Week in Review: March 10, 2023

March 13, 2023

Recap & Commentary

Markets (S&P 500) suffered their worst week since September, following the collapse of Silicon Valley Bank (SVB) and fears of possible contagion within the broader banking sector. Investors entered the week anticipating Congressional testimony from Federal Reserve Chair Jay Powell, the February employment report, and the implications thereof for the Fed’s next rate hike decision later in March. By the end of the week, investors were focused on determining whether SVB’s collapse, the second largest ever, was an isolated event or an indication of broader stress in the banking sector.

Unlike most banks, SVB was unique in that it catered largely to venture capital-backed start-up companies. As such, its customer base was relatively homogenous. For many startups, equity markets represent an important source of capital. In 2022, market volatility prevented many companies from accessing the equity markets via initial public offerings (IPO).  As a result, many of SVB’s clients relied more heavily on their cash deposits to fund operations.

As those cash demands intensified, SVB was forced to sell about $21B in bonds from its investment portfolio to provide liquidity to clients. Many of the bonds were low-yielding Treasuries purchased in recent years when interest rates were at or near historic lows. Due to the Fed’s aggressive rate hikes over the past year, the value of SVB’s bonds were significantly impacted. Thus, SVB was forced to take a $1.8B write-down on the bonds sold. In response, SVB announced plans Thursday to raise about $2.1B to offset the loss. The announcement created panic, leading to a classic “bank-run” in which SVB’s clients tried to withdraw their deposits at once. Without sufficient liquidity to meet the redemptions, the bank collapsed. On Friday, state regulators shut down SVB and placed it in receivership with the Federal Deposit Insurance Corporation (FDIC).

Economic Commentary

Nonfarm payrolls added an additional 311K jobs in February, bringing year-to-date job gains to 815K. Unemployment rose 0.2% to 3.6% as over 400K individuals entered the labor force, pushing the labor force participation rate up 0.1% to 62.5%. Average hourly wage growth rose just 0.2%, its slowest pace in a year, providing some hope that inflationary pressures continue to abate.

Job openings fell 3.7% in January to 10.8M, a three-month low, but remained about 50% above prepandemic levels. That led to a slight decline in the ratio of job openings to the number of unemployed individuals, from 1.96X to 1.90X.

Factory orders fell 1.6%, driven by a decline in volatile civilian aircraft orders. Core business orders (nondefense capital goods orders ex-aircraft) rose 0.8%, with most core categories advancing. On a year-over-year basis, factory orders eased to 6.6%, the slowest pace since March 2021, reflecting cooling demand.

Of Note

Speaking before Congress, Fed Chair Jay Powell reiterated the Fed’s willingness to remain aggressive in its inflation fighting efforts. He also stated that “the ultimate level of interest rates is likely to be higher than previously anticipated.” However, his comments came before the collapse of SVB which sharply swung rate hike expectations for the Fed’s March meeting from 0.50% to 0.25%.

S&P 500-4.4%
Small Caps-8.1%
Intl. Developed-0.9%
Intl. Emerging-3.3%
Commodities-3.4%
U.S. Bond Market1.2%
10-Year Treas. Yield3.71%
U.S. Dollar0.1%
WTI Oil ($/bl)$77
Gold ($/oz)$1,873

The Week Ahead

  • Consumer Inflation (CPI)
  • Producer Inflation (PPI)
  • Retail Sales
  • Housing Starts
  • Industrial Production
  • Consumer Sentiment

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