Market Briefing: Markets Lick Wounds After Bank-Related Selloff
With First Republic Bank shares recovering ground even as a rescue looks increasingly plausible, regional lender indices are climbing, and yesterday’s slow-motion flight to safety is unwinding across the financial markets. With renewed troubles in the banking sector seen reducing the Federal Reserve’s room for manoeuvre, yields are under pressure across the front end of the curve, and the dollar is falling back after posting its biggest daily gain since early March. The pound and euro are steamrolling higher on improved rate differentials, while the credit condition-sensitive Canadian dollar is struggling to lift itself off the mat after yesterday’s bruising defeat.
The Australian dollar is turning in the weakest performance among the majors after core inflation slowed by more than expected in the first quarter, supporting the case for a longer pause in the central bank’s tightening cycle. The trimmed-mean measure of consumer prices climbed 6.6 percent from a year earlier after rising 6.9 percent in the last quarter of 2022, while headline price growth tumbled to 7 percent from the previous quarter’s 7.8. Facing a deeply leveraged household sector and hoping to preserve pandemic-era employment gains, the Reserve Bank of Australia has raised rates by less than many of its global counterparts, and we think it’s unlikely to deliver another hike this year.
Headline durable goods orders are seen climbing 0.5 percent in March, but ex-transport, ex-defence growth should come in closer to 0.1 percent after posting a -0.1 percent decline in February. Recent card spending data would suggest that an accompanying improvement in US advance economic indicators is possible.
The Bank of Canada will release a record of its latest meeting at 1:30 this afternoon, but the minutes probably won’t contain any game-changing insights. Policymakers are likely to acknowledge signs of an easing in inflation pressures, with headline price growth slowing broadly in line with expectations over the early part of the year. Turmoil in the US regional banking sector - although it raised financial stability risks - could be subtly welcomed, given that it helped lower US rate expectations (narrowing rate differentials and supporting the Canadian dollar), while also helping tighten global credit conditions. And evidence of surprising resilience in domestic economic indicators - employment, consumption, real estate market activity - might help brighten the outlook for overall growth, helping reduce odds on rate cuts by year end.
Debt ceiling concerns are ratcheting higher as House Republicans struggle to gain support for a bill that - in its current form - would cut deficits by $4.8 trillion over the coming decade. Any such bill is unlikely to pass the Senate, let alone cross President Biden’s desk, but markets will be watching closely for insight into whether the party can establish a coherent policy position. To be clear, we’re not quite sure how investors will respond. If Republicans are unable to coalesce around a single proposal (even one as meaningless as this one), the odds on a successful, 11th-hour debt resolution would seem likely to fall. But a unified front might be just as worrisome, suggesting that Republicans are willing to engage in another round of performative brinksmanship - a game that both parties have engaged in for decades, without materially shifting overall spending dynamics.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Durable Goods Orders, March Preliminary
USD Advance Goods Trade Balance, March
USD Department of Energy Weekly Inventories
JPY Bank of Japan Rate Decision
CAD Survey of Employment, Payrolls and Hours, February
USD Weekly Jobless Claims
USD Gross Domestic Product, Q1 Advance
EUR Gross Domestic Product, Q1 Advance
MXN Gross Domestic Product, Q1 Preliminary
CAD Gross Domestic Product, February
USD Employment Cost Index, 1Q
USD Personal Consumption Expenditures, March
USD University of Michigan Sentiment, April Final
USD Kansas City Federal Reserve Services Activity, April
USD Baker Hughes Weekly Rig Count