Markets looking for clues from the Fed

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Equity markets had a jitter on Monday as major indices swung from losses to gains and repeated the cycle. It comes at a time when JPMorgan Chase took over First Republic Bank assets.

This ended the crisis episode and ushered in a new focus as contagion effects seemed muted. It kept the financial stability that everyone was hoping for. Helping the sentiments is bank data shows the financial system is well on recovery as deposits stood at $17.20 trillion for the week ended on 19 April, which is a rise from the previous week at $17.18 trillion.

Another key indicator is that the borrowing from Fed’s key discount window has fallen weekly and is moving south below $153 billion, March’s high level.

ISM Manufacturing data is healthy

While the US ISM is still in the contraction region, it is an uptick from 46.3 in March to 47.1 in April. This is much higher than most economists’ estimate of 46.7. It reflects a weaker contraction and a path towards better growth, perhaps in the months ahead.

Bond Yield and the Economy

As interest rates on short-term bonds start to ease down, the longer-term bond rates have only fallen slightly. So investors are questioning what such a bond market is hinting at.

If we look at 6 weeks ago, bond yields are generally falling. The backdrop was a regional bank turmoil that pushed investors to seek safe haven. It implied the expectation that bank failures would hurt the economy, as it could restrict lending and spending, diluting economic demand and cool inflation.

And if such theory and expectation of weaker inflation and growth due to the banking turmoil, perhaps the Fed is at its final move on a rate hike during this upcoming FOMC. That could explain why longer duration bond yield had not fallen as much as the shorter term bond like the 2-year Treasury bond.

Investors on longer-term treasury tend to seek a return above the average expectation of inflation over the period of the asset they are holding. So if they expect inflation to remain fairly stable over the longer term and not drop, then it makes sense that the 10-year Treasury yield will not fall as much in magnitude as the shorter-term bond.

Falling bond yield helps to give some cooling space for Nasdaq, which had been hit by the wrath of higher yield since last year.

What’s on the menu today?

At 10 pm, we will have the JOLTs Job Openings for March, which we expect to drop from 9.931M to 9.775M. This will help to re-confirm the trend of a softer market and gives the Fed more reason to pause its rate hike campaign.

It is 2 May 2023, Tuesday, 8.55 am in Singapore and 8.55 pm. We had a fairly muted trading day which is good for scalping as investors await the FOMC outcome. We hope you had a recharging long weekend and look forward to sharing more market insights with you!