Fed Set to Raise Rates Amidst Ongoing Banking Sector Concerns

The New Zealand labour market remains hot, if past its peak. Unemployment held steady at 3.4% and annual wage growth continued to pick up.

March quarter 2023 labour market surveys

· Unemployment rate: 3.4% (prev: 3.4%, Westpac f/c: 3.4%)Employment change: +0.8% (prev: +0.5%, f/c: +0.8%)

· Labour costs (private, ordinary time): +1.0% (prev: 1.1%, f/c: 1.1%)

· Average hourly earnings (private, ordinary time): +1.9% (prev: 0.9%, f/c: 1.3%)

The unemployment rate held steady at 3.4% in the March quarter. That was in line with our forecast, and marginally stronger than the 3.5% that the market and the Reserve Bank were expecting. The number of people employed rose by 0.8%, also in line with our view (and the December quarter was revised up from 0.1% to 0.5%).

The growth in employment is in part being driven by the fact that there are more people around to hire. The resurgence of migrant inflows saw the working-age population rise by 0.5% over the March quarter, compared to zero growth a year ago.

Even so, employment is still outstripping population growth. The remainder was driven by attracting more people into the labour force – the participation rate rose from 71.7% to 72.0%, another new record high.

The wage measures were strong, but a mixed bag relative to forecasts. The Labour Cost Index rose by 1% for the quarter, a touch lower than the 1.1% rise last quarter. Private sector labour costs were up 0.9%, while the public sector was up 1.3% as collective pay agreements, particularly in healthcare, came into effect.

On an annual basis the LCI was up by 4.3%, compared to 4.1% last quarter. Wage growth tends to be one of the most lagging aspects to the economic cycle, so it’s not surprising that we’d see annual wage growth continuing to accelerate at this point even as consumer price inflation has clearly passed its peak.

The Quarterly Employment Survey (QES) measure of average hourly earnings rose by 1.9% for the quarter, with annual growth picking up from 7.4% to 7.6%. This measure is quite choppy from quarter to quarter, so we don’t put much weight on the fact that it was higher than what we had pencilled in. But it does highlight that what workers are receiving in hand is now keeping up with the rising cost of living.

Overall, the details of these surveys can be summed up by looking at the unemployment rate. The labour market is tight (3.4% is still very low compared to history), albeit past its hottest point (compared to the record low of 3.2% last year), and it isn’t deteriorating in any meaningful way yet. Wage pressures haven’t yet peaked on an annual basis, but are getting close to that point.

Oil prices have slipped back as the short-covering rally prompted by OPEC+'s surprise output target cut has been completed and given way to a wave of profit-taking and fresh short selling prompted by concerns about the economy.

Hedge funds and other money managers sold the equivalent of 87 million barrels in the six most important petroleum futures and options contracts over the seven days ending on April 25.

The selling was the first since the U.S. regional banking crisis erupted in March and came after funds had purchased a total of 245 million barrels over the previous four weeks.

The most recent week saw sales across the board, including Brent (-35 million barrels), NYMEX and ICE WTI (-19 million), European gas oil (-14 million), U.S. gasoline (-13 million) and U.S. diesel (-6 million).

The combined position fell to 447 million barrels (23rd percentile for all weeks since 2013) down from 534 million barrels (38th percentile) seven days earlier.

The ratio of bullish long to bearish short positions fell to 3.52:1 (39th percentile) from 5.00:1 (64th percentile) a week before.

Heightened fears about a business cycle slowdown hitting petroleum consumption overwhelmed any residual bullishness stemming from the OPEC+ production cut announced on April 2.

Investment managers have become especially bearish about the outlook for middle distillates, such as diesel and gas oil, which are the most exposed to the industrial cycle.

Funds held a net position in middle distillates of just 7 million barrels (21st percentile) and bullish longs outnumbered bearish shorts by just 1.13:1 (21st percentile) on April 25.

Persistent inflation, increasing corporate layoffs, and heightened caution around spending by businesses and households signal a further slowdown in the business cycle over the next few months.

Investors also tempered their recent optimism about U.S. gas prices as inventories continued to swell faster than normal for the time of year despite very low prices.

Funds sold the equivalent of 99 billion cubic feet over the seven days ending on April 25, after buying a net total of 1,287 billion cubic feet in the previous eight weeks.

The position slipped to 12 billion cubic feet net short (31st percentile for all weeks since 2006) from 87 billion cubic feet net long (34th percentile) a week earlier.

The ratio of bullish long to bearish short positions slipped to 1.00:1 (31st percentile) from 1.03:1 (34th percentile) the previous week.

Inventories continue tracking much higher than normal despite ultra-low prices fostering more consumption and the re-starting of the Freeport LNG export terminal.

Stocks were 280 billion cubic feet (+16% or +0.61 standard deviations) above the prior ten-year seasonal average on April 21, up from a deficit of 263 billion cubic feet (-8% or -0.98 standard deviations) on Jan. 1.

Stocks have continued to swell even though inflation-adjusted prices are in the 3rd percentile for all days since 1990, a signal that there is a persistent production surplus that will necessitate a further slowdown in drilling.

1. U.S. job openings decreased and layoffs hit a more than two-year high as the labor market softened.

2. RBA unexpectedly raised interest rates by 25bps.

3. Eurozone inflation picked up in April, but the core inflation unexpectedly slowed.

4. Oil prices plummeted 5% due to concerns about the U.S. debt ceiling and interest rate hikes.

5. The new panic in the banking industry may push gold prices higher as the Fed's resolution is approaching.

6. The probability of the Fed raising interest rates by 25bps in May is 85.4%.

According to the monthly Job Openings and Labor Turnover Survey (JOLTS) report released by the U.S. Department of Labor, there were 1.6 job openings for every unemployed person in March, the lowest since October 2021. Job openings, a measure of labor demand, dropped by 384,000 to 9.59 million, the lowest level since April 2021, while layoffs jumped by 248,000 to 1.8 million, the highest level since December 2020, indicating a softening in the labor market that could help the Fed fight inflation. Investors are trying to guess whether the Fed is likely to pause rate hikes when it finishes its two-day meeting this week, or whether further hikes are possible if inflation remains high.

The Reserve Bank of Australia unexpectedly raised its cash rate by 25 bps to 3.85%, the highest level since 2012, as the market expected to keep interest rates unchanged. RBA governor Philip Lowe said policymakers were "absolutely serious" about controlling inflation and were on track to achieve that goal without tipping the economy into recession. Lowe said the central bank has raised its rate earlier in the day to ensure that the current high inflation did not turn into a damaging price-wage cycle. It was ready to tighten policy to avoid another rise in prices caused by inflationary psychology, Lowe said.

AUDUSD jumped to 0.6716, the highest level since April 21, and then retreated. Financial website XM.com reported that it is doubtful whether the Australian dollar has room to gain, given the sharp drop in iron ore prices and the deterioration of economic data in Asia, both of which paint a bleaker picture for the export-dependent Australian economy.

Eurozone inflation accelerated in April, but core price growth unexpectedly slowed, strengthening the expectation for a small rate hike at the meeting of the ECB on Thursday. Headline inflation rose to 7.0% in April from 6.9% in March, according to Eurostat on Tuesday, in line with forecasts of economists in the survey. Core inflation slowed to 7.3% from 7.5%, while core inflation, excluding alcohol and tobacco, slowed to 5.6% from 5.7%, below analysts' forecast of 5.7% and the first decline since last June.

Oil prices fell about 5% to a five-week low on Tuesday on concerns about the economy. Tamas Varga, the oil broker PVM, said the actions taken by central banks to rein high consumer and producer prices were painting a bleak picture of the future outlook. Investors are currently looking for market direction from expectations of a rate hike from central banks that are still fighting inflation. And further interest rate hikes could slow economic growth and weaken energy demand. On the supply side, the market's reaction to the news that OPEC's oil output fell in April was muted, with Craig Erlam, senior market analyst at OANDA, saying that gains after OPEC+ production cuts have now been erased, suggesting that traders believe the economic outlook has deteriorated to a certain extent, and production cuts will not cause the (supply) deficit that has been feared.

Gold hit its biggest one-day gain in a month on Tuesday as bond yields fell on renewed fears of contagion from the U.S. banking crisis ahead of an expected rate hike by the Fed. Edward Moya, senior market analyst at OANDA, said that concerns about the banking sector had back, which did remove the risk that the Fed may consider raising interest rates in June. The market now generally expects the Fed to raise interest rates by 25bps at this meeting, expecting a one-quarter chance of a rate cut in June, and believes that there is no chance of another rate hike. Gold was also supported by some safe-haven demand amid renewed concerns about the health of the banking sector and uncertainty about the U.S. debt ceiling, analysts at BOCI said.

According to CME "Fed Watch": the probability of the Fed keeping interest rates unchanged in May is 14.6%, and the probability of raising interest rates by 25bps is 85.4%; the probability of maintaining interest rates at the current level by June is 14.5%, the probability of a cumulative 25bps hike is 84.6%, and the probability of a cumulative 50bps hike is 0.9%.

UTC+8 17:00 Eurozone Unemployment Rate in March

UTC+8 20:15 U.S. April ADP Employment Figures

UTC+8 21:45 U.S. April Markit Services PMI Final

UTC+8 22:00 U.S. April ISM Non-Manufacturing PMI

UTC+8 22:30 U.S. EIA Crude Oil Inventory for the Week from April 28

UTC+8 02:00 The Fed Interest Rate Decision

UTC+8 02:30 The Fed Chairman Powell Holds a Press Conference

Sentiment in the oil market remains negative. ICE Brent settled more than 5% lower yesterday leaving it in the US$75/bbl region. This is the largest daily percentage decline since early January and the lowest level seen since March. There is little in the way of fresh fundamentals to justify the sell-off, though investors seem to be getting increasingly nervous about the macro outlook and its implications for oil demand. In recent weeks, we have already seen speculators reduce their net long in ICE Brent, while for ICE gasoil, speculators have flipped from a net long to a net short position. The key question now is where the floor is for the market. From a technical point of view, US$70/bbl, which was close to the low seen in March, should provide support to the market. In addition, it is around these levels that we could possibly see the US administration starting to refill its strategic petroleum reserves. And finally, breaking below US$70/bbl would be a concern for OPEC+, and so talk of additional cuts would likely grow if we trade down towards this level.

Bloomberg's OPEC production survey shows that the group's output fell by 310Mbbls/d MoM to 28.8MMbbls/d in April. The decline was largely driven by Iraq, where output is estimated to have fallen by 250Mbbls/d MoM. This was a result of the stoppage of oil flows from Northern Iraq via Ceyhan in Turkey. In addition, Nigerian output is estimated to have fallen by 120Mbbls/d. Further production declines will be seen for May with a number of OPEC producers cutting output further from May through until the end of the year.

Inventory numbers from the API overnight showed that US crude oil inventories fell by 3.9MMbbls over the last week, which was more than the roughly 500Mbbls decline the market was expecting. On the product side, gasoline stocks grew by 400Mbbls, whilst distillate fuel oil stocks declined by 1MMbbls.

Iron ore prices continue to hover around the US$100/t mark after declining more than 17% MoM in April. Prices have come under pressure due to demand uncertainties and abundant seaborne supply, especially from Australia. China's weaker-than-expected peak construction season has also kept raw material prices under pressure. Last week, China Baowu Steel Group, the top global steelmaker, highlighted that the domestic as well as global environment for steel producers remained severe while expecting Chinese steel demand to remain weak for the year.

The latest reports suggest that the cocoa mid-crop harvest in Ivory Coast might be affected by heavy rains and flooding in the region. There are also reports that a poor number of pods on trees has already slowed the mid-crop harvest process. As a result, cocoa supplies from West Africa are expected to lag behind last season. Similarly, cocoa plantations in Cameroon are also affected by the heavy rainfall. Meanwhile, recent rains in Ghana are boosting the cocoa crop, but pest invasion and soaring input costs could cap harvest prospects for the season.

Weekly data from the European Commission show that soft wheat shipments from the EU reached 25.7mt as of 30 April, up 9.4% compared to 23.5mt for the same period last year. Morocco, Algeria, and Nigeria were the top destinations for these shipments

Maybe the U.S. banking turmoil of March 2023 wasn't boxed up, tied with a bow, and neatly shelved for posterity after all.

Shares in regional U.S. banks got clobbered on Tuesday - PacWest BanCorp lost a quarter of its market cap - setting a gloomy and defensive tone for Asian markets on Wednesday ahead of the Federal Reserve's latest interest rate decision.

The U.S. regional banking index tanked 5.5% on Tuesday, its biggest fall since the depths of the crisis in mid-March. The index is at a two and a half year low and has lost a third of its value in the last two months.

Not coincidentally, renewed fears over the U.S. banking system following JP Morgan's recent takeover of failed First Republic Bank also dovetailed with unexpectedly weak U.S. jobs data and increasing alarm over the U.S. debt ceiling standoff.

In addition, global jitters intensified on Tuesday - the Reserve Bank of Australia's shock rate hike, a downbeat bank lending survey from the European Central Bank, and a 5% slump in oil prices painted a gloomy picture for the world economy.

Brent crude oil is now down almost 30% year-on-year - a huge disinflationary impulse for the world economy.

This may play into Malaysian policymakers' thinking as they prepare to deliver their latest interest rate decision on Wednesday. Twenty one of 25 economists polled by Reuters expect the key interest rate to be kept on hold at 2.75% for a third consecutive meeting, with the other four predicting a quarter point hike.

Not only that, Bank Negara Malaysia is expected to keep rates on hold for the rest of this year and all of next, according to the Reuters poll.

As the RBA reminded everyone on Tuesday, however, policymakers still retain the ability to surprise. Surely the Fed won't throw a curve ball later on Wednesday, will it?

Markets are pricing in a 15% chance of no move, a small but not negligible chance, and an 85% probability the Fed will deliver one final 25 basis point hike.

But that's what Asian markets will be waking up to on Thursday. Before that on Wednesday they have the Malaysian rate decision, services PMI data from Australia and India, and South Korean FX reserves to offer local direction.

- Malaysia interest rate decision

- India, Australia services PMIs (April)

- U.S. Fed interest rate decision

Topping this year’s OMFIF Gender Balance Index ratings is Standard Chartered, climbing 26 places from last year as the most balanced commercial bank. Jerry Zhang, chief executive officer, China, spoke with Clive Horwood, OMFIF’s managing editor and deputy chief executive officer, about how and why the bank is a place where women can thrive.

Clive Horwood: Why has Standard Chartered been more successful than its global peers in promoting women to important senior roles?

Jerry Zhang: For women to thrive, you need the right environment. We have a very strong culture at Standard Chartered. I have worked here for almost 30 years and one of the reasons I have chosen to stay is that, at each and every stage of my career, there is something interesting to grow into. There’s no glass ceiling here for women. Just over 70% of our workforce in China is made up of women, and 50% of our senior management in the country. So perhaps on the balance side, we need to do more for men!

CH: What tools or policies do Standard Chartered use to promote the role of women?

JZ: We have a number of intervention tools. We have our own initiatives such as our global women’s network and our Women in Business Leadership Forum. We have strong connections with a number of external associations. And we also invite our C-suite female clients to share their views with our own staff.

CH: What role does mentorship play at Standard Chartered?

JZ: A very important one. I am lucky to work for our Asia CEO Ben Hung, who is a tremendous mentor. Our senior leaders – including CEO Bill Winters – are always there to share ideas and find ways to help me. Earlier in my career, I was lucky to benefit from the support and experience of other female leaders, such as our former CEO for China, Katherine Tsang and our former Regional Head of Financial Institutions, Margaret Lee. These were women running important profit and loss businesses, who were both teachers and inspirations.

CH: What’s the most valuable piece of advice you can share?

JZ: There are a couple of pieces. First, don’t set limits on your own ambitions and aspirations. If you think you can only do so much, then you limit yourself. Be confident in your own ability and the sky is the limit. Second, make sure you get your support system in place and work out how you can best take care of your family and your job. You need a stable background at home to help you focus on work. And don’t be apologetic when it is time to do so.

CH: Do you believe that a diverse business is a better business?

JZ: Men and women are different animals. Each has their own respective set of strengths. You need your team to have complementary skills and more diversity makes for a better team.

CH: China is seen in much of the world as a country where men still dominate, whether in politics or business. Is this perception wrong? Does it make it harder for a woman?

JZ: Some aspects of Chinese society – as in many other countries – still have a male-led hierarchy. But I have found that, for the vast majority of my clients, they only care about the quality of the work and advice we give them. But we can’t ignore the fact that for centuries, men had a dominant role, and some women continue to see their careers through the lens of how men view them. I remember one member of my team, who was extremely successful and talented, but who left the bank because her husband demanded she stay at home. When her husband’s business ran into difficulty, I suggested she come back. She did, and she continues to have a great career.

CH: Is there more that Standard Chartered could have done to keep her in the first instance?

JZ: Perhaps. Today we have a sabbatical programme which is available to our highest achievers. It shows our commitment to, and investment in, those individuals. We also have much more ability to work remotely, especially since Covid-19, although we find that many of our colleagues want to be in-person with their teams as often as possible.

CH: Investment banking, in particular, is a highly competitive industry in which work can be all-consuming. Does that rule out part-time work, which can be a useful way to keep women in the workplace?

JZ: It is a competitive environment. In senior roles, we are completely occupied. My team expects me to give 100% at all times, and I expect the same of them. But just as important is that they feel they can achieve 100% of what is expected of them. And that requires the right working environment, which we try our best to create.

CH: Have you ever felt being a woman has held your career back?

JZ: In this bank, no. My bosses have always been supportive and understanding, creating the right environment for me to be successful in work and supported at home. It’s also about mindset. I want to achieve more in my career. There is no glass ceiling here – just look at the number of women in senior positions. Of course, there are questions I ask myself. Am I of the right calibre to step up to the next level? Do I have enough experience internationally? Have I worked in a broad enough range of business lines? But this is nothing to do with gender.