Weekly house view | Moment of truth

Last week saw more signs of economic slowdown in the US, with a sizable drop in the ISM manufacturing and services indexes for March. The Challenger Report indicated that new hiring slowed to its lowest level since 2015 last month and that job cuts continued to rise. While investors have been increasingly anticipating the end of the Fed’s tightening cycle, the March consumer price index report, to be released tomorrow, will be a moment of truth. It will be key in deciding the Fed to hike rates once more or to pause. We believe a pause is more likely. US banks have been moving away from accessing the Fed's long-standing discount window for short-term funding, turning instead to the more recently established Bank Term Funding Program. But across the two facilities, banks’ emergency borrowing has started to tick down. Meanwhile, US bank deposits in the week ended March 29 fell by USD65 bn, the 10th consecutive week of decline. But the pace of outflows has slowed overall, and—further good news—deposits at small commercial banks seem to have stabilised. US banks kick off the Q1 earnings season this week, with markets set to pay special attention to what they say about the recent tumult in the sector. In this regard, we note comments from JP Morgan’s chief executive Jamie Dimon that the deposits crisis was « not yet over » and that its effects would be felt for several years yet. The tech sector could contribute negatively to Q1 earnings overall, with figures showing a 29% decline in global shipments of personal computers in Q1 and large Asian chip companies missing their sales targets because of a semiconductor glut. Cautious on earnings prospects, we remain defensively positioned in equities overall. And we are negative on REITS, with the total market capitalisation of commercial real estate funds suffering their fastest fall on record in the past two weeks.  In addition, as some high-profile leveraged buy-outs become unstuck in the US, we are negative high yield.

With this year marking the 75th anniversary of the Marshall Plan, it seems appropriate that discussions to revamp the EU’s fiscal rules are gaining traction. According to one proposal, rather than a one-size-fits-all rule, a new version of the Stability and Growth Pact would allow each EU member state to negotiate their own debt reduction paths with the EU executive. Such a modification could be a game changer but faces tough resistance from the Dutch and Germans, who have been calling for tough debt-reduction targets. 

Signs that China’s economic rebound is gaining traction have been overshowed by the military deployment around Taiwan in recent days and by European leaders’ efforts to re-engage with Beijing amid much tension over how to handle relations with the world’s second-largest economy. With Finland officially becoming NATO’s 31st member last week, we seek a rising risk of a recession caused by geopolitics.