Week in Review: March 17, 2023
March 20, 2023
Recap & Commentary
Markets ended the week mixed as the collapse of Silicon Valley Bank (SVB) continued to reverberate. Despite the negative headlines, the tech-heavy NASDAQ recorded its best week of 2023, aided by falling interest rates, while the S&P 500 notched a modest gain. Fixed income market volatility reached historic levels on sharp swings in market expectations regarding the Federal Reserve System’s next rate hike. The 2-Year Treasury yield fell by more than 0.50% on Monday, before rebounding over 0.25% on Tuesday and remained volatile throughout the week. Those moves exceeded the volatility experienced following the collapse of Lehman, the dot.com bubble, 9/11, and the emerging market crises of the 1990s.
U.S. bank stocks remained pressured as investors sought to determine whether other banks might be susceptible to the same forces/factors that contributed to SVB’s demise. In Europe, Credit Suisse came under intense pressure after its largest backer, the Saudi National Bank, said it would not provide additional capital after purchasing a 10% stake last year. Fearing a collapse, the Swiss government stepped in to provide the bank with $54B in liquidity, which failed to quell concerns. On Sunday, March 19, UBS agreed to acquire Credit Suisse for $3.2B, a 60% discount to the bank’s $8B market cap as of Friday’s close.
Already faced with the difficult task of trying to orchestrate a soft landing, the U.S. Federal Reserve must now balance its inflation-fighting efforts against further exacerbating concerns about the global banking industry. Prior to the collapse of SVB, markets expected the Fed to raise rates by 0.50% at its upcoming meeting this week, and for the Fed Funds rate to end the year at 5.25-5.50%. Now, markets expect just a 0.25% rate hike in March and for the Fed Funds rate to end the year at 3.75-4.0%.
February headline consumer inflation (CPI) rose 0.4%, while core CPI, excluding food and energy prices, rose to 0.5%, a five-month high. Shelter prices continued to accelerate, up 0.8%. Compared to a year ago, headline CPI and core CPI slowed 0.4% and 0.1%, to 6.0% and 5.6%, respectively. Fed Chair Jay Powell’s closely watched super-core inflation, core-services ex-shelter, climbed 0.4%, the most in five months, providing further evidence of the Fed’s need to remain vigilant in fighting inflation.
Headline producer inflation (PPI) defied expectations, falling 0.1% vs. an anticipated increase of 0.3%. Compared to a year ago, headline PPI fell 1.1% to 4.6%, far better than the expected 5.4%. The sharp decline provided hope that inflationary pressures in parts of the economy might be easing.
Retail sales fell 0.4% in February, the third decline in the past four months. Core sales, excluding vehicles and gas, were flat. Compared to a year ago, sales slowed from 6.6% to 6.4% the slowest pace since January 2021.
Housing starts jumped 9.8% in February, the first increase in six months. However, compared to a year ago, starts were down 18.4%. Nonetheless, the increase provided hope that the worst of the housing slump may subsiding.
The European Central Bank (ECB) raised rates by 0.50% to 3.5%, making it the first major central bank to raise rates since the recent banking turmoil.
|U.S. Bond Market||1.4%|
|10-Year Treas. Yield||3.43%|
|WTI Oil ($/bl)||$66|
The Week Ahead
- Existing Home Sales
- New Home Sales
- Manufacturing PMI
- Services PMI
- Durable Goods Orders
- Weekly Jobless Claims