Markets flat, HSBC jumps as BP declines

First Republic Finds a Buyer 

JPM picks up First Republic – FDIC gets a buyer without having to stump up too much, JPM engineers a deal that won’t knock its capital ratios and gets FRC’s client base. Everyone seems relieved, though bank shares fell yesterday in the US – but not by a lot. JPM shares rallied – it certainly got the best of the deal, with FDIC anchoring the buyout with a $50bn loan to JPM and absorbing the bulk of losses from any bad loans. Safe for now, but what of the unintended consequences? There will be effects down the line....more regulation, more credit tightening. For now it’s relief that this takeout reduces the likelihood of contagion … the end of the beginning of the banking crisis. Jamie Dimon says this part of the crisis is over. 

US Broke; More Oceanic Hikes 

Debt ceiling – the US government could run out of money by June 1st, according to Treasury secretary Janet Yellen. The Biden administration will hold talks with top congressional politicians on May 9th...a deal will be done but the risk is how much austerity does it take? A Republican bill passed last week in the House is the starting point.  

RBA hikes – surprise in some ways, AUDUSD rallied hard as the market was offside but as we discussed in our week ahead, it was always a good bet that the RBA would raise again despite the pause in April. What maybe did come as a surprise with the hawkish talk, with the RBA saying that "some further tightening" may be required to ensure that inflation returns to target in a "reasonable timeframe". Markets now price in a better than evens chance the RBA goes for another 25bps by August.  AUDUSD hit 0.67 for its highest in a week. 

ECB This Week 

Some important data out this morning ahead of the European Central Bank meeting this week. CPI inflation at 10am seen at 0.9% on the month, +7.0% year-on-year, while core is seen up 1.1% on the month and 5.7% annually. The only question for the ECB is whether it plumps for a 25bps or 50bps hike. Although headline inflation has declined due to energy base effects, core inflation has ticked up. Last week Executive Board member Isabel Schnabel said that “data dependence means that 50 basis points are not off the table”. Staff projections indicate growth picking up next year but inflation coming down all the way through to 2025 – both surely cannot be true unless the ECB really has been able to thread the needle. Bank lending survey data out this morning show non-financial corporate lending growth and household lending growth have both dropped. Net 27% of banks report tightening in the Q1, 38% report a fall in demand. Something for the ECB to ponder – tightening. Hardly a surprise after lots of hikes but we had started to think that hikes were not having much effect. Final PMI data 

More FOMC Decisions 

Fed begins two-day meeting - markets price in a 95% chance the FOMC follows through with its third consecutive quarter-point rate hike. Such a move would bring the Fed funds rate to a range of 5%-5.25%, in line with its current central forecast for the peak in interest rates. The recent banking crisis may see the Fed look to be more cautious, whilst there has been evidence of disinflation, albeit core readings for price growth remain stubbornly high. Final hike? Markets price a one-in-four likelihood of a further hike in June, with cuts coming by the end of the year, though this is not what Fed policymakers believe will happen. And what about the debt ceiling? Hard to see the Fed be too hawkish until that is resolved.  

Market Movers 

HSBC led the way higher, rallying more than 4% in London after reporting pre-tax profits of $12.9bn, treble last year’s total during the same quarter. It also booked a gain of $1.5bn on its £1 acquisition of the UK arm of Silicon Valley Bank. Investors lapped up the 10 cent-a-share divi and $2bn share buyback. Otherwise European banks pretty flat on the session – who knows if another regional lender in the US or a European behemoth gets attacked.  

BP was in the doldrums despite bumper profits that exceeded expectations. Shares declined 5% as investors booked profits. BP posted $5bn underlying profit, down on the same quarter a year ago – the top is in? OPEC+ cuts and China demand story likely to keep pricing firmer though. Management scaled back share buybacks, perhaps the main cause for the decline this morning. WTI (spot) down to $75 this morning from around $76.80, above last week’s lows around $74. 

European stock markets were flat in early trade – lots ahead this week with the Fed and ECB in action and catchup trade with the US after being shut Monday. Wall Street ticked lower yesterday a touch in thin trade. US JOLTS jobs openings later today will be important.