Inflation stays hot, JPMorgan acquires troubled lender

Treasury yields fall amid banking industry stress

• After climbing for much of the month, Treasury yields ended the final week of April lower.

Hedging activity remains elevated to close out April

• Hedging activity increased as we ended the first month of the second quarter, with liability-sensitive driving the volume.

JPMorgan Chase acquires troubled regional lender

• After a series of stabilization efforts failed in the last month and after experiencing a precipitous drop in its stock price last week, a troubled west coast regional bank was seized by the FDIC on Monday morning before being acquired by JPMorgan Chase in an FDIC-led bidding process.

Inflation stays hot, Q1 GDP disappoints

• Investors received several high-profile updates last week, including core PCE and the first estimate of first-quarter GDP.

Treasury yields fall amid banking industry stress

• After climbing for much of the month, Treasury yields ended the final week of April lower.
  • The curve’s shape remained roughly unchanged as the 2-year and 10-year yields each declined 13 basis points to end April at 4.04% and 3.44%, respectively.
  • Notably, the 2s/10s basis remains significantly inverted but currently sits approximately 50 basis points higher than the multi-decade low recorded in March.
• Investors now turn their attention to the quickly approaching FOMC policy meeting.
  • Fed Funds futures pricing at the end of the week suggested market participants see a substantial probability that the FOMC will raise the policy rate by 25 basis points after Wednesday’s meeting.
  • However, market expectations for policy rate action in the second half of 2023 and into 2024 pulled back over the week.
    • Current market projections expect the policy rate to end January 2024, roughly 50 basis points below current levels at a range of 4.25% - 4.50%.

Hedging activity remains elevated to close out April

• Hedging activity increased as we ended the first month of the second quarter.
  • Many of the themes that we have noted previously remain intact.
• While asset-sensitive clients have returned to the fold recently, liability-sensitive clients have driven most of the hedging activity in the last several weeks.
  • The flexibility improvements accompanying the release of the Portfolio Layer Method update have proven attractive for many clients and have increased the utilization of fixed-rate assets relative to wholesale borrowings, in aggregate, across our client base.
• Looking back as we enter May, approximately 70% of the hedges executed year-to-date have been structured to protect against further increases in interest rates.

JPMorgan Chase acquires troubled regional lender

• After a series of stabilization efforts failed in the last month and after experiencing a precipitous drop in its stock price last week, a troubled west coast regional bank was seized by the FDIC on Monday morning before being acquired by JPMorgan Chase in an FDIC-led bidding process.
  • The FDIC began the bidding process over the weekend and solicited bids from JPMorgan Chase, PNC, and Citizens Financial, among others.
  • JPMorgan Chase won the bidding and will acquire the troubled bank’s assets, $173 billion in loans and $30 billion in securities, and approximately $93 billion in deposits.
• Monday’s acquisition marks the third U.S. bank failure since March and the second largest bank failure in U.S. history, sitting only below Washington Mutual’s collapse in 2008.

Inflation stays hot, Q1 GDP disappoints

• Investors received several high-profile updates last week, including core PCE and the first estimate of first-quarter GDP.
• The Fed's preferred measure of inflation, core PCE, rose 0.3% in March and 4.6% yearly, reinforcing the case for a Fed interest-rate hike at the May policy meeting.
  • Services prices, excluding housing and energy costs, decelerated in March but remained elevated at a 4.5% annual pace.
  • Although price pressures remain firm, the 0.3% core increase in March marks the slowest monthly increase recorded since November.
• According to the Commerce Department, GDP growth decelerated to a 1.1% annualized pace in the first quarter, as lackluster business investment and a pullback in inventories drove the slower pace.
  • The first quarter pace marks a notable slowdown from the 2.6% annualized pace recorded in the fourth quarter.
  • Looking ahead, the Atlanta Fed’s GDPNow tool forecasts the U.S. economy to expand at a slightly more robust 1.7% annualized pace in the second quarter.

The look forward

• Upcoming economic data releases
  • S&P Global U.S. Manufacturing PMI – Monday
  • Construction Spending – Monday
  • ISM Manufacturing Index – Monday
  • Factory Orders – Tuesday
  • Durable Goods Orders – Tuesday
  • MBA Mortgage Applications – Wednesday
  • ADP Employment Change – Wednesday
  • ISM Services Index – Wednesday
  • Jobless Claims – Thursday
  • April Non-Farm Payroll Report – Friday
• Upcoming Federal Reserve Speakers
  • FOMC Policy Meeting – Tuesday / Wednesday
  • Chair Powell post-FOMC Press Conference – Wednesday
  • Bullard – Friday
  • Cook – Friday

Rates snapshot

Market implied policy path (overnight indexed swap rates)