This Macro Expert Explains Why Banking Turmoil May Be Far From Over — 'Monetary Policy Is Likely To Remain Tight...'

Andreas Steno Larsen, Founder and CEO of Steno Research, believes the banking turmoil is far from over as persistent core inflation may keep monetary policy tight in coming times.

"Monetary policy is likely to remain tight as long as core CPI stays elevated, and with the metric being stuck at 5% annualized, it could be an argument to why Fed will keep rates high, which is the sole reason behind the latest banking turmoil," Larsen explained in a series of tweets.

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May Consumer Price Index (CPI) rose 4% on an annual basis, registering the lowest increase in two years. However, Core CPI, which strips out energy and food, stood at 5.3%, somewhat higher than the 5.2% predicted by the Street.

Apart from the fear of tight policy, the difference between money market fund rates and those offered by banks is also a cause of concern. Larsen explained that due to the way banks are run, they have no chance of competing with the rate that money market funds (MMFs) are offering. "And as long as the spreads stays wide, banks will slow-bleed. The smaller banks are likely to suffer from this, as confidence remains stronger at bigger banks," he wrote on Twitter.

Price Action: Bond markets are witnessing a decline across the world as investors and traders have begun weighing the possibilities of extended rate hikes due to persistent inflation. The yield on the 10-year U.S. treasury note rose as much as 3.82% before cooling off a bit during Tuesday’s Asian trading session. The iShares 1-3 Year Treasury Bond ETF SHY and the Vanguard Short-Term Treasury Index Fund ETF VGSH shed 0.14% on Friday, according to Benzinga Pro.

Larsen also noted that as deposits leave banks, lenders will have to sell their assets, which have suffered from unprecedented rate hikes. "This is again mainly a matter of confidence, and deposits are likely to seek towards the big banks for cover," he said.

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