Charts of the Week: Trouble Brewing for Banks

Summary

• We see growing risk of a regional banking system crisis.
• Real wage growth is becoming a problem for the Fed.
• The EUR/USD rally could be near its end, if history is anything to go by.
• A more hawkish GDP and inflation outlook could cause the BoE to upwardly revise its forecasts tomorrow.

Are Regional Banks Headed for Crisis?

We had thought regional banks were near the lows during April, but the further selloff last week proved us wrong (Chart 1). We see growing risk of a regional banking system crisis. The sharp rise in the Federal Reserve’s (Fed) interest rates over the past year has weakened many banks, and we think it is likely that inflation remains sticky with further Fed rate rises.

Wage Growth Is an Issue for the Fed

April’s labour market data shows increasing wage pressures. Nominal wage growth is accelerating further from the Fed’s inflation target. Meanwhile, in real terms, real median wage growth has been accelerating since early 2022 (Chart 2). Dominique has more details in her review of nonfarm payrolls here.

EUR/USD Rally Nears End?

EUR/USD has had some impressive rallies in recent years. It shot up over 15% in 2017H1 and did similarly after COVID in 2020. Overlaying the current EUR/USD rally from its September 2022 low, we find that the currency has broadly matched the size and pace.

But in the two earlier instances, it struggled to make further gains and even corrected lower (Chart 3). Something similar could happen again. Bilal has four more reasons we like a tactical short EUR/USD.

BoE to Revise GDP and CPI Forecasts

While we have previously been very dovish on the BoE, the recent data outturns have led us to shift our expectations toward further hikes. The May meeting will also see updates to the monetary policy report (MPR) and the BoE’s forecasts.

Currently, it seems likely that this will mean an upward revision to the near-term GDP and CPI forecasts (Charts 4 and 5). Henry has more details in his latest BoE Preview.

Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)