I want to preface this Week in Review post with a note about the Silicon Valley Bank Collapse. Which, if you’ve had a TV on or been to any news site today, you’ve undoubtedly heard about. This is the second largest bank failure in US history, so it’s understandable if this is alarming to you. Here are my thoughts:
- Silicon Valley Bank (SVB) was largely a bank for venture capital-backed technology companies and start-ups. Many of these companies were considered too risky to obtain traditional bank financing and were already in trouble after the tech crash from 2022. And then the steadily increasing interest rate environment compounded an already precarious situation for the bank’s clients.
- After the bank announced it was seeking $2.25 billion in capital to stabilize its balance sheet, customers and investors panicked.
- What then ensued was a classic “run on the bank,” which was the nail in the coffin for SVB.
Will the collapse of Silicon Valley Bank spread to the broader markets?
This is a logical question on investors’ minds. I think this is highly unlikely to cause broad contagion to the financial markets. This was largely related to an already reeling technology sector. Although this has, and probably will continue to affect the share prices of other banks and lenders in the short-term. But, long-term, I think the overall impact is very minimal.
Ok, on to the Week in Review, which will include more news on (you guessed it) Silicon Valley Bank.
It was a losing week for the stock market as investors digested Fed Chair Powell’s testimony before Congress, the February employment report, and news of SVB Financial’s Silicon Valley Bank being shut down.
The market started to get a bit shaky after Fed Chair Powell’s remarks to the Senate Banking Committee and House Financial Services Committee had investors rethinking the possibility of a 50 basis points rate hike at the March FOMC meeting.
Participants took notice of the following remarks from his prepared testimony:
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Mr. Powell, in the Q&A portion of his testimony, acknowledged that it is likely that the ultimate rate the Fed writes down in its Summary of Economic projections at the March meeting is likely to be higher than what was written down at the December meeting. He also added that the economic data thus far suggests that the Fed has not overtightened and still has more work to do.
Notably, the fed funds futures market saw an abrupt turn in expectations for the March FOMC meeting, pricing in a 78.6% probability of a 50 basis points rate hike versus just 31.9% before Fed Chair Powell’s testimony.
The reaction to Fed Chair Powell’s remarks was jarring enough for the capital markets, but things would get even more challenging in the wake of news on Thursday that SVB Financial (SIVB) was seeking to raise capital after it saw elevated cash burn from its clients. That news was disconcerting for market participants knowing that something typically “breaks” when the Fed is in an aggressive tightening cycle, and that the banks, whether they are the specific problem in that regard, will likely get pulled into it nonetheless given their lending role.
Around 12:30 p.m. ET Friday, it was announced that SVB Financial Group’s Silicon Valley Bank was shut down as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California. That news contributed to added flight to safety interest in the Treasury market and further prompted market participants to rein in their risk exposure amid concerns about a possible contagion effect.
The 2-yr note yield declined 27 basis points this week to 4.59% while the 10-yr note yield dropped 26 basis points to 3.70%.
With the fallout surrounding SVB Financial, the fed funds futures market pivoted back to thinking that the Fed is likely to raise rates by only 25 basis points at the March FOMC meeting. To that end, the CME FedWatch Tool indicates only a 39.5% probability now of a 50 basis points rate increase.
The SVB Financial situation largely overshadowed a relatively pleasing February employment report on Friday that was accented with stronger than expected nonfarm payrolls and weaker than expected average hourly earnings growth.
The S&P 500 settled Friday near its lowest levels of the week with losses in all 11 sectors.
For the week, the worst performing sector was the financial sector, which declined 8.5%, followed by a 7.6% decline in the materials sector, a 7.0% drop in the real estate sector, a 5.6% decline in the consumer discretionary sector, a 5.4% decline for the energy sector, and a 4.5% drop for the industrial sector. The best performing sector this week was the consumer staples sector, which was down 1.9%.
Below are summaries of daily action:
Monday:
Monday’s trade started on a more upbeat note. The main indices enjoyed a positive standing in the early going, supported by gains in some mega cap stocks. Apple (AAPL) led the charge in that respect after Goldman Sachs initiated coverage with a Buy rating and a $199 price target.
Things were more shaky under the surface, though, as investors played a waiting game ahead of key events later this week. Even at midday, when the main indices traded near their best levels of the day, decliners led advancers by a 4-to-3 margin at the NYSE and a 5-to-3 margin at the Nasdaq.
Underlying weakness became more apparent as mega cap strength started to fade. This coincided with selling efforts ramping up in the Treasury market. The main indices spent most of the afternoon in a slow grind lower, ultimately settling near their lows for the day. At the close, decliners led advancers by a roughly 2-to-1 margin at both the NYSE and the Nasdaq.
Monday’s economic data was limited to the January Factory Orders, which declined 1.6% month-over-month in January following a downwardly revised 1.7% increase (from 1.8%) in December. Shipments of manufactured goods increased 0.7% month-over-month after declining 0.6% in December.
- The key takeaway from the report was the strength (and rebound) seen in nondefense capital goods orders, excluding aircraft. Shipments of these same goods, which factor into GDP forecasts, were up 1.1% after declining 0.6% in December.
Tuesday:
Tuesday’s trade started somewhat mixed with investors anxiously awaiting Fed Chair Powell’s testimony before the Senate Banking Committee. The tone in the market shifted markedly after the release of the Fed Chair’s prepared remarks at 10:00 a.m. ET, followed by his testimony shortly after.
Both the stock and bond market reacted strongly to the following comments:
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Fed Chair Powell would add in the Q&A portion of his testimony that the economic data thus far doesn’t suggest the Fed has overtightened; indeed, the data suggest the Fed has more work to do. He also acknowledged that it is likely that the ultimate rate the Fed writes down in its Summary of Economic projections at the March meeting is likely to be higher than what was written down at the December meeting.
The upsetting factor was that Fed Chair Powell’s remarks suggested the market has still underestimated where the terminal rate will fall. In addition, it was forced to contend with an understanding that a 50 basis points rate hike at the March FOMC meeting is back on the table.
Reviewing Tuesday’s economic data:
- January Wholesale Inventories down 0.4% month-over-month, as expected, following a 0.1% increase in December.
- Consumer credit increased by $14.8 bln in January following a downwardly revised $10.6 bln (from $11.6 bln) in December.
- The key takeaway from the report is that the pace of credit expansion is moderating in the face of rising interest rates. The $14.8 billion increase in January, which was driven predominately by revolving credit, was the second-lowest increase in the last 12 months (the lowest was in December).
Wednesday:
There was not a lot of conviction behind Wednesday’s trade as investors digested day two of Fed Chair Powell’s testimony before the House Financial Services Committee. The main indices spent the majority of the session trading either slightly above or slightly below their flat lines.
The lackluster price action was due to the Treasury market signaling concerns about the Fed possibly taking rates too high and forcing a recession. Tuesday’s settlement levels brought the 2s10s spread to its widest margin since 1981 and things didn’t get any better today.
The 10-yr note yield moved up to challenge the 4.00% level again following a $32 billion 10-yr note reopening, which did not go over so well at auction. The high yield of 3.985% at that auction tailed the when-issued yield of 3.958% by nearly three basis points on relatively weak dollar demand. The bid-to-cover ratio was 2.35 versus the prior 12-auction average of 2.43.
With that move, stock prices deteriorated and the major indices slipped to trade closer to their lows of the session.
The main indices were able to close comfortably above their lows, though, thanks to a mega-cap driven rally effort taking root in the last hour of trading. The upside momentum eventually petered out when the S&P 500 almost hit its 50-day moving average (3,997), which pivoted Tuesday from support to resistance.
Reviewing Wednesday’s economic data:
- The weekly MBA Mortgage Application Index rose 7.4% with refinancing applications increasing 9.0% and purchase applications rising 7.0%.
- The ADP Employment Change showed that private payrolls rose by 242,000 in February following a revised 119,000 increase in January (from 106,000).
- The trade deficit for January widened to $68.3 billion from an upwardly revised $67.2 billion (from -$67.4 billion), as imports were $9.6 billion more than December imports and exports were $8.5 billion more than December exports.
- The key takeaway from the report is that both imports and exports increased versus December, reflecting a pickup in global trade activity that is a reflection of increased demand.
- JOLTS – Job Openings totaled 10.824 million in January following a revised 11.234 million in December (from 11.012 million).
- Weekly EIA Crude Oil Inventories showed a draw of 1.69 million barrels following last week’s build of 1.17 million barrels.
Thursday:
The stock market made an attempt to start Thursday’s session on an upbeat note, bolstered by leadership from the mega-cap stocks and some hope that a higher-than-expected initial jobless claims reading could be followed Friday with a weaker-than-expected nonfarm payrolls number for February. That opening move was short-lived, however, as some disconcerting news and price action in the banking space undermined investor confidence.
Banks led a broad-based market downturn that saw the S&P 500 slice through its 200-day moving average (3,941) and close near its low for the session in a steady selloff that involved most stocks.
The bank stocks sold off sharply today amid concerns about rising rates, higher deposit costs, and weaker loan demand that collided with the news that Silvergate Capital (SI) is voluntarily liquidating Silvergate Bank, and that SVB Financial (SIVB), based in Silicon Valley, is seeking to raise capital as it has seen elevated cash burn from its clients.
The latter triggered worries about the state of deposit bases and capital positions for smaller banks that drove concerted selling interest in the space.
The added angst in today’s price action was the understanding that something typically “breaks” when the Fed is in an aggressive tightening cycle, and that the banks, whether they are the specific problem in that regard, will likely get pulled into it nonetheless given their lending role.
It was striking, too, that Treasury yields moved noticeably lower, yet stocks did not respond in opposite kind to that move, implying that the move in Treasuries was more of a flight-to-safety than anything else.
Reviewing Thursday’s economic data:
- Initial jobless claims for the week ending March 4 increased by 21,000 to 211,000 and continuing jobless claims for the week ending February 25 increased by 69,000 to 1.718 million. Those were the highest claims levels since December.
- The key takeaway from the report is that it teased the prospect of some softening in the labor market, as it marked the first initial claims reading above 200,000 in eight weeks. Still, it can be said that the current claims level remains in a zone that is indicative of a tighter labor market overall.
- EIA Natural Gas Inventories -84 bcf vs prior -81 bcf
Friday:
The stock market suffered sizable losses Friday. The employment report brought relatively good news with nonfarm payrolls being stronger than expected and average hourly earnings growth being weaker than expected, but the dealings involving SVB Financial (SIVB halted) were the biggest driver of Friday’s price action. A broad retreat saw the S&P 500 fall below 3,900 on above average volume.
SVB Financial Group’s Silicon Valley Bank has been shut down as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California. This news followed earlier reports that the Founders Fund had advised companies to pull their money from Silicon Valley Bank, according to Bloomberg, and that deposit outflows at SVB Financial were outpacing the sales process (i.e., there were reports that larger banks had reportedly been looking at buying SVB, but their willingness to do so diminished as the bank’s deposits went away), according to CNBC.
SVB Financial’s troubles created uncertainty about a potential contagion effect in the banking industry that fostered a strong flight to safety bid in the Treasury market.
Most reporting thus far has highlighted views by analysts/pundits that SVB’s situation won’t prove to be a systemic banking problem, though, given how well capitalized the banking system is. That said, the market saw a rebound effort interrupted after it was reported around 12:30 p.m. ET that Silicon Valley Bank would be shut down. The market lost its footing from there as broad based selling efforts picked up sending the S&P 500 to 3,846 at its lows for the session.
Reviewing Friday’s economic data:
- February Nonfarm Payrolls 311K; Prior was revised to 504K from 517K; February Nonfarm Private Payrolls 265K; Prior was revised to 486K from 443K;
- February Unemployment Rate 3.6%; Prior 3.4%; February Avg. Hourly Earnings 0.2%; Prior 0.3%; February Average Workweek 34.5; Prior was revised to 34.6 from 34.7
- The key takeaway from the report is that it was still a strong report for this point in the Fed’s tightening cycle, and while the SIVB issue is causing a notable distraction, the strength of the report in our estimation is still enough to keep a 50 basis points rate hike on the table for the March FOMC meeting.
Ok, go enjoy your Spring Break, if you get one…🍹⛱️
Week in Review: Silicon Valley Bank Collapse
I want to preface this Week in Review post with a note about the Silicon Valley Bank Collapse. Which, if you’ve had a TV on or been to any news site today, you’ve undoubtedly heard about. This is the second largest bank failure in US history, so it’s understandable if this is alarming to you. Here are my thoughts:
Will the collapse of Silicon Valley Bank spread to the broader markets?
This is a logical question on investors’ minds. I think this is highly unlikely to cause broad contagion to the financial markets. This was largely related to an already reeling technology sector. Although this has, and probably will continue to affect the share prices of other banks and lenders in the short-term. But, long-term, I think the overall impact is very minimal.
Ok, on to the Week in Review, which will include more news on (you guessed it) Silicon Valley Bank.
It was a losing week for the stock market as investors digested Fed Chair Powell’s testimony before Congress, the February employment report, and news of SVB Financial’s Silicon Valley Bank being shut down.
The market started to get a bit shaky after Fed Chair Powell’s remarks to the Senate Banking Committee and House Financial Services Committee had investors rethinking the possibility of a 50 basis points rate hike at the March FOMC meeting.
Participants took notice of the following remarks from his prepared testimony:
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Mr. Powell, in the Q&A portion of his testimony, acknowledged that it is likely that the ultimate rate the Fed writes down in its Summary of Economic projections at the March meeting is likely to be higher than what was written down at the December meeting. He also added that the economic data thus far suggests that the Fed has not overtightened and still has more work to do.
Notably, the fed funds futures market saw an abrupt turn in expectations for the March FOMC meeting, pricing in a 78.6% probability of a 50 basis points rate hike versus just 31.9% before Fed Chair Powell’s testimony.
The reaction to Fed Chair Powell’s remarks was jarring enough for the capital markets, but things would get even more challenging in the wake of news on Thursday that SVB Financial (SIVB) was seeking to raise capital after it saw elevated cash burn from its clients. That news was disconcerting for market participants knowing that something typically “breaks” when the Fed is in an aggressive tightening cycle, and that the banks, whether they are the specific problem in that regard, will likely get pulled into it nonetheless given their lending role.
Around 12:30 p.m. ET Friday, it was announced that SVB Financial Group’s Silicon Valley Bank was shut down as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California. That news contributed to added flight to safety interest in the Treasury market and further prompted market participants to rein in their risk exposure amid concerns about a possible contagion effect.
The 2-yr note yield declined 27 basis points this week to 4.59% while the 10-yr note yield dropped 26 basis points to 3.70%.
With the fallout surrounding SVB Financial, the fed funds futures market pivoted back to thinking that the Fed is likely to raise rates by only 25 basis points at the March FOMC meeting. To that end, the CME FedWatch Tool indicates only a 39.5% probability now of a 50 basis points rate increase.
The SVB Financial situation largely overshadowed a relatively pleasing February employment report on Friday that was accented with stronger than expected nonfarm payrolls and weaker than expected average hourly earnings growth.
The S&P 500 settled Friday near its lowest levels of the week with losses in all 11 sectors.
For the week, the worst performing sector was the financial sector, which declined 8.5%, followed by a 7.6% decline in the materials sector, a 7.0% drop in the real estate sector, a 5.6% decline in the consumer discretionary sector, a 5.4% decline for the energy sector, and a 4.5% drop for the industrial sector. The best performing sector this week was the consumer staples sector, which was down 1.9%.
Below are summaries of daily action:
Monday:
Monday’s trade started on a more upbeat note. The main indices enjoyed a positive standing in the early going, supported by gains in some mega cap stocks. Apple (AAPL) led the charge in that respect after Goldman Sachs initiated coverage with a Buy rating and a $199 price target.
Things were more shaky under the surface, though, as investors played a waiting game ahead of key events later this week. Even at midday, when the main indices traded near their best levels of the day, decliners led advancers by a 4-to-3 margin at the NYSE and a 5-to-3 margin at the Nasdaq.
Underlying weakness became more apparent as mega cap strength started to fade. This coincided with selling efforts ramping up in the Treasury market. The main indices spent most of the afternoon in a slow grind lower, ultimately settling near their lows for the day. At the close, decliners led advancers by a roughly 2-to-1 margin at both the NYSE and the Nasdaq.
Monday’s economic data was limited to the January Factory Orders, which declined 1.6% month-over-month in January following a downwardly revised 1.7% increase (from 1.8%) in December. Shipments of manufactured goods increased 0.7% month-over-month after declining 0.6% in December.
Tuesday:
Tuesday’s trade started somewhat mixed with investors anxiously awaiting Fed Chair Powell’s testimony before the Senate Banking Committee. The tone in the market shifted markedly after the release of the Fed Chair’s prepared remarks at 10:00 a.m. ET, followed by his testimony shortly after.
Both the stock and bond market reacted strongly to the following comments:
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Fed Chair Powell would add in the Q&A portion of his testimony that the economic data thus far doesn’t suggest the Fed has overtightened; indeed, the data suggest the Fed has more work to do. He also acknowledged that it is likely that the ultimate rate the Fed writes down in its Summary of Economic projections at the March meeting is likely to be higher than what was written down at the December meeting.
The upsetting factor was that Fed Chair Powell’s remarks suggested the market has still underestimated where the terminal rate will fall. In addition, it was forced to contend with an understanding that a 50 basis points rate hike at the March FOMC meeting is back on the table.
Reviewing Tuesday’s economic data:
Wednesday:
There was not a lot of conviction behind Wednesday’s trade as investors digested day two of Fed Chair Powell’s testimony before the House Financial Services Committee. The main indices spent the majority of the session trading either slightly above or slightly below their flat lines.
The lackluster price action was due to the Treasury market signaling concerns about the Fed possibly taking rates too high and forcing a recession. Tuesday’s settlement levels brought the 2s10s spread to its widest margin since 1981 and things didn’t get any better today.
The 10-yr note yield moved up to challenge the 4.00% level again following a $32 billion 10-yr note reopening, which did not go over so well at auction. The high yield of 3.985% at that auction tailed the when-issued yield of 3.958% by nearly three basis points on relatively weak dollar demand. The bid-to-cover ratio was 2.35 versus the prior 12-auction average of 2.43.
With that move, stock prices deteriorated and the major indices slipped to trade closer to their lows of the session.
The main indices were able to close comfortably above their lows, though, thanks to a mega-cap driven rally effort taking root in the last hour of trading. The upside momentum eventually petered out when the S&P 500 almost hit its 50-day moving average (3,997), which pivoted Tuesday from support to resistance.
Reviewing Wednesday’s economic data:
Thursday:
The stock market made an attempt to start Thursday’s session on an upbeat note, bolstered by leadership from the mega-cap stocks and some hope that a higher-than-expected initial jobless claims reading could be followed Friday with a weaker-than-expected nonfarm payrolls number for February. That opening move was short-lived, however, as some disconcerting news and price action in the banking space undermined investor confidence.
Banks led a broad-based market downturn that saw the S&P 500 slice through its 200-day moving average (3,941) and close near its low for the session in a steady selloff that involved most stocks.
The bank stocks sold off sharply today amid concerns about rising rates, higher deposit costs, and weaker loan demand that collided with the news that Silvergate Capital (SI) is voluntarily liquidating Silvergate Bank, and that SVB Financial (SIVB), based in Silicon Valley, is seeking to raise capital as it has seen elevated cash burn from its clients.
The latter triggered worries about the state of deposit bases and capital positions for smaller banks that drove concerted selling interest in the space.
The added angst in today’s price action was the understanding that something typically “breaks” when the Fed is in an aggressive tightening cycle, and that the banks, whether they are the specific problem in that regard, will likely get pulled into it nonetheless given their lending role.
It was striking, too, that Treasury yields moved noticeably lower, yet stocks did not respond in opposite kind to that move, implying that the move in Treasuries was more of a flight-to-safety than anything else.
Reviewing Thursday’s economic data:
Friday:
The stock market suffered sizable losses Friday. The employment report brought relatively good news with nonfarm payrolls being stronger than expected and average hourly earnings growth being weaker than expected, but the dealings involving SVB Financial (SIVB halted) were the biggest driver of Friday’s price action. A broad retreat saw the S&P 500 fall below 3,900 on above average volume.
SVB Financial Group’s Silicon Valley Bank has been shut down as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California. This news followed earlier reports that the Founders Fund had advised companies to pull their money from Silicon Valley Bank, according to Bloomberg, and that deposit outflows at SVB Financial were outpacing the sales process (i.e., there were reports that larger banks had reportedly been looking at buying SVB, but their willingness to do so diminished as the bank’s deposits went away), according to CNBC.
SVB Financial’s troubles created uncertainty about a potential contagion effect in the banking industry that fostered a strong flight to safety bid in the Treasury market.
Most reporting thus far has highlighted views by analysts/pundits that SVB’s situation won’t prove to be a systemic banking problem, though, given how well capitalized the banking system is. That said, the market saw a rebound effort interrupted after it was reported around 12:30 p.m. ET that Silicon Valley Bank would be shut down. The market lost its footing from there as broad based selling efforts picked up sending the S&P 500 to 3,846 at its lows for the session.
Reviewing Friday’s economic data:
Ok, go enjoy your Spring Break, if you get one…🍹⛱️
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