In today’s briefing:
- With Inflation Untamed, More Fed and ECB Rate Hikes Ahead Despite Recession
- The Failure of First Republic: A Systemic Crisis in the Making?
- Regional Bank Watch: On Balance Sheets, The Collateral Damage, and The Spillovers to USD Liquidity
- CX Daily: China’s AI Charge
- Us Equity Watch: A Rotations Game
With Inflation Untamed, More Fed and ECB Rate Hikes Ahead Despite Recession
- With ISM manufacturing new orders below 50 for 8 months, the US will join the Eurozone in recession this quarter. PCE buoyed Q1 GDP, but will weaken as unemployment rises.
- Core PCE inflation at 4.6%YoY (MoM annualised gains of 4.7% in Q1CY23) will oblige the Fed to hike the FF rate another 50bp. Mar’23’s 4%YoY contraction in M2 proved insufficient.
- ECB and BoE need to hike much more, given that CPI inflation is at 6.9%YoY and 10.1%YoY respectively vs their 2% target. Advanced Economies to grow just 0.5% in 2023.
The Failure of First Republic: A Systemic Crisis in the Making?
- A banking crisis is systemic when two conditions are met: Significant signs of financial distress and significant banking policy intervention measures in response.
- To determine financial stress, we look at bank failures, deposits, spreads, and market performance. In addition, the US banking system’s market value of assets is USD 2.2 trillion below book.
- Next, we examine the size of the policy response and reveal it is getting close to the levels seen during systemic banking crises.
Regional Bank Watch: On Balance Sheets, The Collateral Damage, and The Spillovers to USD Liquidity
- The underlying root cause of the “deposit flight” is the monetary policy.
- When depositors leave small and medium-sized banks for either money market funds or another bank – something must give on the asset side of the balance sheet.
- When credit growth declines, Real Estate is the sector that is hit the most.
CX Daily: China’s AI Charge
AI / Special Report: China’s AI charge. OpenAI’s ChatGPT has taken the world by storm.
Bridge / Mainland roads opened to more cars from Hong Kong
Soccer / Two more former top China soccer officials ensnared in corruption dragnet
Us Equity Watch: A Rotations Game
- The macroeconomic environment has left us confident that spill-overs from financial turmoil are to further impact markets.
- The below relationship between USD liquidity and SPX further strengthens our conviction for rotating towards defensives as well as net decreasing overall exposure to mitigate portfolio risk.
- The reallocation towards defensives makes sense, but the question is, whether that narrative is already fairly exhausted and the upside thus likewise.
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