At the close of business last Friday global equities were lower on the week amid renewed jitters in the US banking sector. The yield on the US 10-year note fell to 3.44%, down 3 basis points from a week ago but 11 bps above the week’s low at the height of the banking stress. The price of a barrel of West Texas Intermediate crude oil fell $3.50 to $71.50 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 18 from 17.2 a week ago, trading as high as 21.5 intra-week.
CANADIAN ECONOMIC NEWS
The Canadian economy added 41,400 jobs in April, more than doubling expectations of a 20,000 job gain. The unemployment rate fell to 5%.
US ECONOMIC NEWS
With about 85% of the constituents of the S&P 500 Index having reported for Q1 2023, blended earnings per share shows that earnings declined 2.3%. So far, earnings are handily beating expectations, which began the quarter at -6.7%.
The Federal Reserve indicated that it will approach any further adjustments to monetary policy on a meeting-by-meeting basis, abandoning the practice begun in March 2022 of hiking rates at each meeting. Markets believe the Fed has reached the end of its tightening cycle after pushing Fed funds up to a range of 5% to 5.25% in just over a year. They surmise that looming recession risks amplified by ongoing stress in the banking system will prompt the Fed to begin cutting rates as early as September.
The US economy added 253,000 jobs in April, handily beating expectations of a monthly gain of 185,000. However, downward revisions to the prior two months’ data detracted 149,000 jobs. The unemployment rate fell to 3.4%, the lowest level since the 1960s, while average hourly earnings rose a stronger-than-expected 0.5% month over month. Ten-year US Treasury yields firmed sharply after the data release, after having eased earlier in the week on banking sector stress. Clearly, this was a stronger report than the Fed would have liked given its concern over persistent wage pressures.
US regulators had hoped the seizure of First Republic Bank, the resolution of its failure, and its subsequent sale to J. P. Morgan would draw a line under the crisis in confidence in US regional banks, but those hopes were quickly dashed this week as a series of regional lenders came under further selling pressure. Early in the week, the US Federal Deposit Insurance Corporation outlined three potential avenues of deposit insurance reform meant to stem the deposit flight from vulnerable institutions. However, those reforms would require congressional approval, which would come slowly, if at all. Banks with solid deposit flows and fundamentals have come under attack, but the pressure on the sector eased late in the week. Much of the recent price action in banking has been seen as speculative and not driven by a further deterioration in fundamentals.
US Secretary of the Treasury Janet Yellen told congressional leaders this week that the US government could run out of money by the beginning of June. It’s worth noting that debt ceiling brinksmanship is nothing new in Washington. A 1987 New York Times column said the fight to raise the debt ceiling is a periodic ritual on Capitol Hill, and every battle is surrounded by predictions of fiscal ruin which never happens.
EUROPEAN ECONOMIC NEWS
Inflation in the eurozone is proving sticky. Preliminary April CPI rose to 7% from 6.9% in March, and core prices held steady at an elevated 5.6%. Unemployment in the eurozone fell to a record low 6.5% in April.
The ECB may have more to do in restraining inflation. With European credit conditions tightening, investors think the central bank is within a meeting or two of reaching its terminal rate. Besides hiking rates a quarter-point to 3.25% on Thursday, a slower pace than its recent half-point cadence, the ECB announced it will speed up its balance sheet runoff beginning in July.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
After a one-meeting pause, the Reserve Bank of Australia hiked its cash rate 0.25%, to 3.85%, saying inflation is too high and labour markets too tight.