Recession fears reignited due to the weak economic data. 2Y and 10Y treasury yields are down to 3.79% and 3.28% respectively. The market is pricing in a 45% chance of a rate hike in the coming meeting next month. The manufacturing PMI hit a 3-year low, indicating that the US economy is slowing. All eyes are on US CPI data next week.
Job Rebalancing: Job openings missed expectation (9.9m actual vs 10.5m forecast). The decline has renewed recession fears. Before the banking system crisis, investors were hoping for a softening job market. They are currently focusing on how much credit tightening and weakening job data would be necessary to offset additional rate hikes.
Oil: OPEC+ announced an output cut of 1.66m barrels per day unexpectedly. Oil prices surged, with WTI and Brent prices up around 6.5%. It indicated that OPEC+ has strong pricing power and could influence the prices without impacting the demand. More attention will be on the future path of oil prices and inflation.
Banking Stress: More data will be available for analyzing the banking system stress in the coming weeks. Earnings of banks will be reported next week, and they are likely to discuss their deposit flows, expectations and lending intentions. It would also provide more information on deposit outflows at specific banks. Survey results like NFIB (11/4) and NACM (28/4) will provide insights about credit conditions and credit availability.
Real Estate: Property prices are dropping and the office vacancy rate is at a 20-year high. Commercial real estates (CRE) are particularly vulnerable to the adverse impact of interest rates or bank lending. Even if the interest rates remain unchanged, new lending rates are still 300-450bps higher. In addition, remote and hybrid working options will likely accelerate the markdown in CRE.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Technology and consumer discretionary sectors account for 200% of S&P500 growth since last October’s low. They are the longest-duration stocks but not the most defensive or least cyclical. It implies that investors are expecting the long-term interest rates will return to the pre-COVID levels - 100 to 200bps lower than today.
J.P. Morgan: US large caps and small caps increased by 7.5% and 2.7% respectively. The divergent are mainly attributed to the heavier weight in financial and lower weight in technology in the small caps.
Morgan Stanley: The real yield curve has been inverted. The inversion of nominal yield curve suggests higher recession risk while the inversion of real yield curve suggests a floor under inflation. With the US debt ceiling problem, inverted real yield curve indicates that interest rates will stay higher for longer than what the market is currently discounting in the long-duration assets.
UBS: As rates are likely to reach the peak, investment grade, high-grade government and sustainable bonds are recommended. Emerging market bonds are also attractive mainly attributed to their growth prospects and the weakening US dollar.
Goldman Sachs: Credit tightening is pushing down the yield as the market is still concerning about the stress in banking system. Its impact on the economy is still moderate as of now with the slowing deposit migration, while the downside risks remain when the bank funding costs increase more than expected.
Bank of America: Housing sector is typically the first sector to see the impact of the tightening policy. The economy as a whole tends to experience a delayed effect broadly, and we can already see a few victims from the recent banking sector turmoil.
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