Markets
US regional banks including PacWest and Wester Alliance suffered heavy losses yesterday. Instead of putting the financial unrest to bed, the takeover of First Republic Bank on Monday redirected, be it with a day’s lag, market focus to the next weakest link(s). Broader US stock indices lost a little over 1%, led lower by financials and energy. They did finish off intraday lows though. Core bonds rallied with US Treasuries outperforming. US yields dropped between 9.6 and 18.6 bps, the front end outperforming. Disappointing JOLTS job openings (9590k, lowest in two years) supported UST’s in their ascent. German yields rallied more than 10 bps across the curve at the open, catching up with the US move on Monday. They eventually fell 3.5 (30-y) to 6.7 (2-y) bps as sentiment during US dealings deteriorated quickly. EMU headline inflation advanced 0.7% m/m to 7% y/y but core inflation (marginally) eased for a first time in nine months to 5.6%. The ECB’s Bank Lending Survey revealed a further substantial tightening of credit standards. Both the inflation numbers and the BLS serve as final, crucial input to the ECB meeting on Thursday. Lost interest rate support forced the dollar to give back earlier gains. EUR/USD fought its way back into the upward sloping trend channel. The pair finished the day close to but below 1.10. USD/JPY eased from 137.5 to 136.55. Sterling couldn’t ignore the risk-off this time. EUR/GBP jumped from 0.878 to 0.882.
Wall Street’s performance to some extend filters through in Asian dealings. Stocks mostly lose ground with South Korea underperforming. Japanese markets are closed for the remainder of the week. The otherwise calm session puts the focus on the economic calendar for later today. There are a few more US economic data, including the ADP job report (+148k consensus) and services ISM (expected at 51.8 from 51.2) scheduled for release. But with the Fed meeting looming tonight, we don’t think they’ll put a stamp on trading the way they usually do. Fed chair Powell is expected to raise rates by 25 bps to 5-5.25%, in line with the March dot plot, before most likely announcing a pause in the tightening cycle. The statement in all likelihood will keep the door for further tightening open. Optionality and flexibility are key. In the current mindset however, we doubt the market will interpret today’s rate increase as anything other than a dovish hike that marks the end, not a pause, of this cycle. This may in particular put downward pressure on yields at the front end of the curve, even as today’s hike is not yet fully discounted by US money markets. The idea of rate cuts in the second half of this year may gain more traction. Currently more than two 25 bps rate cuts are priced in. The US 2-y yield lost the 4% barrier again yesterday and it’s unlikely that it is going to recover that level post-Fed. First important support in the 10y yield is located at 3.24% (April YtD low). The US dollar faces additional losses. EUR/USD may test the current YtD intraday high of 1.1095. This level serves as an intermediate resistance level only, with the real, first reference located at 1.1274.
News and views
New Zealand’s statistical office published Q1 labour market data this morning. The number of people employed grew by 0.8% Q/Q (vs 0.5% expected) following an upwardly revised 0.5% Q/Q in Q4 2022. The employment rate (employed/working-age population) increased from 69.3% to 69.5%. The unemployment rate (unemployed/labour force) stabilized at 3.4% even as the participation rate (labour force/working-age population) increased from 71.7% to 72% (highest on record). Annual wage cost inflation measured by the labour cost index increased by 4.3% in the year to March 2023 quarter (up from 4.1% and highest since series began in 1992). Kiwi dollar swap rates buck the global trend this morning, rising between 4 bps (30-yr) and 9 bps (2-yr). NZ money markets now completely discount another 25 bps RBNZ rate hike (to 5.5%) at the May 24 policy meeting, with odds starting to shift in the direction of a final 25 bps move in summer months. The kiwi dollar enjoys the interest rate support, rising from around NZD/USD 0.62 to 0.6250 and leaving support at 0.6085/0.6112 more firmly behind.
