Markets Brace for One-two U.S. Credit Conditions Punch

Economic

Summary:

The gulf between financial markets' and Federal Reserve Chair Jerome Powell's view of the U.S. economy could not be wider, but two national credit conditions and lending surveys within 24 hours of each other could narrow the chasm.

The Fed releases its quarterly Senior Loan Officer Opinion Survey, or 'SLOOS', on Monday May 8, and the National Federation of Independent Business's April survey of small businesses will be released the following day.

They come at a critical time - after 500 basis points of interest rates hikes in little over a year, turmoil in the regional U.S. banking sector is intensifying and claiming more victims.

Lending standards, which were already at levels consistent with past recessions, according to several indicators in the most recent 'SLOOS' and NFIB surveys, will only tighten further.

The question is how much more - enough to actually tip the economy into recession and force the Fed to cut rates in the second half of the year, as futures markets are aggressively pricing? Or not?

Powell and his colleagues have seen the 'SLOOS' report. Speaking to reporters after the Fed raised rates to a 16-year high on Wednesday, Powell said it is "broadly consistent" with the recent tightening in lending standards, and will show that "lending has continued to grow but the pace has been slowing since the second half of last year."

Although tighter credit conditions will weigh on economic activity, hiring and inflation, recession can still be avoided. "It's possible that this time is really different. The case of avoiding a recession is, in my view, more likely than having a recession," Powell said.

California screamin'

If U.S. rates futures are the barometer, however, financial markets could not disagree more. Secured Overnight Financing Rate (SOFR) futures on Thursday priced in as much as 100 basis points of easing by year-end, and Fed funds futures indicated the first cut could be as early as July.

That would be a quick pivot to rate cuts from hikes, but not unusual. In fact, it would be in line with historical trends - according to Joe Lavorgna at SMBC Nikko Securities, the median pivot over the last 18 tightening cycles going back to the 1950s is two months, and the average is three.

It remains to be seen if the Fed will turn tail so quickly this time. As Powell stressed, inflation remains well above its 2% goal and the labor market is surprisingly resilient.

But weaker lending and banking conditions will take their toll.

"We are in the midst of a full-fledged California bank crisis," Phil Suttle, founder of consultancy Suttle Economics, wrote on Thursday. "The resulting national headwind from bank lending ... will push the economy into recession by year end," allowing the Fed to cut rates to 3% by the end of next year, he said.

Recession Watch

The Fed's last SLOOS in February showed that the net percentage of banks reporting tightening standards for commercial and industrial loans in the fourth quarter jumped above 40%.

That is consistent with levels reached before or during the last four recessions - 1990-91, 2001, 2007-09 and early 2020. Similarly, demand for these loans also slumped to previous recession levels.

Markets Brace for One-two U.S. Credit Conditions Punch_2

The NFIB's last survey, meanwhile, showed that credit conditions for small firms measured by the Loan Availability Compared to Three Months Ago index deteriorated sharply to the worst in over a decade.

This index's four-point increase to 9 from February - a higher print means credit is harder to access - was the biggest month-on-month rise in over 20 years. It will be closely watched on Tuesday.

A separate NFIB banking survey published this week shows small business owners are not hitting the panic button just yet, but concern is growing.

Asked last month how concerned they are about the health of the bank they use for business purposes in light of the recent bank failures, 19% said very concerned, 23% said moderately concerned and 28% slightly concerned.

"Small business owners are, not surprisingly, concerned about the stability of the banking system. A strong small business banking system is essential for small business owners to operate and grow their business," Holly Wade, executive director of NFIB's Research Center said.

Perhaps the most ominous signal from the NFIB's banking survey published this week was more than half of small business owners - 55% - reckon the United States is already in a recession.

That's certainly not what Jerome Powell thinks.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

China's foreign exchange reserves have reached their highest level in 14 months, according to recent data. This news is significant because China is the world's largest holder of foreign exchange reserves, and the size of its reserves can have a significant impact on the global economy. In this article, we will explore what this means for the global economy and why China's foreign exchange reserves are important.

What are foreign exchange reserves?

Foreign exchange reserves are assets held by a central bank in foreign currencies, gold, and other assets. They are used to manage the value of a country's currency and to ensure that the country can meet its international financial obligations. Foreign exchange reserves can also be used to support the value of a country's currency in the foreign exchange market.

Why are China's foreign exchange reserves important?

China is the world's largest holder of foreign exchange reserves, with a total of USD 3.205 trillion at the end of April 2023. This is significant because China's foreign exchange reserves have a significant impact on the global economy. China's foreign exchange reserves are used to manage the value of the yuan and to ensure that China can meet its international financial obligations.

China's foreign exchange reserves are also important because they give China a significant amount of financial power. China can use its foreign exchange reserves to invest in other countries or to support its own currency in the foreign exchange market. China's foreign exchange reserves also give it a significant amount of leverage in international negotiations, as other countries may be hesitant to challenge China's economic power.

What does the increase in China's foreign exchange reserves mean for the global economy?

The increase in China's foreign exchange reserves is a positive sign for the global economy. It indicates that China's economy is strong and that China is continuing to invest in other countries. China's investment in other countries can help to stimulate economic growth and create jobs.

The increase in China's foreign exchange reserves is also a sign that China is managing its currency effectively. By managing the value of the yuan, China can avoid currency fluctuations that can disrupt international trade and investment. This can help to create a stable environment for businesses to operate in and can promote economic growth.

In addition, the increase in China's foreign exchange reserves can help to boost confidence in the global economy. China's financial power can help to stabilize the international financial system and prevent financial crises from occurring. This can help to promote investment and growth in other countries.

China's foreign exchange reserves are an important indicator of the health of the global economy. The recent increase in China's foreign exchange reserves is a positive sign for the global economy, indicating that China's economy is strong and that China is continuing to invest in other countries. China's foreign exchange reserves also give it significant financial power, which can be used to stabilize the international financial system and promote economic growth. As such, the increase in China's foreign exchange reserves is good news for the global economy.

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Kevin Du

Cryptocurrency

Binance, the world's biggest cryptocurrency exchange by trading volume, has temporarily closed Bitcoin withdrawals because its network is suffering a "congestion" issue, the company said in a tweet on Sunday.

"Our team is currently working on a fix until the network is stabilised and will reopen $BTC withdrawals as soon as possible", the tweet said.

"Rest assured, funds are SAFU."

SAFU refers to Binance's Secure Asset Fund for Users, an emergency fund the platform set up in July 2018 to protect users' investments. While the fund fluctuates based on the market, it is valued at about $1 billion, according to the Binance website.

The term also means "safe" in the cryptocurrency world.

However, shortly before 9pm UAE time on Sunday, Binance said the issue had been resolved in a follow-up tweet.

"$BTC withdrawals are now resumed on #Binance. Thank you for your patience and we apologise for any inconvenience," the company said on Twitter.

It is not the first time that Binance has temporarily halted Bitcoin withdrawals. In June last year, Binance founder and chief executive Changpeng Zhou tweeted that the platform had temporarily "paused Bitcoin withdrawals due to a stuck transaction causing a backlog".

"Should be fixed in ~30 minutes. Will update. Funds are SAFU." Mr Zhou added.

It has been a tumultuous 12 months for the global cryptocurrency sector, which is only now emerging from a "crypto winter" after the collapse of a number of large platforms including Celsius, Three Arrows Capital and Sam Bankman-Fried's FTX, which filed for bankruptcy in the US on November 11.

The collapse of FTX, once valued at $32 billion, is the highest-profile cryptocurrency exchange failure to date, after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal, Reuters reported at the time.

Bitcoin is currently up 1.12 per cent at $28,981.48 as of 7.50pm UAE time on Sunday.

Last month, Bitcoin climbed above the key $30,000 mark for the first time since June 2022, but is still down more than 50 per cent from its record high of more than $68,000 in November 2021.

In February, Binance admitted that it had "gaps" in its compliance with US regulations and said the company was likely to pay a fine to settle investigations.

The gaps, however, had been closed and the company co-ordinated with US authorities to iron out any issues, Bloomberg reported at the time, quoting Binance's chief strategy officer Patrick Hillmann.

Source: The National News

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Warren Takunda

Traders' Opinions

The Saudi Arabian economy saw a slower growth rate of 3.9% from the previous year in the first quarter of 2023, according to preliminary estimates. This marked the eighth consecutive quarter of economic expansion, but it was also the slowest pace of growth since Q2 2021. The Q1 2023 figure was significantly lower than the previous quarter's 5.5% rise, indicating a possible slowdown in the economy.

Factors Driving the Slowdown

The slowdown was driven by both non-oil and oil activities, which expanded at softer paces compared to the previous quarter. Non-oil activities grew by 5.8%, down from 6.2% in Q4 2022, while oil activities increased by only 1.3%, a significant drop from the 6.1% growth in the previous quarter. However, government services continued to increase, with a growth rate of 4.9%, up from 2.9% in the previous quarter.

Quarterly Seasonally Adjusted Data

Furthermore, on quarterly seasonally adjusted data, the Saudi GDP contracted by 1.3%. This was the first contraction since Q1 2021, reversing from a 1.3% expansion in Q4 2022. The contraction in Q1 2023 could indicate a potential slowdown in economic activity.

Positive Outlook

Despite the weaker first quarter performance, the overall picture for the Saudi Arabian economy remains positive. In 2022, the economy grew by 8.7%, a significant acceleration from the 3.9% gain in 2021. The strong growth in 2022 was largely driven by the recovery in oil prices, which boosted government revenue and allowed for increased public spending.

The Future of the Saudi Arabian Economy

Looking ahead, the outlook for the Saudi Arabian economy is positive, with the government continuing to implement its ambitious Vision 2030 plan. The plan aims to diversify the economy away from oil, create jobs for Saudi citizens, and increase foreign investment. Moreover, the country's large-scale infrastructure projects, such as the NEOM smart city and the Red Sea Project, are expected to boost economic growth in the coming years.

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FastBull Featured

Daily News

【Quick Facts】

1. Non-farm payrolls is bad for the Fed interest rate cut expectations.

2. Bullard: Recent reports show not much progress on inflation.

3. The debt ceiling problem reappears.

4. Bank of Canada is expected to raise interest rates.

【News Details】

1. Non-farm payrolls is bad for the Fed interest rate cut expectations.

Non-farm payrolls increased by 253,000 in April, beating the market consensus of 185,000 (the previous was revised down from 236,000 to 165,000). In terms of sub-items, the rebound of the commodity manufacturing may be related to weather factors. In private services, health and social assistance are still filling the gap, and other key sectors driving employment are growing at different rates.

Average hourly earnings rose to 4.4% (Prev: 4.3%, Fcst: 4.2%). The characteristic of salaries in various industries is wages in industries with high wages and low employment rising more, and wages in industries with low wages and more employment rising less than the overall average. Although the unemployment rate slowed down to 3.4% (Prev: 3.5,%, Fcst: 3.6%), due to the re-increase of non-farm payrolls, the Fed’s interest rate cut expectations after the decision were suppressed.

The good news is if we consider that the new non-farm payrolls in the past two months have been revised downward by a total of 149,000, so although the non-farm payrolls this month exceeded expectations, the three-month moving average of non-farm payrolls still maintains a downtrend. The increase in employment in a single month does not necessarily mean that the labor market's demand in a downtrend has reversed again.

2. Bullard: Recent reports show not much progress on inflation.

Bullard will update his views on the Summary of Economic Projections (SEP) at the June monetary policy meeting. The Fed's restrictive policy may not be enough, we are waiting for the data. Wall Street is "fixed" by temporary inflation. If inflation persists, the Fed will have to take more interest rate measures, but Wall Street is not ready. The recent drop in market interest rates may have "swamped out" the impact of a credit crunch caused by bank stress.

Consumption will remain strong, according to the jobs report. There is now enough room to fight inflation. The aggressive policy has curbed higher inflation, but it's unclear whether it has put inflation on a downward path. I feel that policy is at the "lower end" of the restrictive territory, but it's unclear whether the restrictive territory is enough to keep inflation on a downward path. Today's jobs report was "impressive" on job growth, but was still a long way to be a balanced labor market.

3. The debt ceiling problem reappears.

U.S. President Joe Biden has asked Congress to unconditionally raise the debt ceiling. The House of Representatives passed a bill last month that would raise the government's $31.4 trillion debt ceiling, but it also included sweeping spending cuts over the next decade, which Biden and his fellow Democrats opposed. Biden was adamant that he will not negotiate an increase in the debt ceiling, but will discuss budget cuts after the new ceiling is passed.

Forty-three Senate Republicans said Saturday they opposed a vote on a bill that would only raise the debt ceiling without addressing other priorities, indicating that they could block such a plan from Democrats.

The bill needs 60 votes in the 100-seat Senate to pass. With Democrats holding 51 votes a little higher than Republicans 49 votes. Senate Democratic leader Chuck Schumer needs the support of at least nine Republicans to reach 60 votes to push through the legislation.

House Democratic leader Hakeem Jeffries said the responsible action would be to raise the debt ceiling, "We must ensure that America pays its bills to avoid a dangerous default on our debt that would destroy the U.S. economy."

4. Bank of Canada is expected to raise interest rates.

The latest figures from Statistics Canada show the economy added 41,000 jobs last month, mostly part-time jobs. The unemployment rate remained steady at 5.0% for the fifth straight month, according to its latest labor force survey. This is slightly higher than the record low of 4.9% last summer.

Most of the job gains in April came from wholesale and retail trade, while the biggest losses were in business, construction, and other support services. With the labor market still relatively tight, average hourly earnings rose 5.2% from a year ago, faster than inflation. The Bank of Canada has been warning that a tight labor market will make it harder for inflation to return to 2%, as higher wages could put upward pressure on prices.

Bank of Canada Governor Macklem said in a speech last Thursday that he was "ready to raise rates further" if inflation was significantly higher than 2%, and partly blamed strong wage growth for its role in underpinning inflation.

【Focus of the Day】

UTC+8 22:00 Speech by ECB Chief Economist Lane

UTC+8 04:00 The Fed Releases Financial Stability Report

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Warren Takunda

Economic

Traders' Opinions

The upcoming week in the world of finance is expected to be action-packed, with a plethora of crucial economic indicators scheduled for release worldwide. A diverse range of data will be scrutinized closely by investors and analysts, including inflation rates, producer prices, and consumer confidence measures.

In the United States, the focus will be on prices, as several key indicators are set to be published. The inflation rate, producer prices, and export and import prices will be closely watched, as will the Michigan consumer confidence CPI gauge. These figures will provide crucial insights into the state of the US economy and could impact market sentiment.

Besides these US indicators, CPI data will also be released in several other countries, including China, Mexico, Brazil, India, and Russia. These measures of inflation will offer significant information about the economic conditions in these countries and could be utilized by policymakers to make decisions regarding interest rates and other economic policies.

In the United Kingdom, investors will eagerly await the Q1 GDP growth data release. This figure will provide insights into the UK economy's health and may have a bearing on the value of the pound. Additionally, the Bank of England's latest interest rate decision will be announced, and this is expected to be scrutinized closely by investors and analysts.

In other parts of the world, China is set to publish external trade data, which will provide insights into its trading relationships with other nations. Australia will also report on consumer and business confidence, which could give clues about the Australian economy's state.

Overall, the week ahead promises to be a hectic one for investors and analysts, with a broad range of economic indicators slated for release worldwide. These figures will provide crucial insights into the global economy's health and could have an impact on market sentiment and investment decisions.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Economic

Asian markets are set for a positive start to the week on Monday after strong U.S. jobs data on Friday soothed recession and banking sector fears, and sparked the best day for world equities in five months.

The regional economic data calendar on Monday is light, with the final reading of Japanese purchasing managers index and Taiwanese trade for April the main releases.

Monday's market tone will probably be set by the U.S. feel-good factor, boosted by surprisingly strong corporate earnings, and whether investors think the U.S. really will defy the odds and head for a soft landing.

Federal Reserve Chair Jerome Powell, for one, is very optimistic: "It's possible that this time is really different. The case of avoiding a recession is, in my view, more likely than having a recession," he said on Wednesday after raising the benchmark overnight interest rate by a quarter of a percentage point to a 16-year high.

Two reports on U.S. credit conditions and loan demand on Monday and Tuesday will be more closely watched than usual, in light of the cumulative effect of the Fed's rate hikes and recent stress in the regional banking system.

Asian market sentiment later in the week could be molded by a batch of Chinese economic indicators: trade, lending and money supply figures for April on Tuesday, and CPI inflation on Thursday.

These reports will give investors a clearer insight into how well the region's largest economy is doing after abandoning its COVID-19 lockdown restrictions.

The signs are mixed at best. The heavily indebted property sector remains under severe stress, April's PMI reports were soft, and the economic surprises index - at a 17-year high a few weeks ago - has now declined 13 days in a row.

Economic momentum is clearly slowing. Following Friday's Feel-Good Factor_2

Technology giant JD.com and China's largest chip foundry Semiconductor Manufacturing International Corp both releases first-quarter earnings on Thursday.

Figures on Sunday, meanwhile, showed that China FX reserves rose $21 billion in April to $3.205 trillion, higher than expected and the highest since February last year.

Potentially market-moving events later in the week include: G7 finance ministers meeting in Niigata, Japan from Thursday through Saturday, Bank of Japan minutes of its April 27-28 policy meeting on Wednesday, and the Bank of England's policy meeting on Thursday.

Here are three key developments that could provide more direction to markets on Monday:

- Japan services, composite PMI (April, final)

- Australia business conditions index (April)