JP Morgan Chase’s Acquisition of First Republic Bank Spurs Investor Optimism Amidst Market Dynamics

Ozge Gurses
| May 2, 2023

Investors responded positively to JP Morgan Chase’s decision to acquire First Republic Bank.

While the markets in the US are focused on the Federal Reserve’s interest rate decision this week, concerns about mid-sized banks subsided as investors responded positively to JP Morgan Chase’s decision to acquire First Republic Bank, which had been seized by the US Federal Deposit Insurance Corporation (FDIC) after the banking crisis and saw deposits fall below expectations in the first quarter of the year. As a result, Wall Street indices closed with limited daily losses on Monday, with the Dow-Jones Index (INDEXDJX: DJI) down 0.14%, the Nasdaq-100 Index (NDX: USN) down 0.11%, and the S&P-500 Index (SPX: USY) down 0.04%.

The US Dollar Index (DXY) closed yesterday at 102.2, up 0.4%.

Brent Crude Oil (LCO07: USC) closed yesterday at $79.3 per barrel, down 1.3%, due to growing concerns about China’s economic outlook and anxiety caused by the banking crisis in the US.

US treasury yields rose sharply yesterday due to expectations of a rate hike by the Federal Reserve, corporate bond issuances, and JP Morgan’s acquisition of First Republic Bank. The US 10Y Treasury yield closed up 15 basis points at 3.57% while the US 2Y Treasury yield, which is more sensitive to monetary policy developments, closed up 14 basis points at 4.14% yesterday.

Last week, the March data for the Personal Consumption Expenditures (PCE) deflator and personal income and spending were followed closely, in terms of the monthly price developments that the Fed monitors. 

In March, the monthly increase in the PCE deflator slowed down to 0.1% from 0.3%, in line with expectations, reaching its lowest level since July 2022, while on an annual basis, it fell from 5.1% to 4.2%, reaching its lowest level since May 2021.

Similarly, the core PCE deflator increased by 0.3% on a monthly basis, in line with expectations and similar to the previous month, while on an annual basis, it slightly decreased from 4.7% to 4.6%, reaching its lowest level since May 2021.

In March, personal income in the United States rose by 0.3% from a month earlier maintaining the same growth pace as in February. On the other hand, despite a strong labor market and high savings levels, the monthly increase in personal spending slowed down from 0.1% to 0% and indicated stagnation on the consumption side.

In addition, The University of Michigan consumer sentiment for the US  increased to 63.5 in April, in line with preliminary estimates.

The S&P Global Manufacturing PMI for the US was revised lower to 50.2 in April 2023 from a preliminary of 50.4, and compared to 49.2 in March.

The ISM Manufacturing PMI in April rose from 46.3 to 47.1, surpassing market expectations (46.8) and indicating that the contraction in the manufacturing industry has slowed down.

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In the US, the focus of the markets will be on the Fed interest rate decision and Fed Chairman Powell’s speech

The focus of the US markets will be on the Fed interest rate decision and Fed Chairman Powell’s speech on Wednesday.

Due to the easing effects of the banking crisis and the recent loosening in inflation indicators, the Fed is expected to raise interest rates by 25 basis points at the Wednesday meeting. Possible new signals that the Fed may provide regarding its monetary policy for the upcoming period will also be closely monitored.

Additionally, on Wednesday, S&P Global Services PMI, and ISM Services PMI for April will provide signals on the latest economic activity.

The new orders for US manufactured goods for March, which will provide signals about the outlook for production, and JOLTS job openings for March will be released today.

On Thursday the balance of trade for March will be released. On the same day, employment market data will be monitored as a guide to Fed’s monetary policy. Weekly initial jobless claims, non-farm payrolls, unemployment rate, and average hourly earnings data for April will be followed.

The focus of the European markets will be on ECB interest rate decision and the speech of ECB President Lagarde

Last week, In Germany, the preliminary consumer price index (CPI) for April was closely monitored. The monthly increase in headline CPI slowed down from 0.8% to 0.4%, higher than the expected 0.6%, due to the impact of lower energy prices. On an annual basis, CPI in Germany decreased from 7.4% to 7.2%, slightly below the expected 7.3%, reaching the lowest level since August 2022.

The preliminary GDP growth rate for the first quarter of this year was released for Germany, Italy, France, and the Euro Area.

After a 0.5% contraction in the last quarter of last year, the German economy grew by 0% in the first quarter due to concerns about the energy crisis and recession despite the easing of fears.

The Italian economy grew by 0.5% in the first quarter, exceeding expectations of 0.2% growth after a 0.1% contraction in the last quarter of last year.

The French economy recorded 0.2% growth in the first quarter, in line with expectations after stagnant growth of 0% in the last quarter of last year.

The Euro Area economy recorded 0.1% growth in the first quarter, below expectations of 0.2% growth, after stagnant growth of 0% in the last quarter of last year.

In Europe, the focus of the markets will be on the European Central Bank (ECB) interest rate decision and the speech of ECB President Lagarde on Thursday. The ECB is expected to raise interest rates by 25 basis points.

In addition, the final S&P Global Manufacturing and Services PMI for April, preliminary consumer price inflation and producer price inflation, retail sales in the Euro Area for March, and German factory orders for March will be monitored throughout Europe.

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In Asia, Chinese Caixin manufacturing and services PMI data will be monitored

Over the weekend, the official NBS Manufacturing and Non-Manufacturing PMI for the month of April, which provided signals about the direction of the economy in China, were followed. Accordingly, following its trend in the three-month growth zone, the official manufacturing PMI fell more than expected in April to 49.2 from 51.9, which is the lowest level in the last four months. Expectations were for a slight decrease to 51.4.

The Central Bank of Russia kept its policy interest rate unchanged at 7.5%, in line with expectations, and thus maintained the current interest rate level in the last five meetings.

In Asia, Caixin Manufacturing and Services PMI for April, which will provide signals about the performance of small and medium-sized businesses in China, will be monitored.

Source: EquityRT MacroAnalytics

Disclaimer: The information in the publication is not an investment recommendation and it is not an investment or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but EquityRT does not represent that it is accurate or complete. EquityRT does not accept any liability for any direct, indirect, or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author, as of the date of the publication and are subject to change without notice.

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