Weekend Analysis

The week had started with markets suffering from a "trifecta" of worries, including concerns about regional-bank stability, the souring economic outlook (once again driven by shrinking job openings) and what FED Chair Powell might signal on Wednesday.

First Republic Bank on Monday became the third U.S. bank to fail this year. The collapse of First Republic Bank, the largest U.S. bank failure since the 2008 financial crisis, brought back much of the jitters that gripped the market in March - the last time the Fed met and raised interest rates by 25 bps.
Following the seizure and auction of First Republic Bank FRC and in a deal brokered by the Federal Deposit Insurance Corp, most of the FRC assets were bought by JPM at a tune of $10.6 billion to take control of most of the bank's assets. As the market digested the news, shares of regional banks were pulverized on Tuesday, and sentiment remained weak throughout the week.

Also on the minds of investors is the looming deadline for U.S. debt ceiling and the lack of clarity which remains a bearish factor for stocks. Treasury Secretary Yellen said the Treasury Department may run out of cash as soon as 01JUN to meet all of its payment obligations unless the debt ceiling is raised. This remains unresolved with the next milestone being the meeting of President Biden with Bipartisan Congressional leaders on TUE 09 MAY to find a way to move forward. 

With first-quarter reports over halfway through, analysts see aggregate earnings for S&P companies declining 0.7% year over year. Before companies began to report at the start of APR, Markets had been bracing for a 5.1% drop.

On econ data front, the US manufacturing pulled off of a three-year low in APR as new orders improved slightly and employment rebounded, but activity remained depressed amid MAR, boosted by investment in non-residential structures, but single-family homebuilding remained depressed.

JOLTS job openings fell 341k in MAR to a 23-month low of 9.59 million, showing a weaker labour market than expectations of 9.736 million. MAR factory orders rose +0.9% m/m, weaker than expectations of +1.2% m/m.

The FOMC, as expected, voted unanimously to raise the federal funds rate target by 25bps to 5.00%-5.25%. The FOMC omitted prior language that signaled more rate hikes ahead and instead said it would take into account various factors "in determining the extent to which additional policy firming may be appropriate." The FOMC also maintained plans to shrink the balance sheet each month by as much as $60 billion for Treasuries and $35 billion for mortgage-backed securities. However, when the Chairman Powell said the Fed wouldn’t cut interest rates with inflation remaining high, market gave up the early gains of Wednesday.

US APR ADP employment rose 296k, stronger than expectations of 150k and the biggest increase in 9 months. The APR ISM services index rose +0.7 to 51.9, slightly stronger than expectations of 51.8.

The average hourly earnings in APR also rose +0.5% m/m and +4.4% y/y, stronger than expectations of +0.3% m/m and +4.2% y/y. Consumer credit during MAR also saw an increase of $26.514 billion, stronger than expectations of +$17.000 billion and the largest increase in 4 months.

The labour department report showed job growth accelerated in APR and wage gains increased solidly, suggesting the labour market has stayed strong despite recent interest rate hikes from the Federal Reserve.

The week ended with the NFP data which showed an increase of 253k, stronger than expectations of 185k. Also, the APR unemployment rate unexpectedly fell -0.1 to a 54-year low of 3.4%, showing a stronger labour market than expectations of an increase to 3.6%. The report was hawkish for Fed policy.

Nonfarm productivity fell -2.7% during Q1, weaker than expectations of -2.0%. Also, Q1 unit labour costs rose +6.3%, stronger than expectations of +5.6%.

The U.S. MAR trade deficit narrowed to -$64.2 billion from -$70.6 billion in FEB, wider than expectations of -$63.1 billion.

The strength in the U.S. labour market is bolstering optimism that tighter Fed policy may achieve a soft landing and not push the US economy into recession.

With all this in mind, investors have been risk averse that has seen gold loitering above the key $2k level. Though trading had been thin due to holidays in China and Japan.

Whilst the DoW and S&P posted RED weeks, Nasdaq managed to scrape in a Green week. All 3 indexes continue their struggles with the wCAT10 Res above.

S&P is up 296.75 points or 7.73% YTD and remains 8.62% above its 2023 closing low; however it is still off 13.77% from its record close of 4796.56 it hit on MON 03JAN22.

The volatility index weekly average remains fairly unchanged though it did managed to close above the RN20 on Thursday. Both Short selling and the stocks above their DVI dropped a little this week though nothing out of the ordinary given the overall market sentiment. 

The UK has been very busy looking forward to the coronation of King Charles III, and even if you're not a royalist be grateful that we have a bonus bank holiday on Monday. The country's budget deficit narrowed unexpectedly which boosted the Govt Bond market. The UK private sector economy remained in growth territory in APR, thanks to the strong expansion in the services sector amid lower manufacturing output. 

The UK Composite PMI edged up to 54.9 from 52.2, surpassing the flash estimate of 53.9. With the APR reading, the index is now "comfortably above" the first-quarter average. In the services sector, the index was 55.9, against the prior 52.9 and the flash reading of 54.9. The latest figure indicates the sector's fastest expansion rate since APR22. The FTSE like its US counterpart struggled during the week and ended in RED to now be in a 2 week bear run. 

In the FX space, the week was kicked off with a 25bps rate hike to 3.85% by the the Reserve Bank of Australia,  surprising markets that had been positioned for a pause. It even signaled the possibility of more tightening to come as the inflation remained too high, jolting the Aussie to a one-week high. 

The ECB, the central bank for the 20 countries that share the euro currency, raised interest rates by 25bps to 3.25% and signaled that more tightening would be needed to tame inflation. In contrast and despite raising its own rates by the same bps, the Fed had implied that its marathon hiking cycle may be ending.

CABLE, the love of my life has finally found momentum above the RN1.25. On the hourly chart it ended the week with BuF and so a BuRPI above the h50MA would be a good set up or long/compound. As mentioned a few weeks ago, a set up like this and the pair will have a clear run to the WVI some 200 pips above. 

Both Ethereum and Bitcoin managed a Green week but remain challenged by its RN2K and RN30k respectively.

Not surprisingly we had a bearish look on the ETF sectors with 8 sectors posting a RED week led by Energy (XLE) which wiped out nearly 6 weeks of growth. The sector was heavily impacted by the 7%+ drop in Oil price driven by weak manufacturing growth in China, the world's largest oil importer. On closer review of the three Bullish Sectors for the week and looking at the actual % gain, whilst these are fairly low they should be viewed as good performers given the backdrop of the market conditions. 

All three Sectors in our crosshairs; Staples (XLP), Utilities (XLU) and Healthcare (XLV) have maintained the strength of their momentum with the latter now ever so close to joining the other 2 in the Improving quadrant. 

For next week, UK has a Bank holiday so London Market will be closed reducing liquidity that may affect the Cable. On the Econ data from we have the CPI, PPI and unemployment claims being published in the US and the BoE in UK will have its Rate decision on Thursday.

Have a great weekend folks!

Anil

Let's go trade!