Week in Review: May 5, 2023

May 8, 2023

Recap & Commentary

Markets ended the week lower, weighed down by ongoing concerns about regional banks. There had been hope at the start of the week that the seizure of First Republic Bank and subsequent sale of its assets to JP Morgan would bring a conclusion to the recent banking sector turmoil. Instead, the collapse of First Republic only seemed to intensify the pressure on regional banks.

In the early 1980s, economist Ed Yardeni coined the term “bond vigilantes” to describe debt investors that sell large blocks of government bonds to force a change in monetary or fiscal policy. In some respects, the events of the past week felt like the rise of the bank vigilantes, as investors placed significant pressure on regional banks in the hopes of forcing certain concession from the Fed including higher FDIC insurance limits or even explicit guarantees for all deposits. Friday saw a strong rally in regional banks though it its too early to know if it signaled an end to the current crisis or was just the eye of the storm.

April’s employment report showed nonfarm payrolls added 253K new jobs in April, helping push the unemployment rate to its lowest level since 1969. The continued strength of the labor markets, combined with last week’s strong consumer spending figure within the 1Q23 GDP report suggest that any recession may not be as imminent, or severe, as some fear.

Through Friday 85% of S&P 500 companies had reported 1Q23 earnings. Thus far, 79% have beaten their earnings estimates. According to industry group FactSet, consolidated earnings growth for the quarter is expected to be -2.2%, better than the -6.7% forecast at the end of March.

Economic Commentary

Nonfarm payrolls added 253K jobs in April, far better than the expected 180K. Average hourly earnings grew 0.5% from March, the largest monthly gain in a year. On an annual basis, wages increased 4.4%, up from 4.3% pace recorded in March. Job openings fell 3.9% in March to 9.59M, the lowest level since April 2021, but still well above the pre-pandemic record high of 7.5M. The ratio of job openings to unemployed individuals fell slightly from 1.68X to 1.64X. Layoffs rose 15.9%, while quits slowed to 2.5%, matching its slowest pace since February 2021, suggesting reduced worker optimism about job prospects.

Manufacturing activity as measured by industry group ISM, contracted for a sixth consecutive month, but did so at a slower pace than in March. Signs of weakening demand persisted as new orders contracted for the eighth consecutive month, while inventories contracted for the second consecutive month and at the fastest pace since August 2020. Employment was a bright spot, expanding modestly for the first time since January. Service sector activity reaccelerated in April, following a slight slowdown in March. Both new orders and export orders rose pointing to continued demand.

Consumer debt rose $26.5B in March, the fastest pace in four months, and well over the $16.8B forecasted. Revolving credit, consisting largely of credit card debt, increased 17.3%, compared to nonrevolving increasing just 3.0%.

Of Note

The World Health Organization officially declared an end to the global health emergency posed by Covid-19. While the virus continues to mutate and spread, posing an ongoing threat, it no longer rises to the level of an emergency.

Market Indices   (As of 05/05)

• Consumer Inflation (CPI)
• Producer Inflation (PPI)
• Consumer Sentiment
• Weekly Jobless Claims