Economic data in April took a back seat to the drama in the regional banking sector, as the month closed with the second biggest bank failure in U.S. history.  First Republic bank was seized by regulators over the weekend, and by Monday morning had a new owner in J.P. Morgan.  The combination of rising interest rates and a balance sheet heavy in low interest rate (and interest-only) mortgages to high net worth borrowers doomed the once vaunted bank of the affluent.  Only two months ago, FRC’s stock was trading near $125 per share.  On May 1st, it was at $0.

On the heels of this bank collapse, this week brings an FOMC meeting at which the FOMC is expected to hike short-term interest rates another 25 basis points, bringing the Fed Funds rate north of 5.0%.  Despite the cracks appearing in the regional bank sector, the Fed appears to remain committed to bringing inflation back down to its target rate of 2.0%.  It has a ways to go in that regard.

The Employment Cost Index rose a higher than forecast +1.2% in the first quarter of 2023, and is now up +5.0% year over year.  The Fed’s preferred measure of inflation, the PCE Deflator, edged up +0.1% in March for a +4.2% YoY increase.  Moreover, the PCE Core Deflator rose +0.3% MoM, or +4.6% YoY.  Despite a lower than expected read on Q1 GDP (+1.1% versus expectations for +1.9%), inflation still remains the top concern for the Fed.

Despite rising interest rates and a slowing economy, the employment picture remains robust.  The February JOLTS Job Openings number came in at a heady 9.9 million, while tomorrow’s reading for March is estimated to show +9.7 million job openings.  The Unemployment Rate in March came in at a modest +3.5% as Nonfarm Payrolls rose by 236k.  Average Hourly Earnings rose +0.3% MoM, or +4.2% YoY.  The Underemployment Rate remains just +6.7%.

With three U.S. bank failures having occurred since March, and the Fed seemingly resolute in its pledge to bring inflation under control by raising short-term interest rates, markets appear on edge.  Although underlying wage and employment numbers remain strong, and corporate earnings look reasonable, the yield curve remains heavily inverted, suggesting an economic slowdown, and a possible recession is imminent.  What we wonder is, given the aforementioned labor market strength, if a recession does occur, will anyone notice?

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