Market movers today
Today’s main event is the FOMC meeting where we expect the Fed to deliver their final 25bp hike, which would send the Federal Funds target range to 5.00-5.25%. Going into the meeting, we will also get ADP employment report and ISM services index for April, see Fed preview: One more hike – Cuts still far away, 27 April. This afternoon we also get ADP employment in the US.
Otherwise, markets continue to digest the latest news regarding US banking sector turmoil and JPMorgan’s takeover of the First Republic Bank. Pressure remains on medium-sized regional US banks, while banks’ exposure to real estate is raising growing concerns globally, and market sentiment remains sensitive to headlines.
The 60 second overview
Banks jitters resume: The calm in markets after the takeover of First Republic Bank in the US did not last long. Yesterday other regional banks saw big losses with PacWest Bancorp and Western Alliance Bancorp closing down 28% and 16%, respectively. It is unclear what triggered the declines but sentiment in the banking sector is fragile after we saw the third regional bank takeover over the weekend. The jitters caused a new decline in overall risk sentiment sending stocks and bond yields lower.
US debt ceiling: Uncertainty over the US debt ceiling adds to the anxiety in markets currently. Yesterday, Biden invited congressional leaders for a meeting on 9 May after Treasury Secretary on Monday stated the debt ceiling might need to be raised by as early as 1 June.
US JOLTS: Data on US job openings for March released yesterday showed a bigger-than-expected decline to 9590k (consensus 9736k, previous 9974k). It adds to the picture of a cooling US labour market as also suggested by the rise in jobless claims and job cuts lately. Today we get ADP employment before turning to the non-farm payrolls on Friday.
Euro inflation and credit data: Yesterday we got the final batch of Euro area data ahead of tomorrow’s ECB meeting. The flash inflation for April came in broadly in line with expectations of 7% headline and 5.6% core. The underlying inflation pressures show that services inflation continues to rise while goods inflation is easing. We still expect a 50bp rate hike on Thursday. A resilient European economy, strong labour markets and wage growth is in our view not compatible with the speed of convergence to 2% being sufficiently fast with only a 25bp hike as to us the rate hike in May will also be implicit forward guidance for the July meeting and hence the financial conditions prevailing. Markets are pricing 28bp.
The loan growth data and the credit standards reported a deterioration from previous releases. While the recent banking turmoil did not appear to have added to the tightening of credit standards, the transmission monetary policy is taking effect with deteriorating loan demand.
Oil prices lower: Oil prices dropped sharply yesterday as risk sentiment soured. We attribute the decline to concerns about the outlook for demand amid ongoing monetary tightening coupled with US selling strategic reserves. We see limited further downside from current level as US would likely halt further selling of reserves and might even contemplate buying again. OPEC+ would likely consider further output cuts as well. We still expect Brent to trade in the USD80-90/bbl range the rest of the year.
Equities: Global equities fell yesterday in a broad-based risk-off mode and volatility increased. Based on headline reading one could be tempted to believe banks were the worst performers in a strong defensive rotation. However, that was not the case as the energy sector fell 4% after another drop in the oil price. Consumer discretionary outperformed although the US regional banks came on heavy selling pressure. The flight to safety was more visible through styles where min vol and quality outperformed. In US Dow -1.1%, S&P 500 -1.2%, Nasdaq -1.1% and Russell 2000 -2.1%. Asian markets are lower this morning though loses are limited. Trading volumes are low as the markets in both mainland China and Japan are closed. US and European futures are higher this morning.
FI: US treasury yields declined substantially yesterday after the uncertainty surrounding the US regional banks once again escalated. US 2-year and 10-year yields dropped around 15bp as the market added to the pricing of Fed cuts in the second half of this year and in 2024.
FX: Oil currencies were the big underperformers in yesterday’s session with both NOK and CAD posting decent losses. EUR/NOK has now moved close to the 11.90 threshold. EUR/USD fluctuated through the session but remains around the 1.10 level while EUR/SEK had edged somewhat higher. EUR/GBP moved above 0.88 on the risk-off sentiment while USD/JPY came down to 136.50 on the decline in US yields.