Bloomberg - Evening Briefing - ‘Be afraid. Be very afraid’

The economic outlook and health of the global financial system is either stable or scary—depending on who you ask and where you live. US Federal Reserve Chairman Jerome Powell said this week that the possibility of avoiding a recession is “more likely than that of having a recession.” He also opened the door to pausing interest rate hikes following 10 straight increases. “We may not be far off” the level that’s sufficiently restrictive to squash persistent inflation, he said. But a key driver of price pressures, the robust US labor market, held its ground in April with hiring and wage gains accelerating. Across the Atlantic, the European Central Bank slowed interest-rate increases to a quarter-point as inflation shows signs of ebbing—but a pause is not in the cards for now.

Fed Chair Jerome Powell says he sees a soft landing for the US economy coming into view.  Photographer: Al Drago/Bloomberg

Key to whether Powell can achieve his soft landing is the extent of the fallout from a string of regional bank failures. JPMorgan CEO Jamie Dimon, fresh off his purchase of a spiraling First Republic Bank, declared “this part of the crisis over.” But Wall Street wasn’t buying it, and promptly went hunting for weakness among the lender’s fellow midsize banks. Pershing Square’s Bill Ackman said the regional banking system remains at risk and the FDIC’s failure to update and expand its insurance regime has “hammered more nails in the coffin.” At the Milken Institute Global Conference, the popular view from panelists was that smaller banks aren’t out of the woods and an economic contraction is inevitable. But while the opinions are varied, many landed in the same place. “Powell’s message remains sobering—the Fed’s policy rates will only come down with a greater economic slowdown or credit crunch from tightening bank lending standards,” said Yung-Yu Ma of BMO Wealth Management.

Indeed, “Credit tightening” is the new watchphrase. Banking stresses are leading to stricter lending conditions, with the Fed’s rate hikes taking a big bite out of the value of bonds held by banks. The question now is how much lenders will tighten. For First Republic, the seeds of its downfall were sown in the jumbo mortgages of Silicon Valley, where a unique strategy to loan wealthy individuals extraordinary sums of money blew up spectacularly. Meanwhile, shares of regional banks Western Alliance, PacWest, and First Horizon suffered bruising losses this week. On Friday however, both the battered banks and the broader market recovered some of their losses. 

More threatening than lingering inflation and any credit crunch is the US debt ceiling crisis and the specter of a GOP-induced default. Such a calamity could kill millions of American jobs, crush the stock market by 45% and GDP by 6.1%, the White House estimated. Director of National Intelligence Avril Haines warned that China and Russia would likely seek to exploit a default and spread global doubt about the value of the dollar, US leadership and institutions. With the US Treasury just weeks away from running out of money to pay US debt, Republicans are nevertheless demanding a ransom of unrelated cuts that would likely slash funding for the climate fight, education and potentially veterans. The Fed has made clear that it would not be able to protect the economy if the unthinkable happens. “I have one message for those observing or involved in the standoff over raising the US federal debt limit: Be afraid, be very afraid,” writes Bill Dudley for Bloomberg Opinion. 

Russia claimed the US was behind a drone strike on the Kremlin that it blamed on Ukraine, but provided no evidence. The US said Russia is lying and a think tank contends Vladimir Putin likely staged the event. Amid expectations of a Ukrainian counteroffensive, Ukraine President Volodymyr Zelenskiy visited the International Criminal Court in The Hague, where he urged the creation of a “full-fledged” tribunal to punish Russia for its aggression, which has killed potentially tens of thousands of Ukrainians. The ICC earlier issued a warrant for Putin’s arrest on war crimes charges.

Volodymyr Zelenskiy, Ukraine's president, left, and Sauli Niinisto, Finland's president, during a meeting May 3 in Helsinki. Photographer: Andrey Rudakov/Bloomberg

IBM said it expects to pause hiring for roles that could soon be replaced with artificial intelligence, affecting possibly 7,800 jobs in the coming years. The US is locked in a high-stakes race with China to develop AI and can’t afford to slow down, venture capitalist Vinod Khosla said, as the White House announced that it would support regulations to mitigate potential harms from the technology. For many, it may be hard to remain sanguine given that the so-called godfather of AI, Geoffrey Hinton, says he regrets his life’s work, Parmy Olsen writes in Bloomberg Opinion.

With the US East Coast eager for the al fresco dining season, here are some restaurants in the Hamptons and Maine worth a visit. The set menu at Noma Kyoto will cost you $850, but if you’d rather whip up your own meal, there’s a new smart mixer to boost your game. And if all this eating made your thirsty, this New York City bar in the now-wealthy Lower East Side of Manhattan has been named the world’s best. 

• G-7 finance chiefs and central bankers meet in Niigata, Japan.
• Companies report across Asia, including Panasonic and Honda.
• Saudi Aramco reports; a profit decline is expected on lower oil prices.
• Thailand goes to the polls with voters weighing cost of living and debt.
• April’s US core consumer price index arrives, closely watched by the Fed.

Chinese leader Xi Jinping has been busy striking deals over the past year to expand the ways in which the country's currency is used, with new agreements linked to the yuan stretching from Russia and Saudi Arabia to Brazil and even France. While the US remains the world’s clear financial hegemon, these moves are helping China carve out a bigger place for itself.

The Chinese currency’s share of global trade finance tripled since the end of 2019. Xi Jining is looking to push it further. Photographer: Bloomberg 

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