Weekly house view | Biden for 2024

President Biden announced his candidature for office in the 2024 election. Meanwhile, with Q1 GDP growth just over half the expected 2% and April consumer confidence slipping, recession fears have become more entrenched in the US – something that should limit the coming Fed hike to 25bps despite higher employment cost inflation. But prospects for lower US inflation rates in the coming months saw long-term rates decline last week. We are long US duration. Markets tension around the debt ceiling persists although Speaker Kevin McCarthy’s changes to his US debt limit bill is a step in the right direction in terms of gaining Democrat acceptance. First Republic finally succumbed with the sale of USD93.5 bn of deposits and most of its assets to JP Morgan Chase following intense activity by US government officials over the weekend. It becomes the second-largest failure in US banking history. We expect increased regulation in the banking industry. The action of UK regulators in blocking the proposed takeover of Activision by Microsoft is another example of increasing regulatory intervention. The valuation of a leading challenger bank was cut by half last week, indicating a repricing in private markets is under way. 

German government officials and labour leaders have agreed a 5.5% pay rise and a one-off payment for some 5.5 million public sector workers – a deal that will weigh on future inflation. We continue to believe the euro area will avoid recession in 2023 – even if H2 will be much more challenging – and a 50bps hike following the next ECB meeting is still possible, even if less likely. (We note ECB board member Isabel Schnabel’s very hawkish speech last week.) France’s credit rating was downgraded to AA- by Fitch as the rating agency warned that Macron's reform agenda may stall following his pension reforms. Swiss National Bank announced CHF26.9 bn profit for Q1 2023 which will remove some political pressure from the central bank's officials.

President Lula believes Brazil’s interest rates are too high, hinting that the government may alter inflation targets. In Japan, the BoJ announced no changes following its long-awaited monetary policy meeting. We are still negative Japanese bonds and positive the yen. The Hong Kong Monetary Authority was forced to intervene to defend the HK dollar: it has been flirting with the low end of the peg for quite some time with US rates so much higher than HK equivalents and investors exploiting the large yield differential. This is another source of stress in the international financial system arising from the very rapid rise in US interest rates.