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Msg  73255 of 74294  at  3/22/2023 12:28:02 PM  by

carswell


The Launch Pad

 
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Daily market commentary
The Launch Pad
March 22, 2023
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Today

Futures are little changed with all eyes on the Federal chair Jerome Powell who will deliver rate announcement this afternoon. Across the pond, UK inflation rose unexpectedly for the first time in four months after food and drink prices soared at the fastest pace in 45 years. The pound jumped after the inflation reading and this will likely add fuel to arguments that the BOE will need to hike on Thursday for their rate announcement. Policy makers led by Governor Andrew Bailey had expected inflation to fall sharply this year back to their 2% target.

It’s decision day and the Fed is in a bit of a pickle. The rate decision today at 2pm ET was probably much each easier a couple of weeks ago before the collapse of several banks. Despite inflation still at multi-decade highs, a hike would likely add more stress to an already fragile banking system, whereas a pause could signal that the Fed is not confident in the resiliency of the financial industry or the economy. The current expectation is leaning toward a hike of 25 bps after market pricing was split between a hike and a pause earlier in the week. Fed officials will also be delivering updated rate projections for the first time since December, offering guidance on whether they still expect any additional increases this year.

Calm before the storm? The market’s favourite volatility gauge, the VIX, continues to fall as stocks push higher. Assurances from authorities has helped ease concerns in the market, paving the way for the recent market rally. Sentiment has improved after signs show that the recent banking turmoil may be contained, pushing the VIX towards its biggest two-day plunge since last May. Pessimism surrounding the banking turmoil has replaced inflation as the top concern for investors. Drastic actions have been taken to protect depositors since the collapse of SVB, but some economists are saying that the risk of a credit crunch is still in the cards. For now, it appears that the market is looking past these concerns, at least until we hear from the Fed later today.

A coalition of Canadian lenders representing small and medium-sized financial institutions is urging the federal government to increase the limits on deposit insurance. The lenders believe that raising the limit on deposit insurance sends a strong signal about financial stability while also reducing the risk of bank failures. As of right now, Canada’s insurance program protects depositors up to $100,000 per account. The group, which includes executives from Equitable Bank and Home Capital Group (and excludes the Big Six banks), have been lobbying for deposit insurance reform since before the collapse of SVB, however, the recent turmoil has reignited their concerns. Experts have said that despite limits on deposit insurance in Canada being less than that of the U.S., the last financial institution failure handled by the CDIC was in 1996.

Feeling like the glass is half-empty lately? A new poll found that close to half of Canadians believe they are in worse financial shape compared to a year ago, with many not expecting their situation to improve soon. The results indicate the highest level of pessimism since the survey began in 2010. Among respondents, blame was attributed to inflation, healthcare, and housing affordability respectively. The numbers paint a bleak picture about Canadians' finances and remains top of mind for officials at the BoC and federal government. The federal government has a particularly difficult job as they face the delicate balancing act of helping address affordability while also attempting to keep inflation down in their upcoming federal budget next week.

On April 1 (no joke), the federal minimum wage is set to rise to $16.65 per hour, up from $15.55. The government said that the increase is based on CPI, which reached decade-high levels in 2022. So, who is set the benefit from the increase? The federal minimum wage applies to the federally regulated private sectors, including banks, postal and courier services, and interprovincial air, rail, road, and marine transportation. Where the provincial or territorial minimum wage rate is higher than the federal rate, employers must apply the higher amount.

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Company news

Alright, back to the office everyone. Royal Bank is laying down the law with employees instructing them to return to the office three to four days a week. In an internal memo announced as of May 1, employees will be permitted to work from home only one or two days a week depending on their team's requirements. The bank believes regular in-person interaction is required in order to maintain its competitiveness. In the ongoing tug-of-war between bosses demanding in-person attendance and employees seeking insisting on work-from-home, this move by one the country's largest employers may set a precedent. The memo insisted teams coming together on-site more frequently would result in "solving complex problems faster, learning and growing more effectively, and ultimately building deeper connections with one another." For those who aren't fans of their co-workers, we imagine they will push to work from home two days a week.

After seeing inventories swell by over 40% in each of the last two quarters, Nike is finally working through the glut. Although Nike reported a 14% jump in sales as it sold off inventories, margins fell due to aggressive markdowns required to plow through excess inventories. Additionally, the company sought help from wholesale partners completing a temporary about face on its direct-to-consumer plan. Consequently, wholesale revenues were up 12%.

Here we go again with a meme stock. GameStop shares are looking to open nearly 50% higher after reporting a surprise profit in the fourth quarter and beating analysts’ estimates for revenue. GameStop, known for its consumer electronics and gaming merchandise, has struggled with profitability as the games industry has moved away from physical discs to online downloads. The industry has been further hamstrung by supply chain constraints on consoles and a relatively light schedule of new game releases last year.


Commodities

Oil prices are little changed following a two-day rally on easing concerns over banking crises in the US and Europe. Oil traders are also waiting to see government data on US production and inventories. The Energy Information Administration is set to release US supply and demand data. Yesterday, the American Petroleum Institute reported US crude inventories increased 3.26 million barrels last week. Meanwhile copper inventories have continued to drop recently, a sign the market could be tightening. Stockpiles in Shanghai fell 15% last week, while those immediately available to withdraw from the London Metal Exchange are down more than quarter since Friday.

Iron ore is down for a third day on signs that the steel market isn’t picking up even as peak construction season approaches. The steel-making staple dropped as much as 3.6% earlier this morning to trade below $120 a ton for the first time in six weeks. Investors are waiting for stronger signs of an improvement in steel demand and more restocking along the supply chain. Ten mills have lowered their prices of steel products, according to Mysteel, and spot prices for rebar used in construction have slumped since hitting a 9-month high last week. That threatens to put a further squeeze on profit margins at mills, in turn damping their appetite for buying raw materials.


Fixed income and economics

North American benchmark bond prices are lower this morning with volatility starting to subside, as the US 2-year yield’s 27 bps range yesterday was one of the smallest in days. However, this may only be a short-term with the Federal Reserve rate decision today at 2 pm ET. The rate decision has the bond market lacking true conviction about the Federal Reserve’s policy intentions for the first time since the central bank’s tightening cycle began a year ago. Currently, swaps are pricing for just an 80% chance of a quarter-point rate hike. This marks a departure from other Fed meetings over the past year, in which traders fully priced at least one such move. Keep in mind, the debate until now has been over whether rate hikes would be in 25, 50 or 75 bps increments.

Adding to the ongoing UBS/Credit Suisse drama, UBS Group AG is offering to buy back bonds that were issued days before it agreed to take over troubled rival Credit Suisse Group AG. The so-called bail in bonds are deemed risky, but still safer than Additional Tier 1 notes, which are the most junior bonds in a bank’s debt pile. UBS’s credit risk was jolted when it was tied with the fate of Credit Suisse. After a deal was announced over the weekend, the cost of insuring UBS’s debt for one year soared to a record. But also, the credit default swaps for the holding company rose above those for its operating company, UBS AG, by the most on record. S&P Global Inc. revised its outlook on its A- rating on UBS Group to negative on execution risk from the acquisition but maintained a stable outlook on the operating company.


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