Ear to the Ground

April 28 2023

It was more about economic growth rather than inflation when it came to data released and there were a few surprises.  In the US we saw the release of the first estimate for first quarter GDP.  This was weaker than the market had forecast, posting a quarter on quarter annualised growth rate of 1.1%.  This was well behind the expectation of 2% growth and behind the 2.6% growth figure posted in the fourth quarter of last year.

Blame for the weaker figure was put on a slowdown in business investment growth, companies running down inventories and the housing market continuing to be negatively affected by rising interest rates.  The weaker data comes at a time when the leading US economic indicator, as prepared by The Conference Board, continues to turn down and suggests that a contraction for the US economy is likely at some point in the future.  On a positive note, consumer spending continued to accelerate, perhaps due to higher wage settlements and as they continue to tap into savings which they were able to accumulate during Covid.

Perhaps not having an impact yet on economic growth, but could do so in the future, is the reduction in bank lending which we are currently seeing, along with tighter lending conditions.  Credit makes the world go round, and as the level of credit reduces, potentially the less support there is for the economy.  Tighter lending conditions are especially expected to be seen from US regional banks given the potential issues which lie there.  Woes around First Republic continue, who have hemorrhaged deposits, and confidence remains low with the sector in general.  The S&P 500 Regional Banks Sub Industry Index, tracking these companies share price, currently trades at a low not seen since peak Covid in the first and second quarter of 2020.

There was good news from banks this week, relating to their bond issuance.  As I am sure you will remember, the holders of Credit Suisse Additional Tier One (AT1) bonds saw their investment written down to zero on the takeover by UBS.  These bonds normally have an early call date, whereby the issuer, on set dates, has the ability to call the bond early and return monies back to the bond holders.  This week we saw the first bond in issuance reach such a call date, issued by UniCredit.  Pleasingly, the bank took the decision to call the bond.  This hopefully shows that the industry is in a position of strength, supported by strong capital positions and that future calls will be positively made by other issuing banks.

Finally, we saw the Bank of Japan meet this week, which was the first under the new governor.  There has been much anticipation that the new governor appointed could lead to further changes in the yield curve control policy, with either a widening of the permitted trading range for the 10 year Japanese government bond yield, or the removing of yield curve control full stop.  The conclusion of the meeting however revealed that no changes had been made.  They also announced that they were to conduct a new “broad perspective review of monetary policy”.  This, they have said, could take around 12 to 18 months.  It would appear, therefore, that the can has been kicked down the road a little longer before it becomes a concern again.  Now where have we heard that before?

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