It was a good week for stocks despite an increase in bond yields and growing jitters about the debt ceiling. Tech stocks performed particularly well, but even small-caps and beaten down bank shares managed to rally. The beleaguered regional bank index had its largest gain since 2021 on Wednesday and was up over 9% for the week.
The trigger for the move was news that Western Alliance Bancorp had picked up $200bn of deposits since their last report. There is some hope that we may have seen the worst of the deposit flight from the banking system. Time will tell.
Yields on short maturity government bonds hooked higher this week - the chart below shows the yield on 6-month bills.
Longer-term yields have moved higher as well, but are nowhere near the old highs.
Why? One possible reason is that the fallout from the failure of Silicon Valley Bank and First Republic looks contained for now. Furthermore, the growth outlook in the U.S. is proving surprisingly resilient. The latest estimate from the Atlanta Fed pegs second quarter growth at +2.9%, as you can see below.
This far exceeds the consensus estimates from a cohort of economists (blue line) and runs counter to the ‘we are already in recession’ narrative that seems so common. Stronger economy means less likelihood of a Fed cut anytime soon = higher short-term yields.
But gauging the true strength of the economy can be tricky. Just take this week’s retail sales number. Sales for April were up +0.4% month-over-month (a touch lower than consensus), but strip out car sales and they came in at a strong +0.7% m/m.
But the retail sales number is a nominal number. Adjust for inflation and sales are flat (blue line below).