SVB Fails, Jobs Market Cooling (March 10 Market Recap)?
- Dow 31,909, -1,481 or –4.43%.
- Nasdaq 11,138, -551 or –4.71%.
- S&P 3,861 -184 or –4.55%.
- USD10Y 3.695%, -26.9bp or -6.79%.
- WTI Crude $76.68/bbl, -$3.17 or –3.97%.
Interest rates and inflation threatened to steal all the headlines early this week: Fed Chairman Powell testified to Congress early in the week stating that interest rates were most likely going to end at levels higher than previously anticipated, the probability of a 50bp rate hike soared on Tuesday from 24% a week prior to 68%, and a strong ADP Private Payrolls report seemed to indicate that the labor market is far from cooling. Unsurprisingly, markets tanked.
However, on Thursday, news broke that Silicon Valley Bank (SIVB), a major funding source for Valley startups was facing a “run” on deposits and as a result had sold a $21 billion bond portfolio recognizing a $1.8 billion loss in order to raise cash. Unfortunately, further funding was required, and the bank was going to attempt sell additional shares overnight to raise funds. SIVB fell 60% during trading on Thursday and the S&P 500 Financial Sector fell over 4%.
Friday morning, California regulators had seen enough and requested that the Federal Deposit Insurance Corporation take over the bank. The crux of the problem was that for years SVB had taken in a copious amount of deposits from their startup clients and invested them in bond portfolios which were of a much longer duration than that of their peers and that were paying historically low interest rates. As interest rates rose, the value of those portfolios fell precipitously, and the flood of deposits turned into a trickle as startups felt the squeeze of higher rates. In addition, SIVB had a much larger percentage of their assets invested in securities vs their peers, which had also taken a beating during the 2022 market downturn. Eventually, withdrawals outpaced deposits and the quest to raise capital began.
Interestingly, in 2018, portions of the Dodd-Frank legislation, which was passed specifically to avoid these issues, were weakened, exempting banks under $250 billion in assets from complying with strengthened capital requirement rules (previously banks with assets above $50 billion were subject to the stress test rules). SVB CEO, Greg Becker had lobbied for the change arguing that increased regulation would prevent the bank from providing credit to their clients. Becker also sold $3.6 million of parent company SIVB stock two weeks prior to the bank’s demise.
When the market opens on Monday, a new bank, the National Bank of Santa Clara, will be administering the $175 billion of deposits in the wake of SVB’s failure. Customers with deposits of up to $250,000 will be made whole. There is no guarantee for deposits that exceed that limit. Investors will also be focusing on other smaller banks in the region that service the same markets. First Republic (FRC), Signature Bank (SBNY, which also has crypto exposure) and PacWest Bancorp (PACW) will all potentially be in the crosshairs.
Jobs Market Cooling?
Meanwhile, as the markets were focused on the Silicon Valley Bank drama, Initial Jobless Claims were reported on Thursday and, for the first time in eight weeks, printed above 200,000 claims. Continuing claims also increased. On Friday, February Non-Farm payrolls were stronger than expected but were down considerably from January’s print. More significantly, average hourly earnings were up only half as much as expected (+0.2% vs +0.4%) and were down a tenth of a percent month over month. This data, along with benign reports from next week’s CPI and PPI numbers and the market reaction to the regional banks, could give the Fed reasons to reassess their hawkish stance when they meet on March 22-23.
Two key pieces of inflation data will be released next week, the Consumer Price Index and wholesale prices, the Producer Price Index. Manufacturing data from Philadelphia and New York is also scheduled for release.
- Monday – N/A.
- Tuesday – February Consumer Price Index (CPI).
- Wednesday – February Producer Price Index (PPI), February Retail Sales. March Empire State Manufacturing. Earnings: Adobe (ADBE).
- Thursday – Initial Jobless Claims. March Philadelphia Fed Manufacturing Index. Earnings: FedEx (FDX).
- Friday – March Consumer Sentiment.
If you know of any friends or family members who could benefit from our services and these types of communique during these unique times, we are accepting new clients and offer a complimentary one-hour review.
March 10 Daily Trading Recap…
Monday – Dow +40 to 33,431, Nasdaq -13 to 11,675, S&P +3 to 4,048, USD10Y +1.9bp to 3.983%.
- Six of eleven S&P sectors traded higher today, led by Technology, Communication Services, and Utilities.
Tuesday – Dow -575 to 32,856, Nasdaq -145 to 11,530, S&P -62 to 3,975, USD10Y -0.8bp to 3.975%.
- All eleven S&P sectors traded down today, led lower by Financials, Real Estate, and Materials.
- Fed Chairman Powell spooked the markets today when he testified in front of the U.S. Senate that interest rates will likely go higher than previously forecast.
- The probability of a 50bp hike at the next Fed meeting in two weeks has jumped to 69.8% from 24% a week ago.
- Dick’s Sporting Goods (DKS) beat top and bottom-line estimates and guided 2023 higher.
Wednesday – Dow –58 to 32,798, Nasdaq +45 to 11,576, S&P +5 to 3,992, USD10Y +0.01bp to 3.976%.
- Seven of eleven S&P sectors traded higher today, led by Real Estate, Technology, and Utilities.
- The February ADP Private Payroll report was stronger than expected at 242,000 jobs vs 205k expected.
Thursday – Dow –543 to 32,254, Nasdaq -237 to 11,338, S&P -73 to 3,918, USD10Y –5.1bp to 3.925%.
- All eleven S&P sectors traded down, led lower by Financials, Materials, and Consumer Discretionary.
- Jobless claims finally relented with 211,000 claims vs 195,000 expected and last week’s unrevised print of 190,000. This is the first week in the last eight that claims have been above 200,000. Continuing claims also rose to 1.718 million.
- Earnings: Ulta Beauty (ULTA) blew out their numbers and raised 2023 guidance. Docusign (DOCU) beat their earnings and revenue estimates. Gap Stores (GPS) missed their numbers and continues to search for a permanent CEO.
Friday – Dow –345 to 31,909, Nasdaq –199 to 11,138, S&P –56 to 3,861, USD10Y -23.0bp to 3.695%.
- All eleven S&P sectors traded down today, led lower by Real Estate, Materials, and Industrials.
- Silicon Valley Bank (SIVB), a major funding source for startups in the Valley, was taken into receivership by Federal regulators. Financials traded off 1.76% adding to their huge loss yesterday when they traded down 4% on the news that SVB was trying to raise capital and had to write off a $1.8 billion loss on the sale of a $21 billion bond portfolio to raise cash.
- February Non-Farm Payrolls beat expectations with 311,000 jobs added vs 225,000 expected but was down considerably from last month’s 504,000 print.
- Even better news was found on the wage front, with average hourly wages rising only +0.2% vs expectations of +0.4% and last month’s +0.3% print.
- The February Unemployment Rate also rose, perhaps demonstrating that the labor market is starting to ease. The rate is now 3.6% vs expectations of 3.4% and last month’s 3.4% print.
If you know of any friends or family members who could benefit from our services and these types of communiques during these unique times, we are accepting new clients and offer a complimentary one-hour review.
Disclaimer: This is not a recommendation to buy or sell any of the securities listed above. I personally, or a family member whose account I control, have positions in the following securities/assets…Bitcoin, Cardano, Chainlink, Ethereum, ETHE, GBTC, and TSLA.