Markets
First Republic shares remain in tailspin, but spillover to other markets was way smaller than on Tuesday. The new sell-off in the stock came after CNBC reported that the US government is currently unwilling to intervene for the bank. Bank advisors are working on a deal including an attempt for a capital raise after big banks helped restore confidence in the lender (like they tried earlier by depositing several billion dollars at the beleaguered lender). Key US equity indices opened with small gains but only Nasdaq managed to maintain them by the closing bell (+0.5%). Main European indices lost 0.5% to 1%. Technical elements are at play as well after the EuroStoxx50 bumped into YTD highs and resistance around 4400. US equity futures this morning are again positively oriented following strong after-market Meta earnings. Core bonds attempted to add to Tuesday’s gains, but threw the towel in the US session. US yields added 4.5 to 5 bps across the curve. Changes on the German yield curve ranged between -3.5 bps at the front end and +4 bps at the very long end. Eco data (disappointing core US durables) played no part in yesterday’s story line. The dollar turned back in the soft spot with EUR/USD temporary accelerating beyond the YTD highs to set a new one at 1.1095. The pair eventually closed at 1.1041. Similar technical EUR-accelerations were visible and stood firm against the likes of AUD, NZD and CAD. The EUR/SEK move was more inspired by the Riksbank’s dovish 50 bps rate hike.
Focus now turns to GDP and inflation numbers today and especially tomorrow. Belgian inflation kicks off the national European releases today with the focal point tomorrow at French/Spanish/German inflation figures. The US eco calendar contains US Q1 GDP data today and March PCE deflators, Q1 employment cost index and Chicago PMI tomorrow. The data won’t derail Fed plans to lift policy rates by 25 bps next week, but could make or break our base case for a 50 bps ECB hike. Apart from EMU inflation, we’ll see Q1 GDP and the ECB’s credit and lending survey as well ahead of Thursday’s policy meeting. Overall, we expect the temporary First Republic-related stress to fade further with especially European yields supported by the upcoming ECB meeting. The narrowing short term yield differential between the US and Europe should keep EUR/USD supported as well.
News and views
The US House of Representatives yesterday passed a bill to raise the government debt ceiling currently at $31.4tn. The vote passed with only a narrow majority of 217-215 and is seen as a political victory for the Republican House speaker, Kevin McCarthy. The House Bill would raise to borrowing authority by $1.5tn or being extended till March 2024, whichever comes first. However, the bill also includes spending cuts that are unacceptable for the Democratic party. So, it won’t pass in Senate or meet a veto from President Biden. The White House press Secretary already indicated that Biden won’t approve the spending cuts. As the stalemate persist, the US government is at risk of defaulting on its payments somewhere on summer (potentially end July) depending on the inflow of tax receipts.
Minutes of the previous Bank of Canada meeting showed that immediate focus of the decision was on whether to increase the policy rate or keeping it unchanged at 4.5%. As part of this discussion, the governing council also considered how long the policy rate would need to remain elevated in order to return inflation to target. Economic resilience and persistence of elevated core inflation, concern that the evolution of inflation from 3% to 2% in H2 2023 and 2024 could prove more difficult and the need to be forward looking and not wait too long to ensure that monetary policy was restrictive enough were arguments to raise rates sooner rather than later. The case to maintain the policy rate at 4.5% reflected the Governing Council’s view that headline inflation is coming down quickly in line with the Bank’s forecast and that more evidence would be needed to assess whether monetary policy was sufficiently restrictive. The GC agreed that it was important to continue to signal that it was prepared to increase the policy rate further if needed. It also assessed that cutting rates later this year isn’t the most likely scenario.
