Market Pulse - The week in review - May 8th, 2023

THIS WEEK’S RECAP:

 

▪ Regional banks in the US have had a difficult week, with First Republic Bank being acquired by JPMorgan and concerns over other regional banks on the rise. The FDIC is facing pressure to extend guarantees to larger business deposits, but congressional approval would be needed which takes time and political will. Regional banks are clearly facing a confidence crisis, which makes it difficult for them to find additional funding in the form of equity and increases their borrowing costs. While higher funding costs are problematic for all banks, larger banks remain stable and well funded.

 

▪ Central banks across developed markets were active last week. The Reserve Bank of Australia announced a surprise 25 basis point rate hike, followed by the Federal Reserve raising their target rate by 25 bps to 5-5.25% and hinting at a probable pause. The European Central Bank also raised rates by 25 basis points and signaled further hikes to come. All central banks emphasized the importance of price stability and the need to achieve the 2% inflation target.

 

▪ Purchasing manager index (PMI) readings for various regions showed a slight improvement, especially in the service sector, on a month-over-month basis. However, despite being in expansionary territory, economic activity continues to be sluggish. It is important to point out that an economic slowdown is necessary to tame inflation and was somehow engineered by central bankers.

 

▪ April employment numbers for both Canada and US were published this Friday. Headline numbers were very strong across the board, although there were some significant downward revisions to the previous months for the US. While overall the economic data points towards a slowdown, the economy seems overall more resilient than most expected, which is quite positive. A “soft landing” scenario would be positive for most asset classes.

 

ON DECK FOR NEXT WEEK:

 

▪ The pace and intensity of credit tightening in the US lending market will significantly impact the country's economic direction in the short term. The upcoming release of the Senior Loan Officer Opinion Survey (SLOOS) will provide insights into the speed at which credit conditions may be tightening. The survey results, which will be published on Monday, will be closely watched.

 

▪ The latest read on US inflation comes Wednesday in the form of CPI; the year-over-year level of inflation will likely stay close to 5% this month, but we expect it to fall significantly over the two months that will follow. The Bank of England is expected to raise their target rate by 25 bps to 4.5% at their meeting on Thursday.

 

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