Market Views

GLOBAL CREDIT BULLETS | Monday, 8 May 2023

US Regional Banks – More volatility
US regional banks remain under pressure. Post First Republic resolution, other (smaller) names in the region came under scrutiny. Volatility on the segment remains high, despite some of the names shows no signs of deposit outflows and a relatively healthy balance sheet. Unusual price action makes the local situation unstable, as the reaction of deposits to stock prices remains unclear.
Fed emergency lending fell sharply after First Republic’s shut down, but borrowing through the Bank Term Funding Program (BTFP) remains elevated.

Fed – Time for a pause
The Fed likely delivered their last hike of 25bp to 5-5.25% and moved to fully data dependent stance while leaving a hawkish backdoor. Without the banking stress, Friday’s labour market data would argue for more hikes: Payrolls rose by 253k vs 185k survey and average hourly earnings rose 0.5% on the month.
We focus on inflation this week, for which consensus expects 5% YoY on headline, and 5.4% on core. Overall, we think the Fed job on hikes is done, but pricing cuts (as the market is doing) is premature.

ECB Review – Almost there
The ECB hiked rates by 25bp to 3.25% as expected and offered a hawkish compromise by announcing the full runoff of APP holdings from July onwards. The statement noted a “forceful” transmission of existing monetary policy, but maintained the option to raise rates further to “sufficiently restrictive” levels.
Given the tightening Bank Lending Survey, we believe the ECB is not done, but almost. We see high chances of another 1-2 hikes in summer, but we think the central bank will stop before reaching 4%.

Algebris Investments’ Global Credit Team

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