Another lender failure triggers renewed instability in the banking sector

Market Summary

Last week, investors focused on the increase in interest rates by the Fed and ECB.

In the United States, stocks fell due to Powell's comments on slow rate cuts and concerns about the need to raise the U.S. debt ceiling. Fed increased interest rates by 25 basis points, bringing the fed funds rate to 5.00%-5.25%. Fed Chair Powell suggests peak fed funds rate for this cycle, but keeps further monetary tightening option open, no rate cuts. In Europe, major benchmarks were mixed. The ECB increased its main deposit rate by 0.25% to 3.25% following three 0.5% hikes in 2023. Eurozone inflation rose to 7.0% YoY in April, while the core rate dropped to 5.6%.

In Asia, Japan’s stock markets gained over the first two days of the week and remained closed due to national holidays. Yen appreciated from JPY 136.3 to JPY 134.1 against the USD during the week due to safe-haven demand, U.S. recession fears, and Fed signaling interest rate hike pause. In China, equities ended mixed after a holiday-shortened week as sentiment was affected by unexpectedly poor manufacturing data. China's manufacturing PMI dropped to 49.2 in April, indicating contraction for the first time since December, from March's 51.9.

Major News

Regulators took over First Republic Bank, sold to JPMorgan, but didn't ease concerns for regional banks.

Reserve Bank of Australia unexpectedly raises rate to 3.85% after keeping it on hold in April.

Biden administration claims 100k Russian casualties in Ukraine in 5 months; half are Wagner Group mercenaries, winter offensive failed.

Biden calls Congress leaders to discuss raising debt limit as Treasury warns of bill payment difficulties.

What Caught Our Attention

The US added 253k jobs in April, but tighter monetary policy may impact the labor market. The Federal Reserve hopes to curb inflation by raising interest rates, but industries such as hospitality and food service still face labor shortages that drive wages up.

The lag time for unemployment to rise after interest rates increase is estimated at 14 months, meaning America may see more layoffs soon. The tight post-pandemic labor market with few unemployed workers and many job openings may lead to employers hiring fewer new workers instead of firing existing ones, making a soft landing possible. However, high interest rates pose new risks to the financial system, as seen in recent bank failures. If banks become more cautious, businesses may face limited credit availability and slower growth, potentially cracking the rock-solid labor market.

Source: Kredens Capital, T. Rowe Price, Bloomberg, Financial Times, Wall Street Journal, The Economist, Nikkei Asia