Last week was relatively quiet as markets weighed a modest amount of economic data and digested the second week of the first quarter’s earnings reports. With big tech earnings and PCE inflation data on deck, markets may have been looking ahead. Equity markets have stalled out around the February highs with U.S. and developed non-U.S. markets pretty flat last week, now sitting up 8% and 12% respectively on the year. Bonds were weaker with interest rates moving slightly higher across the curve leaving the 10yr UST at 3.57% and both 3m/10yr and 2yr/10yr slopes still meaningfully inverted. Commodities traded lower with oil’s 5.6% decline taking WTI crude oil back below $80 and the USD appreciated 0.27% to bring its YTD loss down to -1.64%.

• First quarter earnings season update has a 76% beat rate and 5.8% beat margin with blended earnings of -6.2%. Top line revenue is seeing a 63% beat rate and a 1.8% beat margin with blended revenue of 2.1%.
• Second quarter earnings are forecasted to decline 5% by Q3 and Q4 are projected at +1.6% and +8.5% respectively for a full calendar year 2023 growth of +0.8%.
• Markets have quickly reversed rate pause and cut forecasts for later this year, now pricing an 89% likelihood of a 25bps hike on May 3rd. The 3-month T-bill hit 5.20% last week, its highest since 2001, and the forward curve (terminal rates) is now much closer to formal Fed projections.
• Bloomberg noted the BoA Merrill fund manager survey registered its most bearish reading since the GFC with a high cash allocation, a net 10% overweight to bonds, and a healthy 63% of respondents expecting a weaker economy.
• 3.5% of ECB rate hikes, tightening bank lending standards, and elevated inflation have the ZEW Survey of German investor sentiment looking low and deteriorating, similar to the U.S.
• In forecasting lower fuel prices, RBC Capital Markets noted global refining capacity is set to increase by 1.5mbpd in 2023 and 2.4mbpd in 2024, the largest two-year increase in 45 years.
• The U.S. tax deadline hit us all last week, a time when bank deposits typically drop by approximately $250b to pay the invoice. Weaker than expected tax collections of $108b on tax day last week may have pulled the debt ceiling debate into June.
• Bank deposit flight has slowed to a trickle but the expectation is that deposits will continue to leave the banking system until the gap between deposit rates and money fund rates closes.
• Bloomberg reported weekly loan volume (+$61b) and deposits (+$10b) with the 2023 deposit buildup to tax deadline obviously looking very different from prior years.
• With the exception of Japan and Australia, consensus 2023 growth is higher now than at the beginning of the year in every major economy. China reported YOY Q1 GDP of 4.5%, up from Q4’s 2.9% pace.

• U.S. March PMI data (C, M, S) registered 53.5, 50.4, 53.7 showing improvements on both manufacturing and services fronts.

• E.U. and U.K. March PMI data (C, M, S) registered (54.4, 45.5, 56.6) and (53.9, 46.6, 54.9) respectively.

• The April NY Fed Services Activity report showed healthy levels of business activity and clearcut disinflation trends but the overall business climate deteriorating to 2012 levels.

• April’s Housing Market Index registered 45, in line with consensus and a 1 point improvement over the March reading.

• March Housing Starts (1.420mm) and Permits (1.413mm) came in within consensus range after both readings jumped sharply higher in February.

• Existing Home Sales of 4.444mm in March were slightly under consensus estimate of 4.5mm.

Markets last week digested a highly anticipated beginning of Q1 earnings season, ample inflation data, and a look at the March FOMC meeting minutes along with a healthy dose of Fed speaking engagements. Risk markets breathed a sigh of relief generally speaking with encouraging reports from the banking sector and continued evidence of decelerating inflation pressures. The relief rally continued in global equity markets which were up 1% to 1.75% led by the cyclicals. Interest rates shifted higher on the week in a relatively parallel fashion leaving 10yr and 2yr yields at 3.52% and 4.08% respectively. Commodity markets were broadly higher with both oil and industrial metals catching a bid while the USD traded approximately 0.25% weaker, leaving it down 2% on the year.

• Earnings kicked off this week with a closely monitored initial burst of reports from the banking sector where money center banks outperformed on better than feared results while regionals struggled. Some strategists see more downside for earnings with a softening macro backdrop and persistent wage pressures.

• A very important consequence of declining bank deposits and more comprehensively, M2, is that banks create less new money by making loans and buying securities. Fewer deposits and tightening credit standards translate to less lending which is a prominent risk going forward.

• Fedspeak last week continued to reiterate a more hawkish tone than markets are expecting with markets currently pricing in nearly 200 bps in cuts over the next 18 months, beginning in June.

• Notable FOMC minutes anecdotes included ‘several participants’ advocating for a pause in March, banking sector turmoil would likely result in a mild recession later in 2023, and tangible concern about credit creation and bank lending.

• Last week’s friendly CPI report and very soft PPI report were offset somewhat by rising consumer inflation expectations seen in both UofM and NY Fed survey results, likely contributing to an upward move in May FOMC rate hike probabilities (25bps) to 78%.

• Data from S&P Global illustrate a worrying trend of increasing bankruptcy filings in the first three months of 2023.

• Wage growth data also fed the hawkish Fed narrative last week with Atlanta Fed Wage Growth Tracker accelerating from 6.1% to 6.4%.

• March headline and core CPI measured 5.0% and 5.6% YOY with 0.10% and 0.40% MOM readings. The March headline and core PPI measured 2.7% and 3.4% YOY with -0.5% and -0.1% MOM readings.

• March Retail Sales came in below expectations (-1.0% vs -0.4%) with readings on Ex-Vehicles (-0.8% vs -0.4%) and Ex- Vehicles & Gas of -0.3%.

• Industrial Production in March registered 0.4% versus 0.3% forecast with readings on Manufacturing Production (-0.5% vs -0.1%) and Capacity Utilization (79.8% vs 78.8%).

• April’s U of M Consumer Sentiment Survey registered 63.5 versus consensus forecast of 62.7.

• The March NFIB Small Business Optimism Index ticked slightly higher to 90.1, just above the consensus estimate of 89.0.

Markets put a bow on a week, a month, and a quarter last week by putting more distance between today and the mid-March banking turmoil. Large cap stocks are now trading at levels above pre-SVB marks while small caps (more financials and credit risk sensitivity) continue to struggle. Key events during the week included Congressional Fed testimony and typical post-FOMC week Fed speaking circuits alongside a relatively important economic calendar. The S&P 500 turned in a third consecutive weekly gain (+3.5%), with healthy March (+3.7%) and first quarter (+7.5%) gains as well. International developed markets also turned in a positive week (+3.9%), month (+2.4%), and quarter (+9%). Interest rates moved higher across the curve last week, likely correcting the sharp reaction to banking turmoil mid-month, while commodities rallied 4.5% and the USD weakened slightly.

• Is the 60/40 portfolio in comeback mode? March delivered gains for a fourth time in the past six months and closed out a second consecutive quarterly gain of approximately 4% for Q1.

• Mega cap (index heavy) growth stocks have continued to lead markets higher, driving large cap stocks back above pre- SVB levels while small caps, with a larger share of financials and more sensitivity to high yield credit spreads, have lagged significantly in March.

• Monitoring bank health metrics such as deposits, deposit ratios, and capital ratios is important. Additionally, monitoring Fed emerging lending programs to banks are showing Fed discount window borrowing fell $22b last week while BTFP rose $11b for a net $11b liquidity removal.

• Depositor behavior has clearly been pushing bank deposits into money funds wherein we see the increase in the Fed Overnight Reverse Repo facility matching money fund flows and the YTD decline in deposits almost exactly matching the move higher in money fund balances.

• The FDIC completed the bank carcass sales of SVB to First-Citizens Bank & Trust and SBNY to NY Community Bank with partial loss sharing and steep discounts of over 20% on loan purchases.

• Fed speakers (Barkin and Collins) and Congressional testimony from Vice Chair Barr left investors with some hawkish soundbites, finger pointing at inept bank management, and many questions surrounding how much the tightening of lending standards will dampen future growth.

• Goldman noted last week the industry composition of bank lending suggests a more cautious outlook for employment growth because leisure & hospitality and other service industries rely heavily on bank lending for funding.

• We’re at the important doorstep of first quarter earnings season where analysts have been busy lowering EPS estimates (-6.3%) by a larger than normal (3.8%) margin when you compare estimates from December 31 to March 30th.

• A big upside surprise in China’s service PMI reading of 58.2 versus 55.0 has investors hoping the reopening process will translate to a significant consumption boost.

• The February PIO (Personal Income and Outlays) report showed inflation slightly softer than forecast with YOY PCE headline and core inflation of 5.0% and 4.6% alongside MoM headline and core of 0.3%.
• The February PIO report measure of Personal Consumption Expenditures (+0.2%) and Personal Income (+0.3%) were both right in line with consensus.
• The final revision of 4Q U.S. GDP was revised downward from a 2.7% to 2.6% annual rate driven largely by a downward revision of 4Q PCE from 1.4% to 1.0%.
• Weekly jobless claims of 198k and the 4-week moving average of 198.25k both increased over the past week.
• The Consumer Confidence Index in March increased unexpectedly to 104.2, well above the spot forecast of 101 and an improvement over February’s reading of 103.4. However, the final revision of the U of M Consumer Sentiment index came down from 63.4 to 62.0.
• January’s Case-Shiller Home Price Index saw residential housing prices fall 0.2% MOM with a YoY change of +2.5%, below consensus forecast and in the low end of the range.
• Pending Home Sales in February increased 0.8% versus expectations for a 1.0% gain.