Markets had a moribund week through Thursday as investors absorbed news of another bank failure (First Republic), continued signs of economic contraction, and the FOMC’s rate decision. However, markets rallied sharply following Friday’s jobs report in the face of increasing signs of an economic contraction. The NASDAQ Composite recovered the week’s losses, ending higher by 0.09%. The S&P 500 and the Russell 2000 were only able to recover half of the week’s losses and were down -0.78% and -0.49%, respectively.

Early Monday JP Morgan (JPM) announced that it had purchased most of the deposits and assets of First Republic Bank (FRC) for $16 billion.⁽¹⁾ JPM will take on nearly $92 billion in deposits, $173 billion in loans and $30 billion in securities. ⁽¹⁾ JPM expects the deal to be immediately EPS accretive and generate $500 million in incremental income each year. ⁽¹⁾ Regional bank stocks did not respond positively to the news and were the day’s worst performers. Tighter lending conditions (lower revenues) and increasing regulations (higher costs) have eroded their future earnings power. The entire group of stocks has been rerated lower as investors have now begun to incorporate risk of failure likely leading to further consolidation within the industry.

Selling pressure, led by Financials and Energy, continued throughout the week following a batch of soft economic data. ISM Manufacturing came in slightly above expectations at 47.1% but remains in contractionary territory (below 50). ⁽²⁾  JOLTS was reported at 9.59 million showing continuing decline, but remains elevated. ⁽³⁾ Unit labor costs came in much higher than expectations at 6.3%, vs 3.9%, while productivity surprised on the downside at -2.7% vs              -0.1%. ⁽⁴⁾ Corporate earnings remain squeezed as higher labor costs cause margin deterioration despite higher revenues.

On Wednesday afternoon the Federal Reserve announced it will raise rates another 25bps to a range of 5.00-5.25% despite continued banking stress. ⁽⁵⁾ The biggest change was the Fed omitting language that further tightening is appropriate, indicating a pause is now possible. ⁽⁵⁾ While the likelihood of a pause increases, Fed Chair Jerome Powell has stated inflation continues to moderate but inflationary pressures remain high and the road back down to 2% will take time. ⁽⁵⁾ Throughout the press conference Powell underscored the stability of the banking sector but said he expects tightening credit conditions and heightened regulations to weigh on future economic growth. ⁽⁵⁾ Equity markets could not hold on to their initial gains following the decision and sold off heading into Friday’s jobs report.

The markets snapped their weeklong decline on Friday, responding bullishly to the latest employment numbers that showed the US economy added 253,000 jobs in April ‒ higher than estimates of 185,000. Although prior numbers for February and March were revised lower, the US economy remains resilient despite ongoing banking sector issues and signs of contraction. The rally was broad, led by this year’s weakest sectors, Financial and Energy, and all S&P 500 sectors ended the day positive.

Sources:

1. https://www.cnbc.com/2023/05/01/first-republic-bank-failure.html
2. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/april/
3. https://www.bls.gov/jlt/
4. https://www.bls.gov/news.release/pdf/prod2.pdf
5. https://www.cnbc.com/2023/05/03/fed-rate-decision-may-2023-.html
6. https://www.cnbc.com/2023/05/05/jobs-report-april-2023-job-growth-totals-25300-in-april.html