By: Dave Chenet, CFA, CAIA®
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.695%|
Source: YCharts, Yahoo! Finance, WSJ
Markets finished the week on a negative tone, as tech-focused lender Silicon Valley Bank (SVB) was shuttered by US regulators. SVB, the 16th largest bank in the U.S., ran into difficulties as withdrawal requests (a short-term liability to the bank) were backed by a portfolio of long-dated treasury and mortgage backed bonds (long-dated assets). This liquidity mismatch, coupled with losses associated with the price of the bonds which had been purchased in a lower interest rate environment, prompted a failed attempt by the bank to raise additional capital. The Federal Deposit Insurance Corporation (FDIC) will step-in to protect the insured deposits (the FDIC insures up to $250,000 SVB per depositor) and oversee the sale of remaining SVB assets to meet uninsured deposits. SVB represents the 2nd largest US bank failure in history, behind only Washington Mutual in 2008. The default drove significant losses across all sectors of the US market on Friday.
In contrast, economic news was positive on the margin, with Friday’s Nonfarm Payroll report showing employment rising by 311k jobs in February, higher than the 205k increase economists had expected. The 6-month trailing average of 343k jobs/month is much higher than the estimated 100k/month additional jobs considered necessary to keep up with growth in the working-age population. Encouragingly for those keeping a close eye on the likely path of monetary policy, wage growth slowed to a 3-month annualized pace of 3.6% from a 4.4% high. Slowing wage growth eases upward pressure on inflation.
The broad US stock market has given back its year-to-date gains and is back to levels close to where it began the year.
What We’re Reading:
FT: SVB is not a canary in the banking coal mine
FT: China is right about US containment
Inflation in 2023: Causes, Progress and Solutions – Congressional Testimony of Mike Konczal
Chart of the Week:
One key recessionary warning (amongst many) is the persistent gap between wage growth and the rate of inflation. The US economy is consumer-driven and consumers are continuing to see inflation eat away at their propensity to consume. Consumer spending has been supported by the stimulus savings that consumers had put away, but the current personal savings rate and data related to credit card balances suggest that American are increasingly turning to debt to amid higher prices…at a time when higher interest rates mean increase the cost of servicing that new debt.
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