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WEEKLY MARKET COMMENTARY | MARCH 16, 2023
Thrown for a loop.
Early last week, Federal Reserve Chair Jerome Powell told Congress the Fed is committed to bringing inflation down to 2 percent. If economic data continues to come in hot, he said, then it’s likely the Fed will raise rates higher than expected and keep them higher for longer.
Economist Lawrence Summers estimates there is 50 percent chance that the Federal funds rate will be 6 percent or higher before the Fed will reach its inflation target, reported Chris Anstey of Bloomberg. Currently, the effective Fed funds rate is 4.57 percent.
A similar statement made by another Fed official the previous week caused United States Treasury yields to rise in anticipation of rate increases and had little effect on the stock market. After Powell’s comments last week, the stock market headed lower.
As investors considered the Fed’s higher-for-longer stance, news broke that a publicly traded bank had been put into receivership by the FDIC. The bank was not huge, but it was a major lender for technology start-ups. Here’s what happened:
Technology companies began to withdraw money from their accounts at the bank to fund operations. This was necessary because rapidly rising rates have made borrowing more expensive and venture capital is more difficult to attract. In turn, the bank liquidated some of its Treasury portfolio at a loss to cover the withdrawals. When the sale and loss was announced, there was a run on the bank as some large venture capitalists and start-up technology firms withdrew their money, reported Low De Wei and Priscila Azevedo Rocha of Bloomberg.
The bank’s closure had a ripple effect, and the value of many bank stocks fell sharply in the United States and overseas. “At first glance, this does not look like a systemic issue. Markets are very sensitive to bad news from the banking sector and worries about it are never good. That being said, one must be very vigilant about any kind of domino effect…,” the head of capital markets strategy at a global asset manager told reporters at Bloomberg.
As some speculated that events in the banking industry might cause the Fed to slow the pace of rate hikes, Friday’s employment report was released. The number of jobs created exceeded expectations again. Molly Smith of Bloomberg reported:
“The U.S. labor market continued to surprise with another month of robust job creation in February. But under the surface, the details were a bit more mixed. The good news is that more people joined the workforce, including women and minorities, and wage growth for many workers actually accelerated. On the other hand, job gains were concentrated in just a few industries and the number of hours worked on average declined.”
Markets are likely to be volatile this week. Major U.S. stock indices finished last week lower. Treasury yields also moved lower, and the yield curve remained inverted.
_____________________________________________________________________________
Sources:
https://www.federalreserve.gov/newsevents/testimony/powell20230307a.htm
https://www.bloomberg.com/news/articles/2023-03-10/summers-sees-nearly-50-50-odds-fed-must-hike-to-6-or-higher (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2023/03-13-23_Bloomberg_Summers%20Sees%20Nearly%2050-50%20Odds%20Fed%20Must%20Hike%20to%206%25%20or%20Higher_2.pdf)
https://www.newyorkfed.org/markets/reference-rates/effr
https://www.reuters.com/markets/us/feds-waller-if-data-stays-hot-policy-rate-should-go-above-51-54-2023-03-02/
https://www.barrons.com/market-data?mod=BOL_TOPNAV (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2023/03-13-23_Barrons%20Graphs_5.pdf)
https://www.bloomberg.com/news/articles/2023-03-10/why-svb-was-hit-by-a-bank-run-and-where-it-could-lead-quicktake (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2023/03-13-23_Bloomberg_How%20a%20Bank%20Run%20Closed%20SVB%20and%20Where%20That%20Could%20Lead_6.pdf)
https://www.bloomberg.com/news/articles/2023-03-10/svb-crisis-reactions-market-strategists-put-interest-rates-in-spotlight (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2023/03-13-23_Bloomberg_SVB%20Blowout%20is%20Wake-Up%20Call%20for%20Stock%20Bulls%20on%20Banking%20Risks_7.pdf)
https://www.reuters.com/markets/global-markets-wrapup-1-2023-03-10/
https://www.bloomberg.com/news/articles/2023-03-10/the-good-and-the-bad-what-us-jobs-data-show-about-labor-market (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2023/03-13-23_Bloomberg_What%20US%20Jobs%20Data%20Tell%20Us%20About%20the%20Labor%20Market_9.pdf)
https://www.reuters.com/markets/global-markets-wrapup-1-2023-03-10/
https://www.sciencedirect.com/science/article/pii/S2772566921000033
https://www.reuters.com/world/europe/war-worms-polish-politicians-give-each-other-mouthful-over-edible-insects-2023-03-03/
https://www.goodreads.com/quotes/tag/open-mindedness
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