The week began with President Trump announcing a total blockade on all traffic to Iranian ports through the Strait of Hormuz, following a perceived lack of progress on negotiations with Iran. Despite the escalation, markets took it as a sign of progress in negotiations, with the S&P 500 hitting 7,000 for the first time ever on Wednesday.
The week wrapped up with an additional ceasefire declared between Israel and Lebanon. Equities rallied on the news, and bond yields fell 6 to 7 bps. Brent crude prices rose as high as $103 a barrel over the weekend, before falling to around $88 a barrel as of this writing.
The Senate Banking Committee announced it will hold a confirmation hearing next week for Kevin Warsh, President Trump’s nominee for Federal Reserve chair. The hearing is expected to serve as a forum for senators to probe Warsh’s views on the economy and monetary policy.
The announcement was made by Sen. Tim Scott, who also said he expects the Justice Department to drop its criminal investigation into the central bank’s renovation project in the coming weeks. Other senators had previously said they would not vote on Warsh’s nomination until the indictment was dropped, arguing it was a threat to the Fed’s independence.
At the same time, President Trump asserted this week that he would fire current Fed Chair Jerome Powell if he did not step down “in time” and insisted the Justice Department investigation would continue.
The International Monetary Fund warned that the scale of U.S. debt issuance is undermining the premium normally commanded by the world’s safest debt. The IMF’s Fiscal Monitor report noted, “The increase in the U.S. Treasury security supply is compressing the safety premium that U.S. Treasuries have traditionally commanded, an erosion that has pushed up borrowing costs globally.”
The report cited a narrowing spread between AAA-rated corporate debt and Treasuries as a sign of reduced appeal for U.S. debt. The IMF also pointed to the concentration of short-term debt issuance as a potential risk, adding, “When debt is concentrated at shorter maturities, governments must refinance more frequently, increasing their exposure to abrupt shifts in market conditions or investor sentiment.”
According to recent data from JPMorgan Chase, asset-backed securities tied to prime auto loans are weakening, with risk premiums climbing to their highest level in about a year for securities rated BBB. The report noted that just 0.42% of prime auto loans were delinquent at the end of February, but that’s still the highest level since 2017, according to Fitch Ratings. For subprime borrowers, about 6.8% of loans are delinquent, near a record high.
KEY INDICATORS THIS WEEK
PPI-Rose 0.5% YoY versus estimates for a 1.1% increase, less than expected despite a surge in energy prices from the Iran war.
Next week-Retail sales!