Stocks and bonds lower after retail sales, bank earnings & Waller

Snapshot

: Equities down, Treasuries down, Crude up, Dollar up.

REAR VIEW

Waller pushes against market expectations. Bostic wants another hike. Fed's Goolsbee is a dovish voice again. BA stops some 737 deliveries.

PREVIEW OF THE WEEK Ahead

Highlights: Flash PMIs, CPI data for Canada, Japan NZ and UK, PBoC's LPR data, China activity data, minutes from the ECB and RBA. Download the report.

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CENTRAL BANKS - WEEKLY

Reviewing the minutes of the FOMC, BoC and BoK. Download the report.

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Estimates of US Earnings Weekly

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Market Wrap

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MARKET WRAP

Banking earnings were strong despite recent fears that banks would have a bad quarter. JPM saw its biggest intraday gain in November 2020. Retail sales were worse than expected, both on the core and headline level, as suggested by the weak credit card data of BofA, Citi and Bank of America, and the Bank of America's preview. The control group, however, was higher than the Bloomberg consensus. This suggests that consumer spending may not be as bad at all as many people fear, given that the control group is directly fed into the GDP report. Bostic, Goolsbee, and Waller were all Fed speakers. Bostic was more dovish than Goolsbee, but Waller was more hawkish. Crude prices fluctuated but settled more firmly for the day as well as the week. Gold and silver prices also fell. Dollar also rose after its recent crash with DXY reaching highs of 101.75, while money market prices leaned hawkish. The markets now place an over 80% probability of a Fed rate hike in May. However, the rates are only expected to fall by 34bp at year's end compared to 48bp before data and Waller.

US

FED'S WALLER (voter).

The Fed's inflation target has not been met, according to the latest data. Rates need to be raised further. He said the policy needed to be tightened for a longer period than expected by markets. Waller said that the Fed's decision in March to raise rates was justified by the developments to date, but he would continue to closely monitor the data. Waller said that the extent of future tightening will depend on the incoming data, and the tightening of credit. He added that significant credit tightening may offset the need for rate increases, but it is difficult to make a real-time judgment. Waller said it's unclear how the failure and stress of SVB will affect broader credit conditions. However, the liquidity measures taken have stabilised the system.

FED'S GOOLSBEE

He largely reiterated his comments from earlier this week. He noted that he doesn't want to comment on the results of the May election as he wants to wait to see them. However, he did say we should be aware of the fact that the Fed has hiked quite a bit and a lag may be evident, possibly in the weak retail sales in March. He said that the data on producer prices, retail sales, and inflation shows that we are heading in the right directions. However, there is still a clear stickiness to some inflation. Goolsbee believes that a mild recession is possible this year. He said it's definitely a possibility. He watches credit conditions, and he believes that a financial tightening is what makes monetary policy work. But he'll spend the next few months figuring out how much credit tightening there will be.

FED'S BOSTIC (non-voter).

After one more rate hike, Fed can take a pause and assess. Although the recent inflation data are encouraging, prices continue to rise too quickly and the Fed must do more. To avoid unnecessary economic damage, the Fed should take a pause and assess the economy's inflation trajectory. The Fed should pause to assess the economy and inflation path in order to avoid unnecessary economic damage. The rate hikes of the past year are just now beginning to have an impact, but it will take some time for the full effect.

DATA

RETAIL SALES

The headline retail sales declined by 1.0% in the month of February. This was higher than the 0.4% decline expected and the previous -0.2%. (Revised upwards from -0.4%) Core Retail sales also fell, by 0.8% against the consensus of -0.3% and a previous -0.1%. The report was not good, but the surprise on the downside had been well anticipated. This was supported by the weak Costco (COST), Citi, and Bank of America consumer credit card numbers from March. The widely watched BofA Retail Sales Preview also predicted a poor read. Retail control group, which is an input to the consumer spending portion of GDP, decreased by 0.3%. This was in line with Reuters consensus, but better than Bloomberg's expectation of a -0.5%. It does offer a glimmer of hope, given that it directly affects GDP. Atlanta Fed's GDPNow tracker was revised up to 2.5% for Q1 from 2.2% after this week’s CPI and PPI data. The retail sales report showed a sharp headline decline of 5.5% in gasoline stations, which was primarily due to falling gas prices. However, there were many other drops, including 1.6% in motor vehicles and spare parts, 1.2% in furniture, 2,1% in electronics, 2.1% in building materials and 1.7% in clothing. In food and drinks, food and beverage services saw a 0.1% increase, but food and beverage shops experienced a 0.1% decrease.

UOM

The inflation expectations, however, were less encouraging. The shorter-term 1-year rose sharply from 3.6% to 4.6% while the longer-term 5-year remained at 2,9%. Oxford Economics' headline states that 'the slight rise shows how the continuing strength of the labor markets, the rebound in stock values, and the falling gasoline prices has more than offset any concerns over the stress on the banking system. OxEco says that 'the overall picture is still subdued, and we expect spending to fall later this year due to tightening lending conditions and softening labor market conditions.' The consultancy also says that 'with expectations of inflation in the near term still high and volatile, this is another reason for the Fed to continue with rate increases, even though we place more weight on market-based inflation expectations.

IP/MANUFACTURING EXTRACT

The industrial production in March increased by 0.4% compared to the previous and expected 0.2%. Manufacturing output dropped 0.5%. This was more than expected, and also greater than the previous 0.6%. ING states that while IP growth in February was revised up 0.2 points to +0.2% MoM, the details show a more negative picture. ING also states that "both mining and manufacturing output fell by 0.5% MoM, with utilities gaining 8.4%". The desk states that it will correct downwards over the next few months, as weather patterns stabilize. Overall, ING writes that "Manufacturing production is now 1.1% less than it was in March 2022. With the ISM still in contraction territory, the outlook for this sector does not look good."

Fixed Income

T-NOTE M3 FUTURES SETTLED AT 114-27+, 19 ticks lower.

Treasuries were flattened by a large bear after longs made profits on weak retail sales. Waller, the Fed's chief economist, also issued a hawkish message.

The following are the results: 2s +2.2bps @ 4.099%; 3s +1.4bps @ 3.831%; 5s +9.7bps @ 3.604%; 7s +7.8bps@ 3.558%; 10s +6.8bps@ 3.519%.

Inflation breakevens

5yr BEI (+3.6bps) at 2,297%; 10yr BEI (+1,9bps) at 2,317%; 30yr BEI (-0.5bps) at 2,288%.

THE DAY

The T-Notes appreciated very slowly during the APAC session on Friday and European morning. The session highs reached 155-23 before the London/New York handover, but gains were unwound as the US data was released. Risk sentiment was buoyed by strong bank earnings/guidance. Retail sales were mostly on the down side, even though the Control Group came in above Bloomberg expectations.

BofA Report earlier in the Week

After the data, T-Notes hit session lows of 114-23, with longs closing their positions. Not long after the release of the data, T-Notes fell to 114-23, with Waller (voter and hawk), Fed's Waller, making a hawkish statement, calling for more hikes, as well as the need to remain tighter longer. The front end of the market led the knee-jerk downward move on the Uni of Michigan's 1yr inflation expectations. The curve also hit its highest inverted level of the session. However, the selling did not continue and traders ended the week. Bloomberg reported a large options trade which took place shortly after the Uni of Michigan's data. This involved 50k+ of ZNM3 call spreads (hedges with a 10yr yield of 3.35%) that were traded on an exchange in '26.

STIRS

:

SR3H3 -8.5bps at 94.650, M3 -14.5bps at 94.970, U3 -15.5bps at 95.325, Z3 -13.5bps at 95.795, H4 -14.5bps at 96.185, M4 -13.0bps at 96.495, U4 -11.5bps at 96.665, Z4 -11.5bps at 96.730, H5 -10.5bps at 96.760, H6 -10.5bps at 96.765.

Demand for NY Fed RRP Ops at USD 2.254tln. (Prev. Demand for NY Fed RRP op at USD 2.254tln (prev. 101)

Volumes at USD 1.378tln. 1.358tln).

US EFFR is 4.83% (prev. Volumes at USD 109bln, EFFR of US at 4.83% (prev. 114bln).

CRUDE

WTI (K3) SETTLED USD 0.36 HIGHER AT 82.52/BBL; BRENT (M3) SETTLED USD 0.22 HIGHER AT 86.31/BBL

The crude complex closed the day and week in the green, despite a lack of energy-specific news. However, there was plenty of fundamental information, including US Retail Sales, Big Bank Earnings, Central Bank Speak, and UoM prelim.

WTI, however, hit a USD 83.12/bbl high just after the equity open cash and quickly retested its USD 81.76/bbl low. Brent traded between USD 85.53/bbl to USD 86.87/bbl. In terms of oil newsflow, according to the latest IEA MOMR, oil demand will increase by 2mln BPD to a new record of 101.9mln BPD. (vs. the March estimate of 101.9mln BPD). The OPEC 2023 MOMR showed that the world's oil demand outlook was unchanged from last month's estimate of 2.3mln BPD. According to TASS, the Russian Economy Ministry has also raised its Brent oil forecast for 2023 from USD 80.70/bbl to USD 80.70/bbl.

BANK COMMENTARY

JPMorgan (JPM), which has a long-standing forecast for oil prices, predicts Brent oil to average USD 89/bbl during Q2 before rising to USD 94/bbl by Q4.

BAKER HUGHES

: Oil -2 at 588, Natgas -1 at 157, Total -3 at 748.

EQUITIES

CLOSES

: SPX -0.21% at 4,137, NDX -0.23% at 13,079, DJIA -0.42% at 33,885, RUT -0.86% at 1,781.

SECTORS

Consumer Staples – 0.58%; Technology – 0.51%; Industrials – 0.12%. Consumer Discretionary – +0.13%. Energy & Resources +1.19.

EUROPEAN CLOSES

: EURO STOXX 50 +0.63% at 4,390, FTSE 100 +0.36% at 7,871, DAX 40 +0.50% at 15,807, CAC 40 +0.52% at 7,519, FTSE MIB +0.89% at 27,872, IBEX 35 +0.57% at 9,362, SMI +0.76% at 11,344.

Financials

:

JPMorgan (JPM)

The FY23 NII forecast was raised as well. CFO stated that it had seen significant account openings and new inflows during Q1. However, new deposits might not remain in the bank for long. JPM also said that the collapse of SVB does not require a change in regulatory requirements. The bank said that it will not rush into buybacks, and does not care if they are dry.

Citigroup (C),

The company beat its NIM, NII and top and bottom lines while confirming its FY23 revenue forecast. Execs stated that it received deposits in March and in April from wealth and institutional clients. They are pleased with the diversity of its deposit base. CFO said that the recovery of IB has not been as rapid as they would have liked.

Wells Fargo (WFC)

The company's EPS and revenue exceeded expectations, but the average deposit was below expectations. Deposits fell short of expectations. The CFO hopes that NII will increase in H2, however WFC is expecting a decline from Q1 to Q2.

BlackRock (BLK),

Profit and net inflows were up, but revenue was down. Co. is confident that regional banks will accelerate the growth of capital markets.

PNC (PNC),

Profit exceeded expectations but revenue missed. Reports a slight rise in deposits while noting that its provision for losses on credit was down from the prior quarter. Due to the recent volatility in the market and increased economic uncertainty it is also expected that share repurchases will be lower than recent quarters.

STOCK SPECIFICS

Elon Musk plans to launch an AI startup that will compete with Open AI.