Daily Points

ON DECK FOR THURSDAY, MAY 4

KEY POINTS:

• Global markets pit central banks versus US regionals
• US regional bank woes continue…
• …but markets are holding the fort against systemic risk
• Global central banks are not backing off…
• …with the ECB up next and facing 25 or 50 & bias uncertainty…
• …as Eurozone core inflation and wage pressures intensify…
• …while Norges Bank escalates hawkishness…
• …following this week’s hikes by the Fed, RBA & Negara
• BoC’s Macklem to deliver key inflation speech
• US productivity and labour cost figures to add to inflation concerns
• US mass layoffs picking up, still low enough for net job growth
• German exports give back prior gains

Most of today's focus in the aftermath of the Fed's decisions (recap here) is moving onto renewed concerns around US regional banks and the ECB plus key inflation- and job-related readings in the US and a potentially key BoC speech.

US Treasury yields had been shaking off some of the late day rally as 2s cheapened earlier this morning but are losing much of that with only mildly higher yields at the point of publication. Shorter-dated European yields are largely treadingwater waiting for the ECB. US and Canadian equity futures are a little lower while European equities soften by up to about 1% ahead of the ECB. All of this could easily change in significant ways this morning.

PacWest's headlines after the Fed yesterday afternoon dominated but they are trying to do damage control this morning without much success alongside TD’s cancelled acquisition of First Horizon. Having said that, it’s possible that there is a fallacy of composition bias in much of the coverage of US regional bank woes. In other words, that the problems that plague the US regional banks—that are akin to a developing economy’s banking system— must aggregate up to problems for the entire financial system and absent the tools to accommodate the risks they face. The evidence says other in my view. Enter charts 1–3 that show measures of equity market volatility, interbank risk, and corporate credit spreads. Mild deterioration reflects a natural repricing of cyclical risk, but to this point we’re just not seeing the systemic risk premiums and severe dislocation effects being priced into markets. That can’t be ruled out in future, but so far all of the regional banking turmoil is mostly being taken in stride in a sound core banking system.

Norges Bank hiked by 25bps as widely expected and which was consistent with prior guidance. It not only guided that another 25bps was likely at the next meeting but also said that a soft krone and wage pressures may motivate a higher terminal rate than previously expected. Central banks are hardly backing off across recent decisions by the Fed, RBA, Norges and Negara. The common market narrative that central banks are messing up and markets know better may ultimately come true, but thus far it continues to result in flat out wrong expectations to date. Causing damage through tightened financial conditions and weakened aggregate demand that adds recession risk remain the entire point of the exercise but short of sparking a full blown crisis.

German trade figures cratered in March but that was significantly due to the high starting point created by the prior month's strong gains. Exports fell by 5.2% m/m (prior +4%). Imports fell 6.4% (prior 4.4%).

On tap will be three primary focal points.

The ECB faces a somewhat divided consensus on whether it will hike 25 or 50 today and how that decision may impact forward rate guidance if provided. The statement lands at 8:15amET and will be following by President Lagarde’s presser 30 minutes later. A significant minority of just over one-fifth in consensus expect a 50bps move and markets are priced for a few points more than a quarter point lift. Some interpreted core inflation as weakening of late by quoting year-over-year figures. I don't think that's the correct approach as core price pressures at the margin remain hot. If the ECB agrees then they may flag persistent concern if not escalating inflation risks. Month-over-month core cpi has been rising by among the fastest rates compared to like months in years past throughout this year with chart 4 repeated from earlier as the latest evidence of high incremental price pressures alongside rising wage pressures (chart 5) that are fanning more inflation than I think some of the coverage is judging. 

US job market readings will continue to be a warm-up for tomorrow's big payrolls show. Challenger job cuts during April (7:30amET) and Q1 productivity and unit labour costs (8:30amET) are due. Cuts have been rising for a few months but not yet to levels that would threaten bet job gains (chart 6). Productivity is likely to tank given the gain in hours worked and soft headline GDP (even though details were better). That means that unit labour costs (productivity-adjusted labour costs) will probably jump higher and fan more concern around inflation risk (chart 7). 

BoC Governor Macklem speaks on inflation (1:05pmET) and with a full press conference this afternoon (2:15pmET). I think inflation is at a renewed upward inflection point and it will be interesting and potentially impactful to hear his views. House price inflation is returning and wage pressures may be intensifying. On that note, the strike by CRA workers ended this morning and the agreement raises wages by about 3% per year from 2021–24 plus a $2,500 lump sum payment per worker. Major wage settlements in Canada are cementing 3% range gains over multiple years which adds upward pressure to the BoC's 2% inflation target. They risk being copied in other agreements.

Canada also updates trade figures for March that are unlikely to garner much market attention but will help Q1 GDP tracking for whatever that’s worth.