(Bloomberg) – Bond investors will pay much more than usual attention to the latest US quarterly results from banks as they assess the potential hit to economic growth from a slowdown in lending.
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A number of regional lenders are expected to report earnings next week, giving traders a key insight into the health of the industry and their willingness to lend in the wake of the Silicon Valley bank collapse. Since then, volatility has gripped the $24 trillion Treasury market, with daily swings of 20 basis points in two-year yields – which are most sensitive to interest rate policy – now commonplace in a market beset by shifting views on the course of the Federal Reserve is plagued.
The results will give a better sense of how the wind is blowing on the horizon regarding recession risks and the need for rate cuts. Also on the radar is how smoothly markets absorb the usual post-earnings rush of bond selling by banks.
“We’re in a different world now, there’s a credit crunch happening,” said Dominic Konstam, head of macro strategy at Mizuho Securities. “The bond market isn’t going to give up the idea of a recession all about the consumer and that the Fed needs to reverse anytime soon.”
Companies 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 will larger rivals Bank of America Corp. and MorganStanley. Schwab’s outlook will be the focus when it reports results on Monday after deposits fell while unrealized losses rose.
While data from the heightened phase of banking turmoil showed a contraction in lending and deposits, the latest data through April 5 pointed to a partial recovery. All eyes will be on next Friday’s numbers to see if this trend continues. The Financial Stability Oversight Council is scheduled to meet on the same day to take stock of market conditions.
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Amid the uncertain growth outlook and a potential credit crunch, traders have been actively betting on either side of a possible May Fed hike via options, although pricing is still strongly in favor of another quarter-point rise.
After Fed Chair Jerome Powell last month stressed the importance of credit conditions in shaping policy stance, the release of March meeting minutes this week revealed that central bank officials were sketching a “mild recession” that will begin later this year year would begin. They also pointed to the potential for a deeper slowdown, noting that “historic recessions related to financial market problems tend to be more severe and prolonged than average recessions.”
Meanwhile, evidence of stubborn inflation this week worried many Fed officials, a point underscored by Gov. Christopher Waller, who noted on Friday that “there is still work to be done.” Those comments, along with core retail sales data, sent the two-year yield swinging nearly 20 basis points higher as the market confirmed bets of another rate hike by June.
Even with recent moves, Treasuries are still biased towards the prospect of a credit-tightening recession later this year, and the swap market is pricing in around 60 basis points of rate cuts before year-end as insurance should a credit contraction bite over the summer.
“The big question is when will we see the impact,” and it may take at least “a quarter or two,” said John Madziyire, portfolio manager at Vanguard. “The reality is that the Treasury market is not yet pricing in a hard landing, in part because there is uncertainty about inflation falling below 3%.”
In addition to bank revenues, the April 18 individual tax date deadline will help Treasury strategists gain clarity on the government’s cash flows and gain insights into how long it can continue to take extraordinary measures to stay below the debt ceiling . The possible X-date for the debt ceiling hike is seen around mid-August, but that could be delayed due to tax receipts. Meanwhile, a plan to suspend House Speaker Kevin McCarthy’s debt ceiling for a year is due to be unveiled next week.
Something to see
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Economic data calendar:
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April 17: Empire manufacture; NAHB real estate market index; Total net TIC flows
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April 18: building permits; casing begins; Operations of the New York Fed Services
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April 19: MBA Mortgage Applications; Federal Reserve beige book
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April 20: Weekly Jobless Claims; Philadelphia Fed Business Outlook; existing house sale; leading index
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April 21: Bloomberg April US Business Survey; S&P Global US Manufacturing Services Composite PMIs
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Fed calendar:
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April 18: Fed Governor Michelle Bowman
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April 19: New York Fed President John Williams
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April 20: Fed Governor Christopher Waller; Loretta Mester, President of the Cleveland Fed; Atlanta Fed President Raphael Bostic
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April 21: Fed Governor Lisa Cook
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Auction calendar:
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April 17: Bills for 13 and 26 weeks
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April 18: 52-week bills
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April 19: Bills for 17 weeks; 20-year bonds
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April 20: 4 and 8 week bills; 5 year TIPS
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