Fed raised 25bps and hinted a pause. The markets are pricing in 80bps in rate cut by the year-end. Gold prices jumped due to the worries about banking system while oil prices dropped due to a decline in demand.
First Republic Bank: J.P. Morgan acquire First Republic Bank in a government-led deal. The acquisition limits the damage to the Federal Deposit Insurance Corporation’s (FDIC) guarantee fund. J.P. Morgan acquired around $173b in loans, $30b of securities, and $92b in deposits while agreeing to share losses and recoveries with the FDIC.
Job Market: The result of nonfarm payroll beat expectation (253k actual vs 180k consensus). The previous month’s figures were adjusted downward, from 236k to 165k job creation. For unemployment rate, it fell back to a multi-decade low of 3.4%.
Debt Ceiling: Treasury is going to run out of cash potentially as soon as early June. If the parties cannot reach an agreement for a long-term deal, it is possible that there will be a temporary debt expansion given the tight deadline.
Interest Rate: Fed hiked rates by 25bps, pushing the fed fund rate to 5-5.25%. Fed's wording also suggested a potential halt in rate hikes. The removal of the phrase "some additional policy firming may be appropriate" and its replacement “assessing incoming data to determine the necessity of further tightening” led investors to believe that the Fed no longer deemed additional rate hikes suitable.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Earnings and margin came out better than expected. However, the potential risks of tighter lending conditions from banking stress could make the market choppy.
Morgan Stanley: S&P500 is expected to remain range-bound, making the next few months critical for resolving the ongoing bull-bear debate. Additionally, earnings quality is also weakening, which could affect investment returns.
Morgan Stanley: The price of the 1Y treasury credit default swap spread has jumped. The price is implying that the risk is more than twice as in the similar debt ceiling fight in 2011 and 2013.
UBS: We see attractive opportunities in high-quality bonds due to their appealing yields and potential for capital gains during an economic slowdown. Favor bonds over equities, focusing on high-grade government, investment-grade, and sustainable bonds for quality exposure.
Morgan Stanley: The upcoming debt ceiling debate will be a focal point and is expected to result in an agreement. However, this agreement may have significant implications for long-term interest rates. With the majority of treasury debt maturing within 7 years, and $6.5t set to reprice at higher interest rates in the next 12 months, they may need to issue longer-maturity bonds. This could negatively impact long-term bond prices.
UBS: The Fed's dovish tone suggests a potential pause in rate hikes, but this doesn't imply an imminent rate cut due to still-high inflation. The labor market and private sector demand remain strong, so the Fed will likely maintain its restrictive stance and monitor the incoming data closely.
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