2023 Weekly Views

Highlights

US banks

Banks kicked off reporting season on a positive note with strong results across the board. JPMorgan delivered an impressive set of results with EPS exceeding consensus by 19%. Better than expected NII (Net Interest Income) with 2023 guidance raised 10%, stronger deposits and notably better NIM (Net Interest Margin), while non-interest income was also above consensus, seemingly on better FICC and higher growth in Asset Management fees. Expenses were also favorable versus expectations. Citigroup exceeded EPS consensus by 14% including a divestiture gain but were nonetheless ahead of expectations on stronger revenues led by NII and FICC, while expenses were slightly below expectations. Deposits were down 3% q-o-q. Wells Fargo beat EPS expectations by 9%, although not of the same quality as JPM. Upside was driven by both NII and non-interest revenues. Similar to Citi, WFC saw a decline in deposits (-2% q-o-q).

Market update

Earnings kick off

The S&P 500 closed the week at 4,137.64, +0.79% higher. The Dow Jones closed at 33,886.47, +1.20%, with the Nasdaq higher by +0.29%. The volatility index VIX closed the week at 17.07 down from 18.40. The Euro Stoxx 600 gained +1.74%.

The 10-year UST closed at 3.51% up from 3.39% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -160bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 207bps and High Yield tightened 32bps at 492bps. German 10-year Bunds yield closed at +2.44% up from +2.18% a week before. In Europe, Corporate Investment Grade spreads tightened 6bps at 179bps and High Yield spreads tightened 31bps at 487bps.

The US Dollar Index (DXY) depreciated -0.53% last week and closed at 101.55. The Euro closed at 1.0992 (+0.80% weekly); the Yen depreciated -1.23%, closing at 133.79 and the Swiss Franc appreciated +1.29%, closing at 0.8937. Gold closed at $2,004.17 depreciating -0.19%. Oil was higher, Brent closed at $86.31 (+1.40%) and WTI at $82.52 (+2.26%).

Macroeconomy

FOMC meeting

FOMC minutes from the March meeting showed that policymakers had lowered their expectations for rate hikes this year following the banking crisis, with officials calling for more caution and a need to watch for a “credit crunch” in the upcoming data releases. One line of particular interest was that the staff were now forecasting a “mild recession starting later this year”. But overall, the minutes indicate that the committee sees the recent turmoil as contained to a “small number of banks with poor risk-management practices and that the banking system remained sound and resilient”. Participants commented that recent inflation data indicated slower-than-expected progress on disinflation. They noted that revisions to the price data had indicated less disinflation at the end of last year than had been previously reported and that inflation was still quite elevated.

US banks

Latest Federal Reserve balance sheet data show bank borrowings declined slightly from elevated levels in the week ended April 13th. This is the third consecutive week of decline, showing a stabilization in banks’ liquidity needs. The decline in the Fed’s new emergency lending facility (BTFP) suggest some banks felt comfortable paying back loans earlier. Fed balance sheet continued to decline as QT (Quantitative tightening) continued and loans fell. Federal Home Loan Bank (FHLB) debt issuance slowed further last week. They are the lender of next-to-last resort and the decline suggests banks advance borrowing needs have fallen significantly since a month ago. Inflows to money market funds continued but the pace has slowed considerably. More timely bank lending surveys show credit conditions have tightened already after recent turmoil: the Dallas Fed lending conditions survey, the NFIB small business survey, and the NY Fed consumer expectations survey all point to tightening credit conditions, although we are not at GFC levels.

Fed speakers

Philadelphia Fed President Patrick Harker said he is disappointed that US inflation hasn’t slowed by more and was ready to take further steps to bring it down if necessary. Harker said strong jobs gains and an unemployment rate of 3.5% last month show the nation is “effectively at full employment”. Minneapolis Fed President Neel Kashkari said there are signs that last month’s banking sector turmoil following the collapse of Silicon Valley Bank (SVB) is abating. Kashkari did not comment on the path of policy but said that changing the Fed’s 2% inflation goal would damage its credibility and he expects inflation to return to 2% sometime in 2024. San Francisco Fed President Mary Daly raised the possibility of fewer rate hikes by the Fed, stating that policy was at a point where rates did not need to be raised at every meeting. New York Fed John Williams said that the March outlook of policymakers for one more rate hike this year, followed by a pause, is a “reasonable starting place”, though the path will depend on incoming economic data. Chicago Fed Austan Goolsbee said: “we should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation”.

Other central banks

Austrian Central Bank chief Holzmann said that the ECB would need to keep raising rates and that the inflation outlook would warrant another 50bps increase in May. Also, Bank of France Governor Villeroy said inflation is more widespread and potentially more persistent. While rate hikes are in process of passing through the economy, he sees euro area facing risk of entrenched inflation. Lastly, the Bank of Canada (BoC) decided to hold its interest rate steady at 4.5% while the impact of its previous rate hikes filters down through the economy. The move was widely anticipated because the bank had telegraphed its intention to hit pause on rate hikes after raising them eight times between Mar. 2022 and Feb. this year.

What to watch

• Monday: US ISM manuf. index (Apr.)
• Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
• Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
• Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
• Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)