There was nothing particularly unusual or unexpected about yesterday’s European Central Bank (ECB) decision and its Chief Christine Lagarde’s presser, other than the fact that Lagarde didn’t wear a scarf!
The ECB slowed the pace of rate hikes to 25bp this month. The strong decline in bank lending – as a result of bank stress, and signs of slowing inflation – despite last month’s rally in energy prices, justified the 25bp hike announced yesterday. The bank announced that it will no longer reinvest in APP from July, as well.
The key takeaway was, again, that inflation outlook in the Eurozone remained ‘too high for too long’.
Lagarde left the door wide-open to more rate hikes in the coming months, she pledged to lift the policy rates to sufficiently restrictive levels and to keep them there as long as necessary.
No one knows what ‘restrictive enough’ means, but the ‘decisions’ – in plural – reinforced expectations that there will likely be two more rate hikes on the wire before the ECB eventually pauses tightening after summer.
This is important because, it means a clear hawkish divergence between the Federal Reserve (Fed), which is weakened and handcuffed by the ongoing regional bank crisis, and the ECB, which isn’t facing the same intensity of bank stress than the US and which could continue to focus on inflation to make decisions.
The growing divergence between the ECB and the Fed policy outlooks builds a stronger case for a significantly higher euro against the US dollar; price pullbacks continue to be interesting opportunities to strength long positions in the single currency.
Contagion
Stress around the US regional banks don’t seem to be abating.
Lately on the chopping block are PacWest and Western Alliance. PacWest couldn’t avoid that 50% slump after the bank said that it considers strategic options the day before. Western Alliance slumped as much as 60%, before closing the session 38% down. First Horizon on the other hand tumbled more than 33% as the Canadian TD walk away from its acquisition plan, Goldman Sachs slid more than 2% on news that it’s under review regarding its role in Silicon Valley Bank’s (SVB) attempt to raise funds in March.
All in all, US banks slid close to 3% yesterday.
The FDIC now plans to ‘hit big banks with fees to refill the deposit insurance fund, leaving smaller lenders exempt’.
Bank stress fuels Fed doves. As of today, the market is not only expecting three rate cuts in the second half of this year, but price in the first potential rate cut for July.
A bit stretched? It depends on how messy the bank situation gets.
Apple beats
Happily, Apple results gave a smile to investors after the bell. Apple’s overall sales fell for the second quarter in a row, but iPhone sales were stronger than expected and helped Apple beat both revenue and profit expectations.
Apple’s share gained 2.5% in the afterhours trading. The announcement of a $90bn share buyback plan, unchanged from last year, also helped.
Note that Apple and Microsoft, together, made up around half of the gains in the S&P500 this year. And thanks to their sizeable balance sheets – and the falling yields, big tech companies remain a refuge for equity investors. That certainly explains why the S&P500 has been relatively resilient to the bank turmoil. What’s risky however is that, if winds change direction for the Big Tech, we could rapidly see gains in the S&P500 crumble.
US jobs
Data released yesterday revealed that US unemployment benefit applications jumped the most in six weeks, as a sign that the US labour market could be loosening.
Earlier this week, job openings data also came in softer than expected, yet ADP report released on Wednesday came in double the expectations, at 300’000 new private jobs.
Today, the NFP data is expected to reveal that the US economy added around 180K new nonfarm jobs last month, for a steady wage growth at 4.2% on annual basis, and a slight uptick in unemployment from 3.5% to 3.6%.
A soft NFP read, and ideally softening wages growth could further fuel the Fed doves and boost Fed rate cut expectations.
