Macro puzzle

Interpreting the current macro environment and attempting to forecast it is akin to working on a complicated puzzle where no piece fits perfectly. Last week’s data gave evidence that growth was doing relatively ok in the US, with the US manufacturing PMI and its ISM counterpart both edging up, although the ISM remained below the 50 expansion/contraction threshold. New US home sales rebounded by 60k in March, a lagged effect of lower mortgage rates. Finally, consumers continued to reduce their spending on goods while increasing services consumption to a lesser extent, and as a result, managed to reach a higher saving rate of 5.1% in March.

Meanwhile, the US labor market is cooling, but not deteriorating significantly, as hiring sectors such as healthcare, tourism and leisure are compensating for decelerating employment and accelerating layoffs in manufacturing, transportation, software, tech and finance.

Overall, this week’s JOLTs job opening data and labor market report are likely to re-emphasize this slow grind lower of job offering and employment growth. Economists' consensus forecast for JOLTs next week is in agreement with Indeed job opening data which show a small slide of job openings MoM, down -1.5% in March from February.

The Fed will likely consider the macro puzzle and find enough pieces to support a 25bp-rate-hike on Wednesday. This would bring the policy rate to 5.00-5.25%, slightly above core inflation and wage growth. As for the forward communication, Fed Chair Powell will probably emphasize a base case of stable Fed Fund rates for 2023, with some data dependency in case the growth/inflation mix changes. Bond future markets are pricing this scenario of “+25bps and then steady” until June 2023. After June, and especially post September 2023, the market-priced odds of rate cuts increase. We see a high probability of markets having to price out post-September rate cuts, which could translate into some US dollar counter-trend resilience (see technical chart below) in the short-term, before the US dollar resumes its multi-month downward trend.

Impact of more US bank failures

What does the banking situation in the US imply for the macro going forward?

First Republic Bank became the fourth US bank to close this year. It was put in receivership by the Federal Deposit Insurance Corporation (FDIC), and acquired by JP Morgan.

Because of First Republic’s receivership status, JP Morgan was able to “share” the risk represented by potential deposit attrition and also by possible loan defaults (most being real estate loans): the FDIC has committed 80% loss coverage for commercial real estate and single family residential mortgages over seven years. It has also granted JP Morgan $ 50bn five-year fixed-rate term financing.

How to interpret this deal? This appears attractive from a risk-reward perspective for JP Morgan since a large portion of the loan default risk is shouldered by the FDIC and since it has secured multi-year funding, which should bolster the net income accretion from the deal.

Ultimately loan losses would be syndicated among the banks that contribute a premium to the FDIC. We note that the FDIC institutions have also borrowed from the Fed, which appears as the ultimate warrant.

Interestingly, JP Morgan’s stock rose, but the US Regional Bank ETF lost -2.8% yesterday. This brings us to the impact of these events on the US economy. The main implications, in our view, are:

• Regional banking is not yet out of the woods: the Fed Discount Window borrowing has come down (the time limit for borrowing is capped to a few weeks) but the Bank Term Funding Program (one-year term) keeps growing and now stands at ~81.3bn
• Regional banks will probably have to reduce their asset book if deposit outflow pressure persists. Risk appetite for lending to sectors such as commercial real estate will also probably decrease.
• The Fed and the government have created an implicit “put”, guaranteeing all banking deposits.

Our take on the banking turmoil is that, by forcing a tapering of bank lending, it will probably push a resilient economy into a more pronounced growth slow down. We will have to validate this with the US Senior Loan Officer Survey, which will be published at the beginning of this month. We also note that the Fed and the US government will likely act to prevent any more severe banking contagion, which is probably USD negative.

Europe and Japan: EUR and JPY vs USD

Outside of the US, we note that more mature market central banks are playing catch-up with the Fed: the Reserve Bank of Australia has confounded consensus and hiked +25bps today. The European Central Bank could surprise consensus this week with a +50bps hike, and at the very least a hawkish tone. European consumer sentiment keeps climbing up (the GfK index, which tracks German consumers’ sentiment, rebounded to its February 2022 level, before the Ukraine’s war). Lower energy prices, especially natural gas prices, continue to act as a tailwind for European growth. This is likely positive EUR, and negative DXY for the next few months.

In Japan, Bank of Japan (BoJ) Governor Ueda announced a one to one-and-a-half year plan to review the existing monetary policy framework and instruments. The BoJ removed its forward guidance to keep policy rates at current or lower levels (hawkish) but delivered a very dovish press conference, stating that upside risks to inflation undershot downside risks. We are reading this mix of apparently contradictory statements and actions as a very progressive way to introduce a yield-curve control exit. Indeed, the Tokyo core CPI came in at 3.5%, its highest level since 1982. Governor Ueda is probably careful to avoid excessive volatility in the Japanese Government Bond market while preparing the exit, though. The USD/JPY appears asymmetrically biased to the downside: it is only 9.7% away from its 20-year high and an appreciation of 5% (meaning the USD/JPY would go to 130 would compensate for the negative carry of holding USD/JPY, which does not seem excessive).

Crypto: Tactical indicator update

What strikes us the most at the moment is the low level of implied volatility in crypto markets. Our Crypto Risk Premia (CRP), which are based on BTC and ETH option volatility, are hovering around the lows since 2020 (see below). We can see a similar trend of lower volatility in equity markets. We reiterate our assessment that this translates to a certain level of complacency, at least for equity investors.

Our thesis remains that a large spike in volatility / CRP will likely precede crypto and risk assets bottoming. In the meantime, crypto price action has been resilient, and looks like it will continue to trade range-bound. To identify the bottom and top of these ranges, we can use a few “tactical indicators”. All these indicators have been risk-on YTD, with the exception of the BTC call-put spread, which is more reactive, and has turned risk-off last week:

BTC call-put spread: risk-off since last week

Smart money stablecoin indicator: risk-on since May 2022

BTC price momentum indicator: risk-on since January 2023

Crypto: On-chain activity

Finally, a few observations on on-chain activity:

The share of transaction and unique address activity associated with NFT marketplaces (mostly Opensea + Blur) has come down significantly in April. The sector gaining traction, in contrast, is Scaling, mainly driven by zkSync:

As for the L1/L2 landscape, we note that Arbitrum has maintained its leadership in terms of share of transactions and unique addresses vs other chains:

This week

The negotiations between Republicans and Democrats in the Congress on potential spending cuts before raising the debt ceiling are heating up, as the US is likely to hit the ceiling as early as June next month.

Tuesday 2 May

• US March JOLTs Job Openings (9.775m consensus, down 1.5% from February, 9.931m).

Wednesday 3 May

• FOMC meeting, a rate hike of 25bps to 5.00-5.25% is already priced. We expect Jerome Powell to signal that the Fed will likely hold rates steady in 2023, while keeping a data-dependent approach.

• US April ISM Non-Manufacturing (consensus 51.8).

• Caixin China Manufacturing PMI (consensus 50.3).

Thursday 4 May

• ECB meeting: The consensus is for a +25bps rate hike to 3.75%, the surprise could come from a higher-magnitude hike (+50bps), given the level of Eurozone inflation at 7.0% YoY.

Friday 5 May

• US labor market reports: non-farm payroll (consensus 179k), unemployment rate (consensus 3.6%, with a labor participation rate of 62.5%).