Bond investors will pay a lot more attention than usual to the latest US quarterly bank results as they assess the potential hit to economic growth from any slide in lending.
(Bloomberg) — Bond investors will pay a lot more attention than usual to the latest US quarterly bank results as they assess the potential hit to economic growth from any slide in lending.
A swath of regional lenders are set to report earnings next week, giving traders a key insight into the health of the industry and its willingness to make loans following the collapse of Silicon Valley Bank. Volatility has gripped the $24 trillion Treasury market ever since, with daily gyrations of 20 basis points in the two-year yields — the most sensitive to interest-rate policy — now commonplace in a market plagued by changing views on the Federal Reserve’s path.
The results will offer a keener sense of how the wind is blowing in terms of recession risks and the need for rate cuts over the horizon. Also on the radar is how smoothly markets absorb the usual post-earnings rush of bond sales from banks.
“We are in a different sort of world now, a lending crunch is coming for loans,” said Dominic Konstam, head of macro strategy at Mizuho Securities. “The bond market will not readily give up on the idea of a recession around the consumer and that the Fed has to reverse.”
Firms including Charles Schwab Corp., M&T Bank Corp., KeyCorp, Truist Financial Corp, and Republic First Bancorp Inc. are due to report results next week as well as larger peers Bank of America Corp. and Morgan Stanley. Schwab’s outlook will be in focus when it releases results Monday after deposits sank while unrealized losses swelled.
While data from the heightened period of the banking turmoil showed a slide in lending and deposits, the most recent figures to April 5 indicated a partial rebound. All eyes will be on next Friday’s figures to see if that trend continues. The Financial Stability Oversight Council is scheduled to meet the same day to get updates on market conditions.
Amid the uncertain outlook for growth and a potential credit crunch, traders have been actively staking out bets on both sides of a potential Fed hike in May via options even though pricing still strongly favors another quarter-point rise.
After Fed Chair Jerome Powell last month stressed the importance of credit conditions in helping to shape the policy trajectory, this week’s release of the meeting minutes from March revealed central bank staffers outlining a “mild recession” starting later this year. They also flagged potential for a deeper slowdown by noting that “historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”
Meanwhile, evidence this week of sticky inflation worried many Fed officials, a point underlined by Governor Christopher Waller, who on Friday noted “there is still work to do.” Those comments along with core retail sales data saw the two-year yield swing higher by nearly 20 basis points as the market solidified bets for another rate hike by June.
Even with the latest moves, Treasuries still lean toward the prospect of a credit-tightening led recession later this year, and the swaps market is pricing around 60 basis points in rate cuts before the end of the year as insurance should a credit contraction start to bite over the summer.
“The big question is when do we see the impact,” and it may require time of at least “a quarter or two,” said John Madziyire, portfolio manager at Vanguard. “The reality is that the Treasury market is not pricing in a hard landing yet, in part because there is uncertainty about whether inflation falls below 3%.”
In addition to bank earnings, the individual tax-date deadline on April 18 will help Treasury strategists gain clarity on government cash flows and insights into how long it can continue to tap extraordinary measures to stay under the debt limit. The potential X-date for raising the debt ceiling is seen around mid-August, but that could shift based on tax receipts. Meanwhile, a plan to suspend the debt limit for a year from House Speaker Kevin McCarthy is set to be unveiled next week.
What to Watch
- Economic data calendar:
- April 17: Empire manufacturing; NAHB housing market index; Total net TIC flows
- April 18: Building permits; housing starts; New York Fed services business activity
- April 19: MBA mortgage applications; Federal Reserve beige book
- April 20: Weekly jobless claims; Philadelphia Fed business outlook; existing home sales; leading index
- April 21: Bloomberg April US economic survey; S&P Global US manufacturing, services, composite PMIs
- Fed calendar:
- April 18: Fed Governor Michelle Bowman
- April 19: New York Fed President John Williams
- April 20: Fed Governor Christopher Waller; Cleveland Fed President Loretta Mester; Atlanta Fed President Raphael Bostic
- April 21: Fed Governor Lisa Cook
- Auction calendar:
- April 17: 13- and 26-week bills
- April 18: 52-week bills
- April 19: 17-week bills; 20-year bonds
- April 20: 4- and 8-week bills; 5-year TIPS
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