Market Focus Shifts to Landmark Fed Decision, Futures Edge Higher

1. Focus on the Fed

The Federal Reserve is at the center of market attention as investors eagerly await its crucial interest rate decision. As speculation mounts, the debate centers around whether the Fed will opt for a 25-basis point cut or a more aggressive 50-basis point reduction. This would mark the first rate cut since March 2020, a significant shift as the Fed seeks to balance economic momentum and inflationary pressures. The FedWatch Tool by CME Group currently reflects a 61% probability of a larger 50-basis point cut, fueled by reports from the Financial Times and Wall Street Journal, which indicate the possibility of a jumbo cut. Former New York Fed President Bill Dudley adds weight to the argument, stating a “strong case” exists for the larger cut, as current rates may be above neutral territory. However, mixed economic data, including stronger-than-expected retail sales in August and tepid inflation trends, makes this a closely contested decision. Analysts at ING describe it as a “close call,” underscoring the uncertainty in the macro outlook. Investors are also eyeing potential signals from the Fed on future rate cuts, with markets anticipating at least 100 basis points in reductions by the end of 2024.

2. Futures Edge Higher

Ahead of the Fed’s pivotal meeting, U.S. stock futures inched upward. As of 03:30 ET (07:30 GMT), Dow futures added 45 points (0.1%), S&P 500 futures edged higher by 7 points (0.1%), and Nasdaq 100 futures gained 39 points (0.2%). These modest gains follow a turbulent Tuesday session, where positive retail sales data propelled the S&P 500 and Dow Jones Industrial Average to record highs, only for markets to fade on Fed uncertainty. The tech-heavy Nasdaq Composite closed the day with a slight 0.2% increase.

3. 23andMe Directors Resign Over Take-Private Offer

Genetic testing firm 23andMe faced board upheaval as all seven independent directors resigned following failed negotiations with CEO Anne Wojcicki regarding her proposal to take the company private. The board expressed disappointment over the lack of a “fully financed, actionable proposal” that would benefit non-affiliated shareholders. Wojcicki controls 49% of the company and had offered to buy remaining shares at $0.40 each, a move rejected by a special committee. In a memo to employees, Wojcicki stated she was “surprised and disappointed” by the resignations, reiterating her belief that going private would free 23andMe from the short-term pressures of public markets. Shares plummeted in extended trading following the announcement.

4. Nippon Steel Wins Extension on U.S. Steel Deal Review

Nippon Steel’s $14.1 billion bid for U.S. Steel is receiving a prolonged security review, potentially extending the timeline past the U.S. presidential election in November. Bloomberg reports that Nippon Steel was granted the ability to revoke and refile its submission to a U.S. security committee, a strategic move amid political sensitivities surrounding the deal. President Joe Biden has publicly opposed the transaction, further complicating the outlook, particularly as U.S. Steel is a major player in Pennsylvania, a key battleground state in the 2024 election. Shares of U.S. Steel rose 3% in aftermarket trading on the news.

5. Oil Prices Decline as Inventories Rise

Oil prices dipped in early European trading, trimming recent gains following an unexpected increase in U.S. crude inventories. Brent futures fell by 0.5% to $73.33 per barrel, while West Texas Intermediate (WTI) dropped to $69.63. Despite the short-term pullback, prices remain elevated on the back of supply disruptions from Hurricane Francine and anticipation of Fed rate cuts, which have pushed traders to take advantage of discounted oil prices. Additionally, rising Middle East tensions are contributing to price volatility, with Hezbollah threatening retaliation against Israel. Both Brent and WTI contracts have rebounded sharply over the past week, recovering from three-year lows.

Why Big Banks Are Obsessed with 1995

The echoes of 1995 are growing louder on Wall Street, and for good reason. That year, a series of Federal Reserve interest rate cuts sparked one of the best multiyear periods in banking history. With inflation cooling and U.S. consumer spending slowing, the Fed reduced rates by 25 basis points in July, December, and again in January 1996. The result? An extraordinary rally for banks. An index tracking the banking sector surged by more than 40%, outperforming the broader market for two consecutive years. Today, with speculation rising over potential Fed rate cuts in 2025, many financial institutions are drawing parallels to that remarkable period, hoping for a repeat performance. While the path to another 1995-like boom may seem distant, Wall Street analysts and bank executives are contemplating what it would take to recreate such a winning streak.

A Strong Start for 2023

The banking sector has already posted respectable gains this year. The KBW Nasdaq Bank Index (^BKX), which tracks large U.S. banks, is up over 14%, and the Financial Select Sector SPDR Fund (XLF), which includes a wide range of financial institutions, has gained 19%. However, these gains still lag behind major market indices. As Mike Mayo, an analyst at Wells Fargo, puts it: “History isn’t likely to repeat, but it may rhyme.” While Mayo is cautious about expecting a full repeat of 1995, he notes that key similarities are emerging. In particular, Mayo points out that in three instances—1995, 1998, and 2019—where the Fed cut rates without triggering a recession, bank stocks initially sold off before rebounding and outperforming the S&P 500. However, history also shows that only in 1995 did this outperformance last longer than three months after the initial rate cut.

1995: A Turning Point for Banks

The conditions leading up to the 1995 boom were far from ideal for banks. Major institutions were reeling from the bankruptcy of Orange County in December 1994 and the collapse of British merchant bank Barings in early 1995. The bond market had suffered a significant wipeout, leading to substantial trading losses. Meanwhile, commercial real estate lenders were still grappling with loan losses from a crisis dating back to the late ’80s.

Despite this, a key factor worked in favor of the banking sector: a steep yield curve. Long-term Treasury yields remained higher than short-term rates, allowing banks to profit from the spread between borrowing at short-term rates and lending at long-term ones. Moreover, deregulation provided a tailwind, with new laws allowing banks to open branches across state lines, setting the stage for the emergence of mega-banks like Wells Fargo and Bank of America.

Could Regulation Swing Back to Favor Banks?

Today’s regulatory environment is different from 1995, but some believe the pendulum may be swinging back in favor of big banks. While regulation has tightened since the Trump administration, recent developments suggest a potential easing. For instance, new bank capital rules introduced last week were less stringent than initially expected. Additionally, the Supreme Court’s rejection of the Chevron doctrine, which granted regulatory agencies broad authority in interpreting laws, may limit regulatory power moving forward.

However, there are significant differences between now and 1995. The current shift in monetary policy follows one of the longest periods of low interest rates in U.S. history. During the pandemic, banks experienced a surge in deposits, which left many institutions ill-prepared for the recent sharp rate hikes. As Allen Puwalski, CIO at Cybiont Capital, noted, “There’s no argument that falling rates are good for banks. I’m just not sure it’s for the same reasons that it was in ’95.”

The Path to 2025: Can Banks Repeat 1995’s Success?

For 2025 to be as strong for banks as 1995, the Fed would need to engineer a “soft landing”—reducing inflation without triggering a recession. This is a challenging task, but not impossible. As former Boston Fed President Eric Rosengren told Yahoo Finance, “There are plenty of things that could go wrong, but I think it’s a high enough probability that it’s still reasonable to talk about a soft landing.” Looking ahead, banks that have benefited from high interest rates may see shrinking profits, while those that struggled could be poised for a rebound. At a recent Barclays conference, several bank executives, including Bank of America CEO Brian Moynihan and PNC CEO Bill Demchak, expressed optimism about earnings in 2025. Others, like JPMorgan Chase COO Daniel Pinto, were more cautious, warning that analysts might be too optimistic about future earnings.

Conclusion: A Dream Worth Pursuing?

While a repeat of 1995 may seem like a long shot, the banking sector is once again in the midst of significant change. Loan growth, a revival in investment banking, and a favorable regulatory environment could provide the necessary ingredients for another rally. But as RBC Capital Markets analyst Gerard Cassidy cautions, “We do expect to see incrementally higher loan loss provisions in the next 12 months.” In the end, while betting on a repeat of 1995 may be risky, the industry’s trajectory is pointing in the right direction—making it a dream worth keeping an eye on.