rutte played down fears of a new banking crisis in the EU, saying regulations were now much improved.

"For me it seems very unlikely, because of how the European system is organized," he told reporters. "The European framework is solid, there are strong buffers and discussion processes,” he added.

German Chancellor Olaf Scholz said there was “no reason to be concerned” about Deutsche Bank, after its shares fell as much as 14%.

"Deutsche Bank has modernised and organised the way it works. It's a very profitable bank,” Scholz told reporters.

French President Emmanuel Macron also expressed his faith in the euro area banking system.

“We have strict regulations in the euro zone, with a very high transparency of the ratios that are closely followed,” Macron told journalists Friday.

He dismissed the stock turbulence of Deutsche Bank today as “speculative behavior and players looking to make money from short-term moves.”

Investors have been rattled by the collapse of two US regional banks — Silicon Valley Bank and Signature Bank — earlier this month. Sunday’s rescue of Credit Suisse by bigger Swiss rival UBS calmed markets at the start of this week, but the fear of a wider banking crisis returned Friday.

In their joint statement, EU leaders said the European economy had “entered 2023 on a healthier footing than previously expected, despite high inflation and energy prices.”

The recent chaos in the banking system may the be catalyst for a recession this summer, according to economists at Fannie Mae, the government-sponsored company that promotes liquidity and stability in the US housing market by purchasing and guaranteeing mortgages.

Fannie Mae's Economic and Strategic Research (ESR) group thinks the collapse of Silicon Valley Bank and Signature Bank could lead to tighter lending standards among regional banks — cooling the economy into recession.

"Bank failures often foreshadow economic downturns," the group said in a report Friday.

Still, the ESR group was careful to differentiate between the current economic situation and the 2008 Financial Crisis.

They predict this downturn will be less severe than 2008 and more akin to the Savings & Loan Crisis from the 1980s — when interest rate rises exacerbated banking system stress and contributed to a modest recession in 1991(read more about that here).

“Inflation has now been joined by financial stability concerns as threats to sustained growth,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae.

“These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022,” he said.

Treasury Secretary Janet Yellen is scheduled to lead a private meeting of financial regulators on Friday amid continued concerns about the health of the banking system.

The meeting, held by the Financial Stability Oversight Council that Yellen chairs, is closed to the press, according to guidance sent Thursday night by the Treasury Department.

The meeting will include Wally Adeyemo, the deputy Treasury secretary. Adeyemo is among the officials leading the department’s response to the bank crisis.

Founded in 2010 as part of the Dodd-Frank law, FSOC monitors the stability of the financial system. The council is comprised of more than a dozen regulators, including the chairman of the Federal Reserve, the Comptroller of the Currency, the chair of the Federal Deposit Insurance Corporation and the chair of the Securities and Exchange Commission.

The Treasury Department typically provides a readout of FSOC meetings. 

Stocks fell Friday morning as shares of Deutsche Bank tumbled, setting off a fresh wave of bank fears.

Shares of Deutsche Bank fell over 10% after the German bank's bond insurance prices surged, which is what happened to Credit Suisse before it crashed.

The pain resonated through the banking sector. The SPDR Regional Banking Equity Traded Fund, which tracks a number of small and mid-sized bank stocks, fell 2.1%. Shares of Wells Fargo and JPMorgan Chase dropped roughly 2% and 1.2%, respectively.

CNN's Fear & Greed Index was at 31, indicating fear in the market.

While the federal and global governments have intervened in recent weeks to contain the banking crisis, investors are still on edge since the rescues don't guarantee that the financial sector is safe.

Investors also continued to digest Treasury Secretary Janet Yellen's testimony before Congress on Thursday, where she stated that the government could intervene again to rescue financial institutions if they threaten to carry systemic risk.

The Dow fell about 160 points, or 0.5%.

The S&P 500 slipped 0.6%.

The Nasdaq Composite dropped 0.5%.

Mortgage rates have taken would-be buyers on a ride this year — and it's only March.

Generally, home buyers can anticipate mortgage rates to move down through the rest of this year as the banking crisis drags on, which could cool down inflation. 

But there are bound to be some bumps along the way. Here's why rates have been bouncing around and where they could end up.

Inflation is still quite high, but it is slowing and analysts are anticipating a much slower economy over the next few quarters — which should further bring down inflation. This is good for mortgage borrowers, who can expect to see rates retreating through this year, said Mike Fratantoni, Mortgage Bankers Association senior vice president and chief economist.

The MBA forecasts that mortgage rates are likely to trend down over the course of this year, with the 30-year fixed rate falling to around 5.3% by the end of the year.

Read more