The chief executive of a major financial services industry has warned that the economy has not yet fully priced in higher interest rates.
Thomas Michaud, who runs Stifel’s KBW, points out that the market’s reaction to the last rate hike has been delayed – a 25 basis point move to 5% is very different from a 0.5% cut.
“That’s going to be the real deal right now because of the level of interest rates,” he told CNBC’s “Fast Money” on Wednesday. “The impact of these higher rates is growing almost every day.”
Michaud made the call hours after the Fed decided to keep rates on hold. This comes after ten consecutive rate hikes.
The Fed said on Wednesday it would raise rates two more times this year. Michaud expects one to happen in July. However, he questioned whether policymakers would raise rates a second time.
“Trying to deliver new information with these points is not something I would like to take away from what I see happening in the economy,” he said. “The economy is slowing. So I think we’re nearing the end of this rate hike cycle.”
He listed rate-sensitive areas of the economy already in recession: office space in urban areas, residential mortgage originations and investment banking revenues. He believes these problems are causing more pain for regional banks.
“Banks have already tightened up in the fourth quarter of last year. It’s not just since March. Loan growth has been slowing,” Michaud added. “There’s a GFC-like element in bank stocks right now.”
According to Michaud, the rally in regional bank stocks is a short-term rally.this SPDR S&P Regional Bank ETF It is up nearly 18% in the past month.
“Until we think earnings are going to become more stable, the overall industry rebound across all players probably won’t happen,” Michaud said. “Earnings forecasts haven’t been set yet. They haven’t stopped falling.”
He believes that the second half of this year will shift from adapting to the new interest rate environment to credit quality.
“Before the first quarter, we cut the bank’s forecast by 11%. After this quarter, we cut it by 4%,” Michaud said. “My hunch is we’re going to cut them again.”
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