U.S. banking stress simmers with uncertain lending consequences for the wider economy – but the angst appeared to ease with JPMorgan’s purchase of ailing First Republic at the weekend.
While the Federal Reserve is almost certain to raise interest rates again on Wednesday, the move could be its last.
Australia’s central bank surprised markets with an unexpected resumption of its rate hiking campaign on Tuesday – sending the Aussie dollar higher – but yen continues to fall as the Bank of Japan is in no rush to alter its super-easy money policy just yet.
And while contracting overall U.S. corporate earnings are set to mark the start of a profits recession in the first quarter, ‘Big Tech’ stocks – spurred in part by an arms race in artificial intelligence – are racing ahead and the biggest U.S. firm Apple reports on Thursday.
Even for Europe’s mega caps on Tuesday, a sizeable 5% hit to oil giant BP’s stock – as the firm slowed its buyback programme despite $5 billion first quarter profit – was offset by the 5% surge in banking behemoth HSBC – after a tripling of profits beat forecasts and prompted a $2 billion buyback plan.
So in a holiday-strewn month around the world, the VIX – Wall St’s so-called ‘fear gauge’ of the implied stock market volatility for the month ahead – hit its lowest level on Monday since November 2021. Even though it ticked back up a bit above 16 overnight, it remains three full points below its 33-year historical average.
Despite the frontloading of the debt ceiling date and weekend bank drama, the equivalent index of Treasury market volatility remains lower on the month and more than a third lower than the peaks of the March banking blowup.
And even with all the central bank decisions this week – with the European Central Bank meeting as well as the Fed – the overall currency market volatility is close to its lowest in more than a year.
For macro markets, the Fed decision is complicated by the debt ceiling and banking backdrop.
A quarter point hike on Wednesday is fully priced, with less than a one-in-five chance of another move in June and at least 50 basis points of rate cuts from the peak still baked in to futures markets by yearend.
U.S. 2-year Treasury yields gave back some of Monday’s gains on the debt cap deadline. But debt ceiling anxieties were keenest in the bill market, where one-month yields that now cover the June 1 date Yellen flagged shooting up to 50bps higher on Tuesday to 4.87% – roughly where the Fed funds target rate now sits – and 3-month bill rates jumped 20bps to 5.25%.
The dollar was marginally higher against the major currencies – with the exception of the Australian dollar.
The U.S. April employment report on Friday is the big data point after the Fed decision, even though next week’s lending officer report looms large as a readout from the banking stress. March job openings numbers later on Tuesday will give an indication of just how tight the labor market remains.
Stock futures were flat to slightly negative – with European bourses a touch lower and Asia indexes higher.
