It was a pretty uneventful week in the markets ahead of holidays. Stocks didn’t do much at the broad index level with the exception of small-caps, which was pulled down by the financial sector once again. It’s been a brutal run for regional banks, both on an absolute and relative basis, as you can see below.
But the lending program the Fed rolled out a few weeks ago seems to have taken any systemic risk concerns off the table for now.
One direct consequence of the Fed’s lending to the banking sector was a massive ramp higher in it’s balance sheet. As you can see below, the sharp move up undid much of the quantitative tightening that started in early 2022.
The recent dip is due to banks tapping few loans, a sign that deposit outflows have moderated at most banks at least.
The big economic reports of the week were largely jobs related. Friday’s payrolls number came in very close to expectations, and the main takeaway is that the recovery in the labor market continues to cool, albeit in a very gradual, controlled manner. Nonfarm employment increased by 236,000 last month and there were modest downward revisions to prior months.
Job growth has clearly softened over the last few months, but is by no means weak. It’s the same story for wage growth. As you can see below, average hourly earnings growth slowed on a smoothed basis, with the 3-month rate of change getting close to pre-pandemic levels.
The other key labor report, job openings, also told a similar story. The headline stat dropped below 10mm for the first time in months. This tells a tale of a softening, but still pretty healthy market.
This good news as far as the Fed’s battle on inflation is concerned. And the recent dip in bond yields confirms this. The yield on the 10-year Treasury has moved materially lower the last few weeks, and a technician might say yields are on their way to 3%?
Investors are betting the Fed has one more rate hike in them at the May 3rd meeting before calling it a day. As you can see below, the odds of a quarter point hike in less than a month stands at 67%.
The move in rates has only pushed the yield curve deeper into the red. The spread between 10-year and 3-months yields is the most negative since the early 80’s.
(Other) Charts We Found Interesting
- The bottom panel captures just how unprecedented the outflow of deposits from the banking sector was in March.
- There’s no great mystery why – the massive spread between money market and bank deposit yields.
- Supply chains are back to normal (blue line) and goods price inflation moving in the right direction.
- Service sector inflation has been a problem, but even this is looking much better. Consumer prices follow service sector inflation with a slight lag. Could we really see a 3% headline CPI later this year?
- Earnings season starts in earnest this coming week. Expectations are low – analysts see a contraction of -7% for S&P 500 earnings.
- The Tulare basin in the southern San Joaquin Valley of California is flooding due to this, and the snowpack hasn’t even started melting.
- To put the size of Tulare Lake in perspective.
Have a good weekend.
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