Market Briefing: Markets stay rangebound ahead of action-packed week
Treasury yields and the dollar are slightly higher after regulators seized First Republic Bank and sold most of its operations to JPMorgan. While some risk aversion is evident, fears of wider contagion remain muted, with most market participants expecting the regional lending sector to emerge relatively unscathed after flawed business models led to three of the four largest bank failures in American history - Silicon Valley, Signature, and First Republic - over the last two months.
Currency markets are generally quiet with most of Europe and Asia out on holiday. The yen remains on the defensive after the Bank of Japan elected to maintain its loose-money policies, the pound and euro are essentially unchanged - although still well-supported above their 1.25 and 1.10 respective support levels. The Canadian dollar is slightly weaker as traders monitor a slow decline in oil prices and position ahead of an expected drop-off in job creation rates in this Friday’s employment report.
Data released last night showed the Chinese manufacturing sector suffering a modest reversal in March, suggesting that the country’s post-Zero-Covid rebound is running out of momentum as Western consumers slow spending and domestic buyers remain cautious. The official factory purchasing manager index slipped from 51.9 in April to 49.2 in March, while activity in the services and construction sectors fell to 56.4 from 58.2 in the previous month.
Today, S&P’s manufacturing purchasing manager index is seen moving back into expansionary territory in April, to 50.4 from 49 in the prior month, and the Institute for Supply Management's equivalent is expected to hit 46.7 in April, up from 46.3 in March.
Tomorrow’s euro area inflation data should tilt the balance of opinion in favour of a quarter-percentage-point move at Thursday’s European Central Bank meeting - but an unexpectedly-strong print could jolt expectations higher. Markets expect the headline consumer price index will climb to 7.1 percent year-over-year in March, with fuel costs driving an acceleration from 6.9 percent in the prior month. Core prices are seen slipping from 5.7 percent to 5.5 percent, adding to tightening lending conditions in building the case for a bigger downshift in the pace of rate hikes.
Investors overwhelmingly expect the Federal Reserve to deliver a quarter-point rate hike on Wednesday - but this has largely been priced in, so relatively-subtle changes in the accompanying statement language could have a more meaningful impact on markets. Turmoil in the banking sector has undoubtedly contributed to a tightening in credit conditions, but a raft of data releases last week showed consumer spending and business investment remaining robust even as growth begins to slow. Price and wage pressures - as measured using the core personal consumption expenditures and employment cost indices - are no longer accelerating, but aren’t yet falling in a clearly-sustained way. This suggests officials could replace a sentence that previously said “some additional policy firming may be appropriate” with one that articulates a more data-dependent stance - perhaps something closer to: “additional policy firming may yet be appropriate”.
We suspect Friday’s non-farm payrolls number will have more profound implications for front-end pricing, with the headline number likely to determine market expectations for rate cuts in the back half of the year. Current consensus suggests that 175,000 positions were added in March, reflecting a tighter borrowing conditions and a gradual softening in labour market demand - but with homebuilding activity re-accelerating even as infrastructure and commercial projects hire workers, there is potential for an upside surprise that helps anchor rates higher.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD S&P Global US Manufacturing Purchasing Manager Index, April Final
USD Institute for Supply Management Survey, April
CNY Caixin China Purchasing Manager Index Manufacturing, April
AUD Reserve Bank of Australia Rate Decision
EUR S&P Global Eurozone Manufacturing Purchasing Manager Index, April Final
EUR Euro Area Bank Lending Survey
EUR Consumer Price Index, April Preliminary
USD Job Openings and Labor Turnover Survey, March
EUR Unemployment Rate, March
USD ADP Employment Change, April
USD S&P Global US Composite Purchasing Manager Index, April Final
USD Department of Energy Weekly Inventories
USD Federal Reserve Rate Decision
USD Federal Reserve Press Conference
BRL Central Bank of Brazil Rate Decision
CNY Caixin China Purchasing Manager Index Composite, April
EUR S&P Global Eurozone Composite Purchasing Manager Index, April Final
EUR European Central Bank Rate Decision
USD Weekly Jobless Claims
USD Trade Balance, March
EUR European Central Bank Press Conference
AUD Reserve Bank of Australia, Statement on Monetary Policy
USD Non-Farm Payrolls, April
CAD Employment, April
USD Baker Hughes Weekly Rig Count