Weekly Market Update: Global Stocks Decline as Some U.S. Regional Banks Falter, U.S. Inflation Report Scheduled This Week
Last Week Review
Bank unease resurfaced again, as regional bank stocks declined more than 10% last week. PacWest Bancorp fell 43% as it considered strategic options, such as a sale. First Horizon dropped 38% after its merger with Toronto-Dominion fell through. While strong jobs data helped support a partial rebound last Friday, global equities declined 0.3% last week. Short-end interest rates fell and credit spreads increased.
Fed Opens the Door for a Pause
The Federal Reserve raised its policy rate 0.25% to a target range of 5% to 5.25%. The Fed’s statement and post-meeting comments offered several indications that this may be the last hike of the cycle, though it stopped short of committing to a pause. Chair Jerome Powell highlighted the Fed’s ongoing commitment to inflation and that the labor market remains tight. Powell noted growth headwinds from availability of credit, but he expressed little concern on bank stress. In response, Treasury yields declined, bank stress accelerated and investor Fed policy rate expectations declined with futures trading showing no more rate hikes.
Strong U.S. Job Gains and Wage Growth
The April U.S. employment report showed 253,000 jobs added, well above 180,000 expected and up from 165,000 in March. Wages grew 4.4% year-over-year, higher than expected and a tick up from March. The unemployment rate of 3.4% fell somewhat below expectations and from the previous month. While March’s numbers were revised materially down, we think April’s robust job gains help temper recession fears while upside inflation risks from sticky wage growth keeps pressure on the Fed. Although the two-year Treasury yield still ended last week falling 0.09%, it gained 0.13% on the day of the jobs report while equities responded favorably.
European Central Bank Downshifts but Signals More to Come
As expected, the European Central Bank (ECB) delivered a 0.25% increase in its policy rate to 3.25%. This marks a downshift from the prior increase, however. Unlike the Fed, the ECB stated that more hikes are on the horizon. Earlier in the week, Europe’s preliminary core Consumer Price Index budged down just a notch to 5.6% year-over-year. Investors currently expect the ECB to deliver one to two more 0.25% rate hikes.
U.S. Earnings Coming in Better than Expected
First quarter earnings reports for companies in the S&P 500 Index show that sales have risen 4.1%, or 2.5% above expectations, and earnings have declined 1.6%, or 7% above expectations. Earnings and forward guidance are showing some resilience in the face of weak projections.
This Week Preview
U.S. inflation Expected to Be Flat
The April U.S. Consumer Price Index is expected to be unchanged at 5.0% year-over-year. Core inflation, which excludes volatile food and energy prices, is expected to decelerate to 5.5% from 5.6% in March. Hotter-than-expected inflation may call into question the Fed’s willingness to pause rate hikes, especially after last week’s strong jobs report. Loan data scheduled for Monday will also be under close observation as the Fed has indicated credit conditions are feeding into its policy calculus. Beyond U.S. monetary policy, the Bank of England is expected to announce a 0.25% rate hike on Thursday. This would bring its target rate to 4.50%.
U.S. Debt Ceiling Talks Heat Up, Bank Stress on Watch
Last week, the Treasury announced that the U.S. government could default on its debt as early as June 1 without an increase in the debt ceiling. President Joe Biden is scheduled to pull together congressional leaders for negotiations on Tuesday. Meanwhile, investors should remain on watch for further signs of bank stress after regional bank issues continue to contribute to broader financial market volatility.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of May 7, 2023.
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