Take Five: Rate hike vs bank stress

(Reuters) -Meetings at the U.S. Federal Reserve, the European Central Bank and Australia’s central bank top the agenda, while megacap Apple (NASDAQ:) brings the U.S. earnings season to an end, as markets work through fresh banking tremors.

Here’s a look at the week ahead in markets from Ira Iosebashvili and Lewis Krauskopf in New York, Dhara Ranasinghe and Amanda Cooper in London, and Kevin Buckland in Tokyo.

1/ONE AND DONE?

The Fed is expected to deliver another 25-basis point interest rate increase on Wednesday and signal a pause in its most aggressive rate-hiking cycle since the 1980s.

Policymakers and markets remain at odds over the rates trajectory: The world’s top central bank projects borrowing costs to remain at around current levels through 2023, investors are betting on cuts after the summer.

Signs the Fed may be coming around to the market’s view could push Treasury yields lower – in theory benefiting the big megacap stocks that led markets higher this year.

Futures markets show investors pricing an nearly 90% chance of a rate increase. But confidence in a 25 bps rate hike has wavered in recent days after problems at lender First Republic reignited concerns over the U.S. banking sector.

2/FRANKFURT’S NO.7

The ECB will likely lift rates for a seventh straight time on May 4 and policymakers appear to be converging on a 25 bps hike rather than a larger 50-bp increase. Yet, key inflation and bank lending data releases in the days ahead could sway that outcome.

With some stability returning to the banking sector after the March rout, hawks may feel confident pushing for a large hike. Tuesday’s flash April inflation data is likely to confirm underlying price pressures – running above 5% – remains uncomfortably high. Some 2.5 million employees in Germany’s public sector will get a 5.5% permanent increase next year, a sign that wage pressures are picking up.

But if bank lending data, also out Tuesday, shows credit conditions have tightened substantially, doves could feel emboldened to push back. 

3/BIG APPLE

    The U.S. corporate earnings season reaches a crescendo on Thursday with results from Apple, the largest U.S. company by market value at $2.6 trillion.

    Along with other megacap stocks, Apple has led the ‘s rally in 2023, giving the company even more heft in indexes. Apple’s over-7% weight in the S&P 500 is bigger than the entire energy sector and nearly matches the consumer staples group.

The iPhone maker is expected to post $93 billion in revenue for its fiscal second quarter – a 4.4% drop year-on-year, Refinitiv data shows. Analysts expect a nearly 6% drop in earnings per share to $1.43.

    The report from Apple, whose widely used products and services include MacBooks and iPads but also banking, is a gauge for global consumer demand and its results stand to ripple through markets given its importance to a number of industries.

    4/PAUSE PATROL

    Bets for a return to policy tightening by the Reserve Bank of Australia on Tuesday have fizzled out, after a soft reading of consumer prices added to evidence that inflation peaked at the end of last year.

    That has put the dollar under pressure, keeping it pinned near the closely watched $0.66-mark, even when the greenback wilted against other major peers.

    RBA governor Philip Lowe has stressed a pause at the April meeting did not necessarily mean the tightening cycle is over, and minutes showed a hike was hotly debated.

    Whether Lowe, whose term ends in September, will be around to oversee further moves is another question. Speculation is rife that, unlike this two predecessors, he won’t be asked to stay on.

5/CREDIT WHERE CREDIT’S DUE

The UK’s 1970s-style inflation and near-zero growth isn’t a good look. There isn’t a credit crunch – yet – according to a recent Bank of England survey. But lenders expect rising defaults on consumer credit, mortgages and corporate loans.

Data on Tuesday will show whether house prices are indeed moderating, and if the decline in mortgage lending is stabilising. New car sales, which in March hit 18-month highs, will also be under scrutiny.

Brits loaded up on credit card debt at the fastest pace in a 24-month period since early 2006 in February and data from the BoE on Thursday will show how that trend is evolving.

This kind of borrowing isn’t cheap. BoE stats show the average interest rate on a UK credit card is 22.5% – its highest since the mid-1990’s. And with more rate rises in the pipeline, the pressure is only likely to intensify.

Meanwhile Prime Minister Rishi Sunak faces his first big electoral test on May 4 in local polls where the opposition Labour Party hopes to capitalise on a year of chaos for the governing Conservatives.

Source link