As Banking Stress Recedes, Will Inflation Be Brought Back Into Focus?

April 3, 2023

As Banking Stress Recedes, Will Inflation Be Brought Back Into Focus? Photo

Last week, as banking stress receded, markets calmed down. The S&P 500 Index finished the week up 3.5%1 while the U.S. 10-year Treasury rate increased slightly, by nine basis points.2 There are also signs that the banking system is stabilizing. The combined balance of the two Federal Reserve (Fed) short-term lending facilities has declined by $11 billion.3 Although money continues flowing from bank deposits to money market funds, the pace has slowed down. Friday marked the end of the first quarter and it was certainly a memorable one.    

On the economic data side, we have received the final estimation of gross domestic product (GDP) growth for 4Q 2022, proving the economy was still growing at a healthy pace of 2.6%.4 Additionally, the fact that The Conference Board Consumer Confidence Index rose in March shows that consumers have not been fazed much yet by the banking stress.5 Meanwhile, both the Personal Consumption Expenditures (PCE) data from the U.S. and the Consumer Price Index (CPI) data from the eurozone underscore how sticky inflation is, especially in the core components, which is keeping the central banks concerned.

This week, job market insights will be front and center, with Tuesday bringing job openings data and Wednesday delivering the ADP private employment data. Additionally, on Friday, the nonfarm payroll data for March will be closely examined. A Bloomberg survey of economists has revealed a median estimate of 240,000 jobs being added.

Any signs of fatigue in the job market would add to the market pricing of recession. On the other hand, strong jobs and wage data could indicate lasting inflation and lead to further monetary policy tightening. We will also see the March ISM Report on Business data on Monday and Wednesday. Another data release to be watched will be the U.S. trade balance, a component of GDP, on Wednesday. Last but not least, three speakers from the Fed are scheduled to be on the docket, with their comments likely to draw close attention.6


1CNBC – Stocks close higher Friday, Nasdaq notches best quarter since 2020; 3/31/2023

2MarketWatch – U.S. 10 Year Treasury Note; as of 3/31/2023

3Board of Governors of the Federal Reserve System – Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks; 3/30/2023

4Bureau of Economic Analysis – Gross Domestic Product Q4 2022; 3/30/2023

5The Conference Board – U.S. Consumer Confidence; 3/28/2023

6MarketWatch – U.S. Economic Calendar; as of 4/3/2023

Tags: U.S. economy | Inflation | Labor market | Monetary policy | Banks | Federal Reserve

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