Little fallout by another US major bank failure. US Treasury rates up 12-15bps; reverses Friday's move; ISM report slightly stronger than expected. Indigestion from significant corporate debt issuance ahead of Fed this week

Another one bites the bust. There has been little fallout from another US bank failure, with JP Morgan acquiring First Republic Bank in an FDIC-supported deal. The key market move overnight has been a notable sell-off in US Treasuries for a number of reasons, with the 10-year rate currently up 15bps. JPY continues to weaken in the aftermath of the BoJ meeting. The NZD is slightly weaker and AUD has outperformed, seeing NZD/AUD back at 0.93.

First Republic Bank became the latest casualty of the banking sector turmoil, replacing Silicon Valley Bank as the the second largest bank to fail in US history (Washington Mutual in 2008 remains the largest US bank failure). JP Morgan agreed to acquire First Republic Bank in a government-led deal with JP Morgan and the FDIC agreeing to share the burden of losses. JP Morgan CEO Dimon said he thinks “we’re mostly out of the woods” for now, adding that the banking system still needs to deal with a number of threats, including commercial real estate exposure and the current rate environment, but “the slate of bank failures in the past weeks ought to be abating”.

The market saw the deal as good for JP Morgan, with its share price currently up 2½%. Fallout across the rest of the banking sector from another failure has been modest, with the KBW banking index down 1% and the smaller regional banking index down just over 2% – this in a market with the S&P500 currently showing a small gain. European markets are on holiday.

The US ISM manufacturing index lifted slightly more than expected to 47.1, remaining in contractionary territory, along with new orders which rose 1½ points to 45.7. The six-month streak below 50 is the longest since the 2008/9 recession.  Employment and prices paid indices rose by about 3 and 4 pts respectively to 50.2 and 53.2, which provides little comfort about the inflation outlook.

The key market mover overnight has been US Treasuries, with a slight steepening bias and rates up 12-15bps across the curve, taking the 10-year rate to 3.57%. Drivers of the move include a rebound in rates after Friday’s notable rally, driven by European rates and month-end flows, the slightly stronger than expected ISM survey and a ramping up of corporate debt issuance ahead of the Fed’s meeting later this week, with 12 companies looking to raise a combined $30-35b.

In his FOMC meeting preview, WSJ Fed whisperer Nick Timiraos noted the Fed is on track to increase rates by 25bps while deliberating whether that will be enough to then pause the fastest rate-raising cycle in 40 years, adding “officials are likely to keep their options open as they finesse carefully calibrated signals in their post-meeting statement and remarks by Fed Chair Jerome Powell at a news conference after the meeting ends”. He noted that the Fed officials will have the results of the key Fed senior loan-officer survey when they meet, which won’t be released publicly until next week.

In currency markets, JPY has been the largest mover, with USD/JPY up 0.8% from last week’s close to 137.40, more yen weakness that follows the BoJ’s meeting on Friday – where it left its ultra-easy policy settings unchanged with forecasts showing a rapid return to sub-2% inflation, despite strong upside momentum, and looking to undertake a 12-18 month review of monetary policy.

EUR and GBP are down 0.4-0.6%, following their outperformance through April, seeing EUR back below 1.10 and GBP below 1.25. Commodity currencies have outperformed, with the AUD and CAD the only two majors to show (small) gains against the USD, while the NZD shows a small fall to 0.6170. This sees NZD/AUD back to 0.93, while NZD crosses against JPY, EUR and GBP are all stronger.

Yesterday, domestic rates were mainly lower, playing catch-up to Friday’s bond market rally, although weaker US Treasuries through the afternoon pared back earlier falls. The net result was NZGBs falling 1-4bps across most of the curve. For swaps, the 2-year rate closed 1bps higher at 5.06%, after being marked at 5.01% in the morning. The 10-year swap rate was 3bps lower at 4.17%.

This afternoon, the RBA is widely anticipated to keep policy on hold for a second successive month and maintain a tightening bias.  Only 3bps worth of hikes have been priced in, so a 25bps hike would come as a major surprise. As well as the Statement, Governor Lowe will be speaking tonight in Perth where he can flesh out more detail. On the data front, Euro area CPI data are expected to show the core rate ticking down to 5.6% y/y. A major positive surprise would push the market in the direction of a 50bps hike later this week whereas a 25bps hike is widely anticipated at this point.  The US JOLTs report was a market mover last month when it showed job openings fell significantly, and the latest update is released tonight.