• We finally have some closure on First Republic; the deal clears the deck for global monetary tightening to continue unabated; April ISM manufacturing PMI reading will be the highlight
  
• Fitch cut France’s rating by a notch to AA- with stable outlook
  
• The BOJ is optimistic about wage growth; Australia reported final April manufacturing PMI ahead of RBA meeting tomorrow; Korea reported weak April trade data

The dollar is firm as First Republic gets closure. DXY is trading higher for the third straight day just below 102 as the deal should help dial down banking sector risk in the U.S. With most of Europe on holiday, the euro is trading lower near $1.10 and sterling is trading lower near $1.2520. USD/JPY is trading at the highest since March 10 and is testing the 200-day moving average near 137. It should eventually break above and near 137 and test the March 8 high near 138. Recent data have been dollar-supportive but until rate cuts this year are finally priced out, the dollar is likely to remain vulnerable. Perhaps the First Republic deal and a hawkish Fed this week will open up the next stage higher for the greenback.

AMERICAS

We finally have some closure on First Republic. After marathon talks, regulators seized the troubled bank and will sell the bulk of the assets to JPMorgan Chase. JPMorgan will assume all of First Republic’s $92 bln in deposits as well as most of its assets, including nearly $175 bln in loans and $30 bln in securities. In order to help facilitate the deal, the FDIC will share losses on Frist Republic’s loans and estimated it would see a $13 bln hit from the deal. While the deal leads to even greater consolidation of the U.S. banking sector, it was a necessary one in order to address this long-festering problem. We are cautiously optimistic that this resolution finally ends the banking sector turmoil that began nearly two months ago.

The deal clears the deck for global monetary tightening to continue unabated. The Fed, ECB, and Norges Bank are all expected to hike rates this week. Of note, all three also hiked back in March, when the banking sector turmoil was at its height. All three looked beyond the turmoil then to focus on inflation and all three are likely to do the same this week. Indeed, most major central banks underscored that they saw no tradeoff between financial and price stability and so far, markets have proven them right.

April ISM manufacturing PMI reading will be the highlight. Headline expected at 46.8 vs. 46.3 in March. Keep an eye on prices paid, which is expected to fall two ticks to 49.0. Services will be reported Wednesday, with headline expected at 51.8 vs. 51.2 in March. Of note, S&P Global preliminary April PMIs came in stronger than expected. Manufacturing came in 50.4 vs. 49.0 expected and 49.2 in March while services came in at 53.7 vs. 51.5 expected and 52.6 in March. As a result, the composite rose to 53.5 vs. 51.2 expected and 52.3 in March and was the highest since May 2022. Chicago PMI also came in much stronger than expected last week and at 48.6 is the highest since last August.

Other data will be round out the picture of the U.S. economy. March construction spending is expected at 0.1% m/m vs. -0.1% in February. Of note, the Atlanta Fed’s GDPNow model on Friday issued its initial estimate for Q2 growth at 1.7% SAAR, which would represent an improvement from 1.1% in Q1. Next model update comes today after the data. Bloomberg consensus sees Q2 at 0.6% SAAR and Q3 at -0.6% SAAR.

EUROPE/MIDDLE EAST/AFRICA

Fitch cut France’s rating by a notch to AA- with stable outlook. The ratings agency noted that France’s projected budget deficits for this year and next year “are well above” the median for countries with AA ratings. This cut now puts Fitch below S&P’s AA and Moody’s Aa2 ratings and may be a sign of more to come. This is the first time one of the big three agencies has downgraded France since Macron became president in 2017. While Fitch recognized the potential impact of the recent pension reforms, it noted that “Political deadlock and - sometimes violent - social movements pose a risk to Macron’s reform agenda and could create pressures for a more expansionary fiscal policy or a reversal of previous reforms.” On that note, protests are being held across the country today and coincides with the Labor Day holiday across most of Europe.

ASIA

The Bank of Japan is optimistic about wage growth. In its quarterly economic report, it said “It is highly likely that the growth rate of scheduled cash earnings will increase clearly this year. This is likely to underpin private consumption.” The bank added that the results of the wage talks so far suggest sizable gains from both large businesses and smaller companies, noting that total wage increases from small companies with 99 or less employees was 3% vs. 1.9% last year. Finally, “Close attention needs to be paid to whether moves to reflect price rises in wages, as observed in this year’s annual spring labor-management wage negotiations, will continue.” March earnings data will be reported May 9 and are not expected to show much improvement from February. The March spike in unemployment complicates the wage outlook.

Japan reported unchanged final April manufacturing PMI. Japan bucked the global trend in April as manufacturing picked up to 49.5 vs. 49.2 in March. Services and composite PMIs won’t be reported until next Monday. Overall, the economy is still recovering but recent data have shown some signs of softness. No wonder the Bank of Japan delivered a hold last week.

Australia reported final April manufacturing PMI. It was revised down a tick to 48.0. Services and composite PMIs will be reported Wednesday. In between, the Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 3.60%. At the last meeting April 4, the bank delivered its first hold and Governor Lowe noted that “The decision to hold rates steady this month does not imply that interest rate increases are over. Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.” However, he added that “The board is prepared to have a slightly slower return of inflation to target than some other central banks,” adding that “Our judgment at the moment is that if we can get inflation back to 3% by mid-2025, and preserve many of those job gains that had been delivered in the last few years, that’s a better outcome than getting inflation back to 3% one year earlier and having more job losses.” WIRP suggests nearly 40% odds of one last hike but for the most part, most believe the tightening cycle has ended. Furthermore, the start of an easing cycle by year-end is no longer priced in but has instead been pushed out to early 2024. This seems about right. The bank releases it Statement on Monetary Policy Friday that will contain updated macro forecasts.

Korea reported weak April trade data. Exports came in at -14.2% y/y vs. -12.2% expected and -13.6% in March while imports came in at -13.3% y/y vs. -12.0% expected and -6.4% in March. Shipments to Europe rose 9.9% y/y, while those to China fell -26.5% y/y and those to the U.S. fell -4.4% y/y. Lastly, total chip exports came in at -41% y/y vs. -34.5% in March, suggesting ongoing headwinds for this sector.