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Saxo Spotlight: Banking sector concerns, debt ceiling standoff and US CPI, May 8-12

APAC Research

Summary:  Market’s aggressive pricing of rate cuts from the Fed this year will be on test in the week ahead with US CPI on the radar, but it will depend more heavily on how banking sector risks evolve and if any progress is made on the US debt ceiling standoff. Bank of England is expected to hike rates by 25bps, but it remains to be seen whether the market accepts its divergence from the Fed. China’s credit data will be key to watch, as will be Japan’s wage data. Earnings calendar thins out with consumer names like PayPal and media giant Walk Disney to report.

Weekly 5 May 2023

US: Sticky inflation may find it hard to take the limelight away from banking crisis

The Fed has signalled a data-dependent mode in its rate hike cycle last week, which could well mean a pause at the next meeting. Market has continued to price in aggressive rate cuts for this year despite Chair Powell’s comments clarifying that rate cuts won’t happen this year. Market surely knows something, and the answer may well lie in the banking crisis. With fears of more regional banks falling victim to the rapid rise in interest rates over the last 1.5 years, inflation concerns have taken a backseat. What also offers comfort is that inflation is cooling with the commodity prices turning lower and a high year-ago base being lapped. Still, it is worth noting that supply chain issues persist and the strength in the labor market is continuing to support the services side of the economy strongly. This means the cooling in inflation, in itself, doesn’t provide enough comfort for now for the Fed to take its foot off the pedal. The US April CPI print is due to be released on May 10. Bloomberg consensus expects core CPI at 5.4% YoY/0.3% MoM from 5.6% YoY/0.4% MoM previously.

Economic risks rising with banking crisis and debt ceiling deadlock

Even as regional banks saw a recovery on Friday, the deposit flight concerns could bring back anxiety this week after four US banks have collapsed. A crisis of confidence is engulfing the US banking sector amid concern that big unrealized losses on bond investments might push some of them to the brink. Investors are also worried about high exposure to commercial real estate which could be the next shoe to drop. The Senior Loan Officer Opinion Survey (SLOOS) will be out today, and an indication of tighter lending conditions could spook a further risk-off in the markets.

Meanwhile, the impasse over the US debt ceiling also continues to threaten further pressure on the US financial markets this week. President Biden is scheduled to meet with Congressional leaders on Tuesday to discuss the debt ceiling. Treasury Secretary Janet Yellen has warned that there are “no good options” for solving the debt limit stalemate other than Congress lifting the cap. Further concerns on credit tightening or delays in debt ceiling solution could continue to drive up short-term Treasury yields, potentially in 2year or 3months respectively. The yield on a T-bill maturing at the end of this month is ~4.5%, but there’s a 60-90 basis-point premium for bills maturing in June and July, reflecting the tension in markets. Markets continue to price in rate cuts in H2 amid the banking and debt ceiling risks, and it remains to be seen whether the CPI print this week could move the needle.

Japan: Back from Golden Week and wage data on the radar

The Japanese yen has been strong last week after a slump following the last Bank of Japan meeting. The sharp slump in US yields brought USDJPY back to the 134 handle from ~138 levels a week ago. Japanese traders return on Monday after a 5-day Golden Week holiday and may be reviewing their portfolios in light of the significant yield/yen move. The fate of yen in the coming week remains in the hands of the US banking stress, but Tuesday also brings Japan’s wage data which is a key focal point for the new BOJ governor Ueda to confirm inflation stickiness. Nominal cash earnings are expected to strengthen by 1.0% YoY in March from a downward revised 0.8% in February even as real cash earnings remain negative due to the impact of inflation. A stronger-than-expected print can again ramp up expectations of a policy tweak from the BOJ, aggravating yen strength.

UK: Market may not believe Bank of England’s hawkish message

The Bank of England’s next policy announcement comes on Tuesday, 11 May and a 25bps rate is expected, which will take the interest rate to 4.50%. Inflation appears to be a bigger problem for the UK compared to US and Europe, and growth is also holding up better than what was previously expected. March core CPI remained firm at 6.2% YoY, disappointing market expectations of a softer print, while the headline remains in double digits. Meanwhile, the services PMI for April has firmed up further to 55.9 from 54.9 previously, with manufacturing PMI having improved as well despite still being in contraction. The improving economic situation should allow the BOE to remove much of its recession forecast as it unveils updated economic forecasts next week. UK also so far remains somewhat isolated from the financial crisis concerns that are hitting the US and have had a go in Europe as well. But the split in the committee could potentially widen, and a data-dependent approach will likely be maintained, as the concerns around the impact of policy tightening so far will probably gain more focus. If the market doubts that the BOE can deliver a lot more tightening even if Fed and ECB pause, it will remain hard to see further strength in sterling.

China: Credit, trade, and inflation expected to decelerate in April

Economists predict that China's export growth in USD terms will soften to 8% Y/Y, after a robust 14.8% surge in March. Meanwhile, import growth is forecasted to decline by a negligible -0.3% in April, a milder drop compared to the -1.4% recorded in March. Bloomberg's survey forecasts that the CPI inflation rate will ease to 0.3% Y/Y in April, reflecting a sustained downtrend in food prices, following March's 0.7% reading. Additionally, the PPI inflation rate is predicted to drop further to -3.4% YoY in April, down from -2.5% in March, largely due to base-effect. Aggregate financing for April is projected to be RMB2000 billion, a significant drop from March's RMB5380 billion, attributed partially to the seasonal moderation of new loan growth.

Earnings calendar thins out, focus turning to consumer names and Asia

For the week ahead, 32 S&P 500 companies will report quarterly results, including one from the Dow DJIA, Walt Disney (DIS). With tech and bank earnings out of the way, results from PayPal, Tyson Foods and Under Armour will be on test for how consumer spending is holding up in the wake of rising interest rates and risks of an impending credit crunch. Tyson reports earnings before the market open on Monday while PayPal reports after market close, and Under Armour will be on tap before Tuesday’s open. Tuesday also brings Airbnb earnings after the close, and double digit growth in bookings is expected as global travel demand remains upbeat. Disney’s margins will be in focus after mass layoffs in Q1, and impact from writer strikes will also be on watch.

Focus also turns to earnings reports from China, where JD.COM, SMIC and Hua Hong Semiconductor report earnings on Thursday. Japanese firms like Nintendo, Toyota and SoftBank also report this week and the impact from the Japanese yen will be key.

Key economic events this week:

Monday, 8 May

  • UK Market Holiday
  • Japan BOJ Meeting Minutes
  • Australia Building Permits (Mar)
  • Germany Industrial Production (Mar)
  • Taiwan Trade (Apr)
  • US Federal Reserve's Senior Loan Officer Opinion Survey on bank lending practices, SLOOS (May)
  • United States Wholesale Inventories (Apr)
  • ECB’s Lane speaks

Tuesday 9 May

  • Japan Household Spending (Mar)
  • Japan Labor Cash Earnings (Mar)
  • Australia Consumer Confidence (May)
  • Australia Retail Sales (Mar, final)
  • China Trade (Apr)
  • President Biden to meet with Congressional leaders on debt ceiling
  • US NFIB Small Business Optimism (Apr)
  • Fed’s Williams speaks

Wednesday 10 May

  • Germany Inflation (Apr)
  • United States CPI (Apr)
  • Thursday 11 May
  • Japan BOJ Summary of Opinions
  • Japan Current Account (Mar)
  • China CPI, PPI (Apr)
  • United Kingdom BOE Meeting
  • United States PPI (Apr)
  • United States Initial Jobless Claims

Friday 12 May

  • China M2, New Yuan Loans, Urban FDI (Apr)
  • Hong Kong SAR GDP (Q1)
  • United Kingdom monthly GDP, incl. Manufacturing, Services and Construction Output (Mar)
  • United Kingdom GDP (Q1)
  • BOE’s Huw Pill speaks
  • United States UoM Sentiment (May, prelim)

Earnings this week:

  • Monday: Devon Energy, PayPal, Tyson Foods
  • Tuesday: Duke Energy, Airbnb, Occidental, Aramco, Nintendo
  • Wednesday: Walt Disney, Robinhood, Beyond Meat, Credit Agricole, ABN Amro, Toyota
  • Thursday:, SMIC, Hua Hong Semiconductor, ING, Softbank, Rolls Royce
  • Friday: SocGen

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