• The FOMC met market expectations by ‘skipping’ June but made clear in the post-meeting press conference that future hikes are on the table. The ECB stepped down to a 25 bps hike following a path of two 75 bps and three consecutive 50 bps moves while the BOJ made no changes.

• U.S. inflation numbers eased slightly in May creating a little more breathing room for Fed officials to skip in June and wait on more data for the July decision which is now trading at a 60% probability for a 25 bps hike.

• Consumer surveys are adding to the disinflation narrative with UofM and NY Fed responses showing 1yr forward expectations falling materially while longer term expectations have remained relatively anchored under 3%.

• Yield curve slope indications for growth and monetary policy conditions have changed meaningfully. The 3m/10yr slope has ‘flattened’ from peak inversion of -1.89% to -1.57% while the 2yr/10yr has ‘deepened’ from -0.72% to near record inversion of -0.93%.

• The past couple weeks had seen breadth measures improve but still leaves the S&P 500 well into short-term overbought territory with 14-day RSI above 70, 2.37 standard deviations above the 200 dma, and 2.85 standard deviations above the 50 dma.

• The latest data on banks’ aggregate holdings indicate loan portfolios slightly above pre-SVB levels and deposit balances at March 22nd levels – following three straight weeks of outflows.

• With over 40% of banks reporting tightening lending standards, a BCA research study noted that on average, private credit outperformed private equity by 40%-50% over the following five years and by 10%-20% over the following 7rys with no adjustment for risk disparity in either case.

• The case for a stimulus response in China grew last week with property investment (-7.2% vs -6.7%), decelerating retail sales (12.7% vs 13.7%), industrial production decelerating from 5.6% to 3.5%, and new home prices falling 0.1% MoM.

• An OPEC report projecting 2023 oil demand at 2.3mbpd above 2022 levels served to boost oil prices and offset weak growth/recession price action early in the week. Some would argue that may be under appreciating potential demand destruction as we approach year end.

•  CPI inflation in May was generally in line but cooled versus April’s reading with headline and core readings of 4% and 5.3% respectively alongside MoM of 0.1% and 0.4%. Headline readings were slightly under consensus while core reads were spot on.

• Producer Prices (PPI) in May cooled more than forecasted with YoY headline (1.1% vs 1.6%), core (2.8% vs 2.9%), and super core (2.8% vs 3.3%) all below consensus. MoM numbers were also soft with headline (- 0.3% vs -0.1%), core (0.2% vs 0.2%), and super core (0.0% vs 0.1%).

• May’s NFIB Small Business Optimism Index of 89.4 was slightly better than consensus 88.4 and above the forecast range of 87.5 to 89.0.

• Retail Sales for May stayed healthy, beating the forecast (0.3% vs -0.1%) and landing at the high end of the range. Ex-vehicles (0.1% vs 0.1%) and ex-vehicles & gas (0.4% vs 0.2%) were both at and above estimates respectively.

• Industrial Production for May slipped -0.2%, below consensus estimate of 0.1% and at the low end of the forecast range.

• U of M Consumer Sentiment for June came in above consensus (63.9 vs 60.0) and the high end of the range of estimates (59.4 to 63.0).

• Weekly Jobless Claims again surpassed estimates (262k vs 248k) and the four-week average increased from 237.5k to 246.75k.

• A table this week from Bespoke reminds us of the old saying ‘be greedy when others are fearful and fearful when others are greedy’ illustrating returns following three recent reasons to be fearful (debt ceiling, SVB bank failure, Fed rate hiking cycle)
• Thankfully, the debt ceiling was suspended for a sixth time last week in a last minute budget negotiation compromise. Not thankfully, we have $30t in outstanding debt and zero political will on either side to address any actual material budget issues.
• Large caps record outperformance over small caps and U.S. outperformance over non-U.S. can be, at least partially, explained through an examination of sector weighting differences with growth stocks (NASDAQ) leading the way and more prevalent in U.S. markets.
• Economic reports last week took some pressure off the FOMC with respect to a June rate hike with unemployment edging higher and wage growth slightly below consensus. The June Fed Funds contract is now pricing a 76% “hold-steady” rate decision and 24% on a 25 bps hike.
• The combination of a slowing economy and substantially higher interest rates (debt service) has led to a notable increase in leveraged loan defaults.
• A BCA Commodity and Energy Strategy research note predicted China’s CCP will be announcing a new round of credit led policy stimulus shortly to address fledging economic growth.

• • The May Employment Report registered 339,000 jobs, well over consensus 190,000, but the unemployment rate rose to 3.7%. Participation Rate stayed at 62.6% while average hourly earnings were in line with consensus for both MoM (+0.3%) and YoY (4.3%).

  • The April JOLT Survey showed job openings increasing 3.67% to 10.10mm but down 14.05% from one year ago.

  • Eurozone headline and core inflation eased to 6.11% and 5.3% respectively, both cooling off from prior month readings.

  • The March Case-Shiller Home Price Index rose 0.42% from the prior month and +0.63% YoY.

A light economic calendar, the unofficial end to Q1 earnings season, ongoing debt ceiling negotiations, and ample FedSpeak were primary drivers behind the capital markets last week in what amounted to some risk-on price action. Equity markets posted solid gains on the week. The S&P 500 was up 1.65% marking a fresh YTD high (+9.2%) while developed (+0.71%) and emerging (+1.12%) markets weren’t far behind. Year to date global equity markets have returned 9.5% with developed international (+12.2%) offsetting the emerging markets (+2.9%) and U.S. markets in line. Rates jumped sharply higher across the curve last week, taking the 10 yr UST yield back up to 3.7% while both commodities and the USD edged higher.

• Charlie Bilello updated his CNBC “Markets in Turmoil” fail safe go long market signal, illustrating very clearly the “be greedy when others are fearful” rule of thumb. This S&P 500 rally does seem to be lacking breadth, despite marking a YTD high last week, and has been range bound.

• Much like Wall Street earnings forecasts, consensus economic forecasts too have been well below the mark as evidenced by the surging Bloomberg Economic Surprise Index.

• Alpine Macros’ look at the Fed Senior Loan Officer Opinion Survey illustrates a significant shift tighter in CRE lending standards along with a dramatic fall in loan demand.

• Fedspeak last week saw hawkish comments from Bullard, Logan, Barkin, Mester, Bostic, and Kashkari countered by a doveish but undecided Goolsby. Powell’s remarks Friday echoed past statements but market based expectations for a 25 bps hike in June did move briefly higher.

• A surprise hike this month by the BoA and an unexpected inflation acceleration in Canada serve to remind investors and global central banks that monetary policy (risks) remain.

• U.S. politicians are talking tough on the debt ceiling with mid-week signs of progress followed by a breakdown on Friday, putting talks on “pause.”

• The WMT earnings report marks the unofficial end to Q1 earnings season with blended earnings decline of – 2.2% and revenue growth of 4.1%. Forward earnings estimates for Q2 (-6.4%), Q3 (0.7%), and Q4 (8.1%) see recovery eventually but not until year end.

• A Goldman Sachs look at corporate debt shows a move higher in default rates but ample runway when accounting for generationally low coupons, excluding floating rate bank loans.

• The contrarian narrative from MRB to those in the recession camp includes, while inevitable eventually, the cost of capital is not yet at a breaking point for the U.S. economy and delevered private/consumer sectors and the relative importance of CRE vs RRE are tangible positives.

• NY Fed Household Debt and Credit Report showed credit growth slowing from 8.5% to 7.6% in Q1 with a deceleration in mortgages offsetting notable increases in credit card and HELOC debt while credit card delinquencies are beginning to turn higher.

• April Retail Sales were mixed versus forecasts with headline (0.4% vs 0.7%), ex-vehicles (0.4% vs 0.4%), and ex-vehicles & gas (0.7% vs 0.4%) but rebounded from the declines posted in March.

• April Industrial Production beat expectations (0.5% vs 0.0%) as did the reading on Manufacturing Output (1.0% vs 0.1%).

• The Empire State Manufacturing Index fell from 10.8 to -31.8 in May, the second largest monthly drop on record, albeit a notoriously volatile index over recent months.

• The Housing Market Index in May registered 50, ahead of the spot forecast of 45 and the consensus range of 43-46. Starts of 1.401M and Permits of 1.416M were both within consensus range. Existing Home Sales declined 3.3% MoM to 4.28M.

• Initial unemployment claims of 242k was improved over the prior month jump higher to 264k.

Markets last week continued to wrestle with banking sector weakness, the debt ceiling stalemate, and a mixed bag of economic data points. The S&P 500 closed the week down 0.29%, outperforming developed (-1%) and emerging (-2.13%) markets, leaving global equity markets up 8% YTD. Bond yields edged slightly higher with the 10yr UST closing at 3.46% while the USD clawed back a good percentage of its YTD losses, up 1.45% for the week. WTI drifted back down to the $70 support level again, joining industrial metals in taking the overall commodity complex lower on the week.

• Bank balance sheet stress, declining deposits, FDIC seizures, curtailed lending activity, and commercial real estate exposure amount to significant uncertainty surrounding policy, consumer/business confidence, and the overall economic outlook.

• Key banking system monitoring points are deposit outflows and loan/lease growth alongside credit spreads and bond market receptiveness to new issuance.

• The latest IMF Global Financial Stability Report highlighted the stark difference between U.S. and European bank stresses in terms of bond market-oriented balance sheet losses with exposure nearly 2x higher in the U.S. and losses as percentage of Tier 1 capital nearly 5x higher.

• BCA U.S. Political Strategists are assigning a 10% probability of a technical default on U.S. debt thanks to historically high political polarization which may introduce greater risks if the economy proves resilient. Regardless of default, the investment implication is clearly negative.

• MRB is maintaining a contrarian stance on recession highlighting a stabilizing housing market, the poor track record of a contractionary ISM Manufacturing Index, the manufacturing weighted and narrow variable LEI, and resilient unemployment despite the uptick in claims.

• While non-U.S. equities are up 18% in USD terms since the mid-October bottom, momentum has slowed materially over the past two months, defensive sectors have been outpacing the cyclicals, and higher beta geographies have underperformed the U.S.

• Economic data out of China including a sharp decline in aggregate financing and new loan issuance alongside weak PMI and trade data have supported the view of what looks like a lopsided and tempered recovery.

• The BoE met expectations by delivering a 12th consecutive rate increase, hiking rates by 0.25% to 4.5%.

• April’s headline and core CPI readings slowed as expected with headline and core readings of 4.9% and 5.5% respectively. MOM registered 0.4% for both headline and core, as forecasted.

• April’s headline and core PPI also slowed relative to prior month levels and came in below consensus on both headline (2.3% vs 2.5%) and core (3.2% vs 3.3%) readings.
• Initial jobless claims of 264k were well above the 245k consensus and the estimated range of 240k-250k, taking the four-week moving average to 245.5k. Claims are now 82k above the 1yr low in September of 2022.
• May’s U of M Consumer Sentiment survey fell sharply to 57.7, well short of consensus forecast for 63.0 and the prior month reading of 63.5.
• April’s NFIB Small Business Optimism Index deteriorated slightly to 89.0, just below the 89.7 spot consensus and at the low end of the forecast range (89.0-90.0).

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.