• Reports suggest U.S. bank regulators are considering a downgrade of their assessments of First Republic; House Republicans passed their debt ceiling bill by a narrow 217-215 vote; we get our first look at Q1 GDP; regional Fed surveys for April will continue to roll out; BOC released the summary of its March deliberations; political risk has picked up in Colombia
  
• EU fiscal policy is back in the spotlight; this dredges up the age-old north/south creditor/debtor divides; ECB tightening expectations have steadied ahead of next week’s decision; Turkey is expected to keep rates steady at 8.5%
  
• Two-day BOJ meeting started today; Singapore announced tax hikes on property purchases; oil prices have filled the gap created by the surprise OPEC+ supply cut at the start of this month

The dollar is treading water as markets await fresh drivers. Despite ongoing concerns about First Republic, global equity markets are higher along with global bond yields. Within this backdrop, DXY is trading flat near 101.48. The euro is trading flat near $1.1045 and sterling is trading modestly lower near $1.2450. USD/JPY remains heavy near 133.75 despite the improved risk sentiment. Of note, the flat DXY does not really reflect today’s gains in the dollar bloc and Scandies. With commodity prices under pressure as global growth slows (see below), it’s hard to get positive on the growth-sensitive currencies, which also included EM FX. Recent data have been dollar-supportive but until rate cuts this year are finally priced out, the dollar is likely to remain vulnerable.

AMERICAS

Reports suggest U.S. bank regulators are considering a downgrade of their assessments of First Republic. If so, such a move could limit the troubled bank’s access to the Fed’s lending facilities. Authorities are reportedly giving First Republic time to shore up its finances but with no solution in sight, regulators are reportedly thinking about downgrading the bank’s condition, including its so-called Camels rating. This would most likely limit Frist Republic’s use of the discount window and the emergency Bank Term Funding Program (BTFP) created last month. The regulators reportedly favor a private rescue that doesn’t involve the FDIC. Who wouldn’t if you’re a regulator? But ironically, downgrading First Republic could instead force that outcome to come even more quickly. Stay tuned.

House Republicans passed their debt ceiling bill by a narrow 217-215 vote. Speaker McCarthy was able to get it passed despite four defections from his own party. Those defections were seen despite some last minute tweaks to shore up support. It is dead on arrival in the Senate and President Biden has vowed to veto it in favor of a clean debt ceiling bill coupled with separate budget talks. Will this now lead to serious talks between the two sides? We certainly hope so. Yet the proposed spending cuts that are contained in the bill seem to be such a non-starter that it’s hard to see where the common ground lies. Reports suggest tax receipts this month came in on the low end of estimates and so the drop dead date is likely to be sooner than the August timeframe that many had assumed.

Fed tightening expectations have eased a bit ahead of next week’s decision. WIRP suggests nearly 80% odds of 25 bp hike at the May 2-3 meeting, down from 90% at the start of this week and back to the 80% at the start of last week. We continue to believe that a 25 bp hike next week is a done deal. Between the May 2-3 and June 13-14 meetings, the Fed will have digested two more job reports, two CPI/PPI reports, and one retail sales report. At this point, a pause in June might just be the most likely outcome but it really will depend on how all that data come in. Looking ahead, nearly two cuts are now priced in by year-end. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. We concur.

We get our first look at Q1 GDP. Consensus currently is at 1.9% SAAR vs. 2.6% in Q4. Personal consumption is expected at 4.0% vs. 1.0% in Q4. The mix of Q1 growth will be important because in Q4, the bulk of growth came from inventories while personal consumption and net exports slowed. Of note, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 1.1% SAAR, down from 2.5% before yesterday’s weak data. This is the final model update for Q1 and now the model will start tracking Q2, with the first estimate coming tomorrow.

Regional Fed surveys for April will continue to roll out. Kansas City Fed manufacturing index is expected at -2 vs. 0 in March. So far, the regional Fed surveys for April have come in soft. Richmond Fed manufacturing came in at -10 vs. -8 expected and -5 in March, Dallas Fed manufacturing index came in -23.4 vs. -12.0 expected and -15.7 in March, Philly Fed came in at -31.3 vs. -19.3 expected and -23.2 in March, and Empire survey came in at 10.8 vs. -18.0 expected and -24.6 in March.

Housing data is expected to show ongoing weakness. Pending home sales are expected at 0.8% m/m vs. 0.8% in February. The recent bounce in new and existing home sales has gotten some folks excite about a possible bottom. With rates still rising and credit still tightening ahead of a likely recession, it’s way too early to get optimistic about this sector. A look at the housing data going back to the financial crisis shows that are many, many instances of a false bottom. We think this is one of them.

Weekly jobless claims will be reported. Initial claims are expected at 248k vs. 245k last week. If so, the 4-week moving average would be little changed from 240k last week. Continuing claims are for the BLS survey week containing the 12th of the month and are expected at 1.870 mln vs. 1.865 mln last week. If so, they would be the highest since November 2021. The claims data clearly show the labor market is weakening. How much weakening remains to be seen. Consensus for April NFP next Friday stands at 175k vs. 236k in March.

Bank of Canada released the summary of its March deliberations. At the April 12 meeting, the bank kept rates steady at 4.5% for the second straight meeting but the summary shows that officials considered a hike. The arguments for hiking were stronger-than-expected growth, sticky core inflation, and the risks that getting inflation down from 3% to 2% could “prove more difficult.” On the other hand, the arguments for keeping rates steady were a broadly unchanged outlook for growth and inflation along with signs that demand, prices and jobs market would likely cool in the coming quarters. With such balanced risks, another pause allowed policymakers an opportunity to wait and see whether further hikes are needed. Lastly, bank officials wanted to send a hawkish signal and that it was “important” to show that the bank is ready to hike again if needed. Lastly, the summary also reiterated Governor Macklem’s comments at the press conference that rate cuts “did not seem to be the most likely scenario.” It will really depend on the data going forward. Next BOC policy meeting is June 7 and another hold is expected. Looking ahead, the market is pricing in two cuts by year-end, which we still believe is very unlikely.

Political risk has picked up in Colombia. President Petro called for a cabinet shuffle and fired Finance Minister Ocampo. Ocampo was well respected by the markets and so his replacement by key Petro ally Ricardo Bonilla will raise concerns about economic policy going forward. Part of Ocampo’s appeal was his orthodox approach that led him to push back against several questionable proposals from Petro. If the peso continues to weaken as a result of the great uncertainty, the central bank may be forced to hiked rates to help lend some support. It meets tomorrow and is expected to keep rates steady at 13.0%. However, nearly half the analysts polled by Bloomberg look for a 25 bp hike to 13.25%. At the last policy meeting March 30, the central bank hiked rates 25 bp to 13.0% and Governor Villar said inflation data would determine if the tightening cycle has ended. Since then, March CPI data showed both headline and core inflation accelerating to new cycle highs and so we expect a hawkish surprise tomorrow with a 25 bp hike to 13.25%.

EUROPE/MIDDLE EAST/AFRICA

European Union fiscal policy is back in the spotlight. Finance Ministers are meeting in Sweden this week and are holding working sessions on growth, sustainable public finances, and support for Ukrainian reconstruction. Of note, the European Commission yesterday outlined its proposals to reform the so-called Stability and Growth Pact, which sets limits on member budget deficits and debt. These proposals reportedly fell short of German Finance Minister Lindner’s call for stricter debt-reduction targets. Immediately after the new proposals were announced, Lindner called a press conference to say that the proposals still need significant changes and warned that approval isn’t a given. The EU Finance Ministers will be joined by their respective central bank governors tomorrow and Saturday.

Of course, this dredges up the age-old north/south creditor/debtor divides. In that regard, peripheral spreads have been well-behaved despite the aggressive ECB tightening seen over the past year. QT is expected to accelerate in H2 and so with the eurozone recovery expected to disappoint, the periphery should come back in the spotlight later this year.

ECB tightening expectations have steadied ahead of next week’s decision. WIRP suggests over 20% odds of a 50 bp hike next week. After that, another 25 bp hike is priced in for June 15 followed by another 25 bp hike September 14. After that, no more tightening is expected and so the peak policy rate is seen at 3.75%, down from 3.75-4.0%% at the start of this week and back to 3.75% at the start of last week.

Turkey central bank is expected to keep rates steady at 8.5%. However, a couple of analysts polled by Bloomberg look for a 50 bp cut to 8.0%. At the last policy meeting March 23, the bank kept rates steady after cutting 50 bp at the February 23 meeting. It noted that “The Committee assessed that the current monetary policy stance is adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.” However, we see some risks of a dovish surprise as this is the last meeting before the May 14 elections. Indeed, President Erdogan said Friday that “As long as this friend of yours remains in power, interest rates won’t rise, interest rates will continue to fall. And you will also see inflation coming down.” Of note, Erdogan canceled more campaign events after falling ill during a live TV interview Tuesday, injecting more uncertainty into what looks to be a very tight race.

ASIA

Two-day Bank of Japan meeting started today. This is the first meeting under new Governor Ueda and no changes in policy are expected. However, new macro forecasts will be released and should send some strong signals in terms of forward guidance. Core inflation is running well above target but the February forecasts saw a drop back below target in both FY23 and FY24. If this benign outlook is maintained in the new forecasts, it would suggest the BOJ remains in no hurry to tighten. Of note, FY25 will be added for the first time and will also be an important piece of the puzzle. WIRP suggests 15% odds of liftoff tomorrow, rising to around 35% for July 28. A hike is almost priced this year as odds have risen to nearly 95% for December 19. However, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited. Of note, recent reports suggest BOJ policymakers are concerned about tweaking YCC so soon after the banking sector turmoil.

Singapore announced tax hikes on property purchases. Stamp duties for domestic second-home buyers were boosted to 20% vs. 17% previously while those on foreign home buyers were doubled to 60% vs. 30% previously. No surprise that shares of Singapore property developers fell. The government noted that “Demand from locals purchasing homes for owner-occupation has been especially strong, and there has also been renewed interest from local and foreign investors in our residential property market. If left unchecked, prices could run ahead of economic fundamentals, with the risk of a sustained increase in prices relative to incomes.” This is just the latest of a series of moves to cool the housing market and follows tax hikes in December 2021 and tighter mortgage limits in September 2022. This stands in stark contrast to most other economies that are struggling with weak housing markets due to aggressive monetary tightening.

COMMODITIES

Oil prices have filled the gap created by the surprise OPEC+ supply cut at the start of this month. For Brent, a break below $76.75 would set up a test of the March low near $70.10. Likewise for WTI, a break below $71.55 would set up a test of the March low near $64.10. And it’s not just oil, as many of the major industrial commodities are now back to pre-reopening levels. One could also say that it’s not just China, as global growth is a growing concern for us.