• Regional bank stocks remain under pressure; the Fed’s weekly H.4.1 report continues to suggest banking sector concerns are overblown; the weekly H.8 report today will be another piece of the puzzle; PPI data came in a tad softer than expected; weekly claims suggest some softening in the labor market
  
• BOE hiked rates 25 bp to 4.5%, as expected; Governor Bailey laid the groundwork for a pause; the monthly U.K. data dump began; ECB hawks are trying to regain control of the narrative; Turkey goes to the polls this Sunday
  
• Thailand goes to the polls this Sunday

The dollar is trading flat ahead of the weekend. DXY has held on to most of its recent gains as it trades above 102, the highest since May 2 and on track to test that day’s high near 102.404. A break above that sets up a test of the early April high near 103.058. The euro is trading lower near $1.09 and is on track to test the April 10 low near $1.0830. Sterling is trading slightly higher near $1.2535 after the BOE decision (see below) and clean break below $1.2530 sets up a test of the May 2 low near $1.2435. USD/JPY inched higher to test the 135 level again before falling back to trade near 134.65 currently. We look for continued gains and a break above 136.15 is needed to set up a test of the May 2 high near 137.75. Banking sector concerns and dovish market pricing for Fed policy have been the two major negative headwinds on the dollar. While regional bank stocks remain under pressure, the data suggest low risks of systemic problems (see below) and so we believe the dollar has likely put in a near-term bottom. However, we need significant repricing of Fed policy in order to see another big leg higher for the greenback.

AMERICAS

Regional bank stocks remain under pressure. The well-known ETF for this beleaguered sector has fallen four straight days and eight of the past nine. However, pre-market trading suggests a higher open today for these stocks. The outlook is mixed as one regional bank reported rising deposits whilst another reported deposits fell nearly 10% last week. Of note, the FDIC just proposed a special assessment on banks with high levels of uninsured deposits in order to replenish its deposit insurance fund. This assessment would impact the largest 113 U.S. banks and estimates suggest that banks with more than $50 bln in assets would pay over 95% of the new fee.

The Fed’s weekly H.4.1 report continues to suggest banking sector concerns are overblown. Data reported yesterday show commercial bank use of emergency borrowing from the Fed rising modestly in the week through May 10. Discount Window borrowing rose to $9 bln vs. $5 bln last week and $74 bln the week before that while Bank Term Funding Program borrowing rose to $83 bln vs. $76 bln last week and $81 bln the week before that. Recall that most of last week’s drop was due to the seizure of First Republic as the Fed reclassified outstanding lending to the troubled bank as “other credit extensions.” We’ll get a fuller picture when the weekly deposit data is reported today but the lower emergency Fed borrowing these past two weeks suggests there really aren’t any serious banking sector stresses besides the drop in share prices.

The Fed’s weekly H.8 report today will be another piece of the puzzle. The deposit data are lagged and this report will be for the week ending May 3. As a result, the data should pick up some of deposit flight that may have occurred during this latest round of banking sector concerns. But if the lack of any emergency borrowing these past two weeks means anything, there shouldn’t be much deposit flight to be seen so far this month.

Fed easing expectations continue to run high. At the start of last week, the swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months. Now, it's seen in the 3.5-3.75% range in 12 months with three cuts still priced in by year-end. Fed officials are likely to continue pushing back against this dovish take. Yesterday, Kashkari said “Inflation has come down but it’s still well above our 2% target. We have seen some softening in wage growth nationally, but it’s very mixed.” He added “We’ve been surprised at how high it got, we’ve been surprised at how persistent it’s been. And it’s coming down – there is some evidence that it’s coming down. But so far it’s been pretty darn persistent. That means we’re going to keep at it for an extended period of time.” Daly, Bullard, and Jefferson speak today. Cook speaks Saturday. All are expected to push back against the notion of any pre-ordained pause or pivot, but it will really be up to the data to do the talking. We believe the CPI data show a continued need to keep policy tight but then the PPI data undermined this message a bit.

PPI data came in a tad softer than expected. Headline came in a tick lower than expected at 0.2% m/m vs. a revised -0.4% (was -0.5%) in March, while the y/y rate came in at 2.3% vs. 2.5% expected and 2.7% in March. Core came in as expected at 0.2% m/m vs. -0.1% in March, while the y/y rate came in a tick lower than expected at 3.2% vs. 3.4% in March. The big question is whether firms can resist passing on lower costs to consumers in an effort to maintain pricing power and boost profit margins. We won't know for months yet. With PPI out of the way, the next key inflation report is PCE on May 26. The Cleveland Fed’s Nowcast model estimates headline PCE at 0.48% m/m and 4.46% y/y and core PCE at 0.38% m/m and 4.66% y/y. Of note, the model’s estimates for both headline and core CPI came in higher than both consensus and the actual April readings.

Weekly claims suggest some softening in the labor market. Initial claims came in at 264k vs. 245k expected and 242k last week. This is the highest since late October 2021 and is another sign that the labor market is softening. Continuing claims came in at 1.813 ml vs. 1.82 mln expected and 1.801 mln (was 1.805 mln) last week. Of note, next week's initial claims data will be for the BLS survey week containing the 12th of the month.

The preliminary May University of Michigan consumer sentiment will hold some interest. Headline is expected to fall half a point to 63.0, driven by a large drop in current conditions to 67.5 that outweighs a small rise in expectations to 60.8. Of note, 1-year inflation expectations are expected to fall two ticks to 4.4% while 5- to 10-year expectations are expected to fall a tick to 2.9%. April import/export prices will also be reported.

EUROPE/MIDDLE EAST/AFRICA

Bank of England hiked rates 25 bp to 4.5%, as expected. The vote was 7-2 as Dhingra and Tenreyro favored keeping rates steady at 4.25%. Forward guidance was unchanged from March as the bank said “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” The bank noted that inflation will fall more slowly than what was forecast in February and added that the economy is expected to avoid recession. This was all pretty much as expected but we think the upward revisions to inflation and growth forecasts imply greater risks of tightening ahead. Indeed, a 25 bp hike is nearly 80% priced in for June 22 and another 25 bp hike is about 75% priced in for August 3. Inflation remains stubbornly high and so the market now sees the terminal rate peaking near 5.0% vs. 4.75% before the meeting.

In an interview after the decision, Governor Bailey laid the groundwork for a pause. He noted that “We are approaching a point when we should be able to in a sense rest in terms of the level of rates. But we haven’t seen the evidence yet to give a stronger sense of the read of that, so that’s why I’m very clear that we have to be evidence driven.” When asked if the bank is nearing a pause, he said “Well, I’m going to say I hope we are because this is the 12th consecutive increase in rates. But again, I’ll be very clear that we will be guided by the evidence as it comes to us.” Chief Economist Pill speaks today.

The monthly U.K. data dump began. March GDP came in at -0.3% m/m vs. flat expected and actual in February, IP came in at 0.7% m/m vs. 0.1% expected and a revised -0.1% (was -0.2%) in February, services came in at -0.5% m/m vs. flat expected and -0.1% in February, and construction came in at 0.2% m/m vs. -0.3% expected and 2.6% (was 2.4%) in February. Despite the weakness in March, Q1 GDP was able to eke out a small gain and rose the expected 0.1% q/q and 0.2% y/y vs. 0.1% q/q and 0.6% y/y in Q4. Private consumption was flat q/q, government consumption fell -2.5% q/q, and GFCF rose 1.3% q/q. Despite the fact that a contraction was avoided again, the U.K. growth outlook remains quite weak. Indeed, the -0.3% m/m drop in March GDP suggests the economy is going into Q2 with a loss of momentum. And much of the BOE tightening hasn’t had full impact yet.

ECB hawks are trying to regain control of the narrative. Nagel said “There’s consensus in the Governing Council that interest-rate hikes should continue. The data don’t allow us to consider changing our view that further rate hikes will be necessary, and that also applies for beyond the summer break.” This comes after similar comments yesterday from him as well as reports this week that some ECB officials believe that two more 25 bp hikes at the June and July meetings won’t be enough to tame inflation and that hikes may extend to the September meeting. WIRP suggests a 25 bp hike is priced in for June 15 and about 60% for July 27. In fact, the odds of that last 25 bp hike top out at around 90% for September 14 and so the market so far does not believe the hawks. The split between the hawk and the doves clearly remains in place but it feels like the doves have taken control of the narrative, at least for now.

Turkey goes to the polls this Sunday. The landscape shifted unexpectedly this week after opposition candidate Muharrem Ince withdrew from the election. Ince did not endorse anyone but his votes are seen as likely going to the main opposition candidate Kemal Kilicdaroglu, who may win a simple majority and avoid a runoff. Incumbent President Erdogan is fighting for his political life and faces one of the stiffest challenges to his rule after leading the nation for nearly two decades. A coalition of six opposition parties are backing a joint presidential candidate in Kemal Kilicdaroglu, who has pledged to unwind many of Erdogan’s policies. Recent polls suggest a slight lead for Kilicdaroglu but it’s going to be a close call. To say this election is important would be an understatement. Erdogan has driven away a generation of investors with his unorthodox economic policies. He has also been a thorn in NATO’s side by so far vetoing Sweden’s entry. An opposition victory would help start the process whereby Turkey becomes investable and a reliable NATO ally once again but the outcome is by no means assured. Stay tuned.

ASIA

Thailand goes to the polls this Sunday. There are 6,600 candidates from over 70 parties running for the 500-seat lower house and so it could get messy. The main contenders to lead the nation are incumbent Prime Minister Prayuth Chan-Ocha and opposition leaders Paetongtarn Shinawatra and Pita Limjaroenrat. Polls show opposition parties winning a large majority in the lower house, but the 250 appointees to the Senate will also help choose the next Prime Minister, who will need a total of 376 (a simple majority of total seats in both houses) in support. Because they were appointed by the military under new constitutional rules installed by the miliary, the Senate could tip the election in favor of former army chief Prayuth. Prayuth leads the conservative United Thai Nation Party after breaking ranks with the military-backed Palang Pracharath party. Paetongtarn Shinawatra leads the Pheu Thai party, which was formed by her father and former Prime Minister Thaksin Shinawatra. Despite being hugely popular and winning several elections , both the elder Thaksin and his sister Yingluck were ousted by military coups eight years apart. Of note, the current army chief said there was “zero chance” of another military coup after this election. Pita Limjaroenrat leads the Move Forward party, which is seeing support from younger generation of voters that seek to lessen the influence of the royal family.