Please see below, the weekly market commentary from Brooks Macdonald highlighting the key economic and markets news over the past week. Received today – 13/03/2023
Silicon Valley Bank’s failure catalysed a rapid sell-off amongst risk assets last week
Equities were sharply lower last week as the US banking sector suffered in the aftermath of SVB’s failure. US equities underperformed with the banking sector, predictably, bearing the brunt of the equity market sell-off. On Friday the number of new US jobs created in February beat market expectations however the average hourly earnings, a key measure of labour market inflation, missed expectations, coming in at 0.2% month-on-month versus 0.4% expected. This, alongside the SVB news, catalysed a broad rally in bond markets which saw US Treasury yields fall alongside expectations for the US terminal rate.
Silicon Valley Bank collapsed last week, bringing with it broad volatility across most asset classes. The bank was heavily exposed to venture capital funded technology companies that were burning cash reserves as funding markets dried up in 2022. Deposit rates also became less attractive as short-term US Treasury yields rose and the yields available on other asset classes improved. Last week these factors were compounded by a growing concern that the bank was likely to fail, which began a bank run as depositors sought to withdraw their funds. Overnight the Federal Reserve and US Treasury announced that they were taking emergency measures to protect the banking system including widening access to the Fed’s discount window. This allows banks to obtain liquidity without selling assets which have been heavily discounted by the rapid rise in interest rates. Specifically for SVB, the Fed announced that depositors ‘will have access to all of their money starting Monday’. The rapid tightening in US monetary policy was always likely to cause heightened idiosyncratic risk within markets and SVB is a high-profile casualty of the seismic shift in interest rates over the last year.
US CPI on Tuesday will be the major market event of this week with implications for the next Fed meeting
Tomorrow all eyes will be on the US CPI report which will play a major role in helping the Fed choose between a 25bp or 50bp interest rate hike at their next meeting. Headline CPI is expected to have expanded by 0.4% month-on-month bringing the annual rate to 6% (from 6.4% at the last reading). Core CPI is expected to also rise by 0.4% over the month however the annual rate is forecast to be stickier, at 5.5% compared to 5.6% for January.
Economic data this week will play a major part in determining whether the Fed hike by 0.25% or 0.5%
The Federal Reserve are in their communication blackout window so will not be able to comment on SVB or the US CPI release this week. Bond markets feel however that a high-profile bank failure may be enough to convince the Fed not to raise interest rates by 50bps at this month’s meeting. Should CPI meaningfully beat to the upside however, the Fed may be forced to take a more aggressive monetary policy approach even if it risks further idiosyncratic contagion in markets.
Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.
Alex Kitteringham
13th March 2023