We left off last week with the news that Silicon Valley Bank (SIVB) had collapsed and the FDIC was stepping in to take over. Shortly after our writing last Sunday, there was news that New York’s Signature Bank (SBNY) would also be closing. With the mounting fear of contagion effects and increasing volatility, the Federal Reserve, the FDIC, and the U.S. Treasury announced that all SIVB and SBNY deposits would be fully guaranteed under an exception to the $250k deposit insurance cap. The exception is the systemic risk exception, designed to stop high-level crises from spreading beyond a single institution; as they noted, “we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
While the intention was to stabilize the banks and promote confidence in the system, it didn’t stop the markets from a significant selloff in regional banks and U.S. treasuries. To give some context, the S&P Regional Banking ETF (KRE) has dropped ~25% since Wednesday of last week (3/8), which is surpassed only by a few other historical declines, including during the initial stages of COVID-19 and the 2008/2009 Great Financial Crisis. Moreover, the moves in short-term U.S. Treasuries are even more dramatic. The 1-day and 3-day declines in yields for short-term treasuries are the largest since Black Monday in 1987. From a qualitative perspective, investors have moved from whispers about a 6% Fed Funds rate to pricing in rate cuts in 5 business days. And while that’s what the numbers say, it would have been surprising to see the current pricing of short-term rates persist, and it lasted only a short time, as rates picked up in the back half of the week. The volatility is almost unprecedented, with the 2-year yield moving by more than 20 basis points for seven straight days, the first time since the 70s. However, things are moving quickly, as evidenced by the concern over Credit Suisse that popped up on Wednesday, so the Fed could take a break from raising rates.
Given all the noise in the banking sector, it was unsurprising that much of the economic data released throughout the week went unnoticed. Nevertheless, there were several crucial releases, with CPI, PPI, Retail Sales, and housing data reported throughout the week. No doubt, the most significant headline outside of the banking issues was CPI, which was right in line with forecasts, at +6.0% YoY and +0.4% MoM. While inflation continues to move in the right direction, having declined for 9-months in a row and moving to the lowest level since September 2021, work still needs to be done. There was some excellent news in the PPI number released, which showed a -0.1% MoM decline against an expectation of a +0.3% increase. Goods prices led the drop, where food was down -2.2%, partly driven by chicken eggs down -36%.
Retail Sales showed weakness, dropping -0.4% MoM, slightly more than expected. After multiple reports in January showing surprising strength in the economy, this was labeled as an early sign that things may start to cool off. With that said, Building Permits were surprisingly strong, up +13.8% MoM to 1.5 million units (annualized), the highest level in five months, which implies relative strength in the economy. So no matter what side of the debate you’re on, there is data to support your case. Either way, remember that these data points reflect one month, and it takes more than one to make a trend.
Economy
- U.S. equity markets were surprisingly resilient given the negative news flow for the week ending March 17, with the S&P 500 up +1.4%, the Nasdaq up +4.4%, and the small-cap Russell 2000 down -2.6%. News out of the banking sector took up most of the bandwidth, with other essential releases regarding CPI, PPI, and Retail Sales taking a back seat.
- The annual inflation rate in the U.S. slowed to 6% in February, compared to 6.4% in January. Food prices grew slower while the cost of used cars and trucks declined. Also, energy and fuel oil costs slowed sharply, with gasoline prices falling -2% after a +1.5% rise in January. Moving in the opposite direction, prices rose faster for electricity and shelter.
- Producer prices for final demand in the U.S. went down -0.1% MoM in February, against market expectations of a +0.3% increase. The indexes for residential natural gas, fresh/dry vegetables, diesel fuel, home heating oil, and primary basic organic chemicals fell. In addition, services cost decreased by -0.1%, the same as in the prior month.
- Retail sales in the U.S. were down -0.4% MoM in February, compared to market forecasts of a -0.3% fall. The most significant decreases were seen in sales at furniture stores, food services, and drinking places, miscellaneous retailers, motor vehicles and part dealers, clothing stores, and gasoline stations.
- Housing starts in the U.S. surged +9.8% MoM to a seasonally adjusted annualized rate of 1.45 million in February, the highest in five months, and considerably above market forecasts (1.3 million), showing that some confidence may have returned to the housing market despite mortgage rates and inflation remaining elevated.
Stocks
- U.S. equities were in positive territory. Technology and Communication Services were the top performers, while Energy and Financials lagged. Growth stocks led value stocks and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 30 basis points to 3.39% during the week.
- Global bond markets were in positive territory this week.
- Government bonds led for the week, followed by corporate bonds and high yield bonds.
