I don't see why it would mean anything in regards to Smash.
Nintendo is still partnering with them like the other companies they partner with, meaning a Smash character is still possible.
In regards to Banjo specifically, it's not the only thing people considered going for them at least, not from what I've seen.
It’s more significant than that in terms of fan speculation because people mainly worked off of this as if it was specifically Nintendo collaborating with Microsoft. Because of this “exclusive” partnership, the idea was that Sakurai/Nintendo would add a character to Smash.
This is when Steve and Banjo
truly ramped up. Steve was originally (prior to Verg) mainly a meme pick. There was support, but nothing major. Then, the Microsoft news came up, and it became a major point that “Oh wow! Nintendo and Microsoft are working together, and those dudes said Steve is in!”
It’s a business decision by Microsoft, and I believe that’s all this is. The probability of it happening was mostly because it seemed like it was a special, targeted deal.
Granted, i’ve been saying it since this whole Microsoft thing started. Not everything that everyone does with Nintendo directly relates to Smash. This seems just like a business opportunity for Microsoft to branch out with their playerbase (they sell like **** in Japan) and build relationships.
That in itself does not mean Smash is suddenly getting a Microsoft character. Could it happen? Sure. But considering what they’re doing isn’t as exclusive as some thought, I don’t see why it would be seen as nearly as likely.