Market Overview|Quilter Cheviot

US regional banking sector instability continues

Our Weekly Market Overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Problems in the US regional banking sector continued to rumble on last week and resulted in the second largest bank failure in US history when First Republic was seized by regulators and then hoovered up by JP Morgan. Like Silicon Valley Bank before them, the causes were mainly lax regulation, rising interest rates and large deposit outflows although equity markets were largely untroubled by the developments and there was little sign of a flight to safety in the bond market. Time will tell whether there will be more dominoes to fall.

The Federal Reserve also remains more concerned, for now, about inflation pressures than the risk of a slow-moving credit crunch and is likely to raise interest rates once again this week. Their stance was backed up, in the main, by the latest round of economic data with the Q1 GDP report being most notable for what it revealed about ongoing price pressures in the economy, particularly from wages. Further afield, the Bank of Japan decided not to make any major changes to monetary policy despite ongoing speculation about an end to ultra-low interest rates although they did initiate a policy review which may ultimately take them in a new direction.

Looking ahead, investors will continue to focus on earnings data releases as well as the Fed and ECB meetings with both expected to raise rates by 0.25% before the Bank of England probably follows suit next week. Nonfarm payrolls are out on Friday while negotiations will continue in Washington over raising the debt ceiling although we are still at the shadow boxing stage, politically-speaking.

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