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Tomorrow sees the unofficial start of Q1 earnings season with reports from the largest banks in the US. Given the recent crisis in the financial system that saw three regional banks in the US collapse, plus the emergency takeover of Credit Suisse, it’s not surprising this will be a major focus of the markets. And not just the stock market, as what’s going on in the banking sector can spill over to currencies, and monetary policy.

Yesterday’s release of the FOMC minutes showed that the banking crisis was front and center for the Fed. Members who had previously considered voting for 50bps decided to go for a smaller hike instead. The staff projections for the economy were cut, with the Fed now expecting the economy to fall into a mild recession later in the year because of the banking sector.
 

What to look Out for

There are two key issues to focus on with bank reports that could drive markets: deposits and loans. One of the things that the Fed pointed to was that the economy was expected to grow slower due to banks giving out less loans. The increased scrutiny of banks and the higher cost of risk would make financial institutions much more cautious in providing funds to people and businesses. That, in turn, would contribute to slower spending, and slow the economy.

Banks have already been reporting an increase in delinquencies in their monthly master trust reports. What that means in plain English is that banks are seeing more people not pay back their credit card debt on time. This increased stress on the financial system will contribute to higher interest rates, making people less willing to take out loans as well.
 

It’s inflation and rate cuts

With less money to spend among consumers, it’s natural to suppose inflation will come down as well. This could be what the Fed is banking on, as the consensus among FOMC members is just one more hike and then hold rates steady. If banks are less willing to initiate loans, then they are doing the Fed’s work in terms of bringing down inflation.

The market disagrees with the Fed’s assessment, pricing in an expectation that the coming recession will be bad enough that the Fed will be forced to cut rates. Thus, forecasts from banks, including how much loan reduction they might be making in the new climate, could be determined how the Dollar evolves over the coming days.
 

Deposits in focus as well

The banking crisis was caused by a shift of depositors away from what were seen as vulnerable banks, towards the major banks which were seen as more solid. If the banking situation is normalizing, then the major banks would see stabilizing deposits, which could help alleviate market worries.

Here markets are likely to be much more focused on conference calls where CEOs could give more details about how deposits have been performing in April. It might not just be the major banks, as smaller banks report through the rest of the month. If any of them see a substantial drop in deposits, then it could send shivers through the market.

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