If one thing was evident this week, the markets continue to have a toxic reaction when Fed Chair Powell speaks. Chair Powell was in Washington D.C. on Tuesday & Wednesday for the Semiannual Monetary Policy Report to Congress, where he delivered prepared remarks and took questions from Senate & House committees on banking and finance. Throughout his comments, there was a repeated focus on how tight the labor market is and how inflation remains resilient relative to expectations. He noted, “inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting” and that wage gains “remain above what is consistent with 2% inflation and current trends in productivity”. Moreover, he noted “the ultimate level of interest rates is likely to be higher than previously anticipated” and that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” While none of the comments Powell made were an actual change of direction given the tone from all the Fed speakers of late, it was undoubtedly more hawkish than the markets were expecting, leading to equity market declines and increases in expected interest rates.
There were a few additional interesting exchanges between Chair Powell and both Senator Kennedy (R-LA) and Senator Warren (D-MA). As anyone who follows politics even very casually would know, these two Senators are on nearly opposite ends of the political spectrum; however, both were equally aggressive in questioning Chair Powell, specifically on the assumption that higher unemployment is necessary and worthwhile to reduce inflation. Senator Kennedy was remarkably direct, asking, “in effect…when you’re slowing the economy, you’re trying to put people out of work, are you not?” And Senator Warren was equally clear in identifying the Fed’s own Summary of Economic Projections (SEP), which projects current rate increases will put two million Americans out of work. Whether or not these exact numbers come to fruition will only be known in the future; however, Powell had little to say to combat the line of questioning. The best he could offer was a traditional macroeconomic theory that high inflation puts a more significant burden on workers than the estimated unemployment increases. Regardless of politics, based on historical periods of aggressive rate increases, there will likely be accompanying job losses as the Fed tries to cool inflation.
Tied directly to the debate on how far to raise interest rates, there was major news in the financial sector with the collapse of Silicon Valley Bank on Friday. While this is not a household name in the banking world, it was the 16th largest bank in the U.S., making it the largest bank to fail since the Great Financial Crisis in 2008. Many say this is an example of the unintended consequences of raising interest rates too fast. Treasury Secretary Janet Yellen was on CBS’ “Face the Nation” this morning to discuss the concerns regarding SVB. While there were few specifics, she noted the situation was very different than 15 years ago and that a bailout was not currently on the table. Moreover, she reassured citizens, “the American banking system is really safe and well capitalized.”
The flip side of Yellen’s comments is the concern that if SVB depositors are not made whole, a similar style run on other smaller regional banks could lead to a spiraling situation. As of this writing, there are whispers that 50% of depositor funds will be available on Monday (3/13/23), with the remainder being accessible based on the realized liquidation value of SVB’s assets. While these are just rumors, it is easy to see how receiving anything less than 100% of deposits could make customers at other banks uneasy. Regardless, SVB’s failure and how depositors are treated will be something to watch closely in the coming weeks and months as it will impact all financial markets and possibly Fed policy decisions on future rate increases.
Economy
- U.S. equity markets performed poorly for the week ending March 10, with the S&P 500 down -4.5%, the Nasdaq down -4.7%, and the small-cap Russell 2000 down -8.1%. Much of the volatility began around Chair Powell’s testimony to Congress and then continued through the Non-Farm Payroll numbers and collapse of Silicon Valley Bank on Friday.
- According to ADP, private businesses in the U.S. unexpectedly created 242k jobs in February, well above an upwardly revised 119k in January and market forecasts of 200k. The services sector added 190k jobs, led by leisure and hospitality (+83k), financial activities (+62k), education/health services (+35k), information (+9k), and trade/transportation and utilities (+3k), while the professional/business industry shed jobs (-36k).
- The number of job openings in the United States fell by 410k to 10.8 million in January from an upwardly revised 11.2 million in December. Over the month, the largest decreases were in construction (-240k), accommodation and food services (-204k), and finance and insurance (-100k). Available positions increased in transportation, warehousing, and utilities (+94k) and nondurable goods manufacturing (+50k).
- Americans filing unemployment benefits jumped by 21k from the previous week to 211k on the week ending March 4, well above market expectations of 195k. The latest value was the first upside surprise in one month, diverging from a series of labor data that underscored a stubbornly tight job market and hinting that labor conditions could start to soften.
- The U.S. economy unexpectedly created 311k jobs in February, well above market forecasts of 205k, following a downwardly revised 504k in January. The reading continues to point to a tight labor market, and it is also well above 100k per month considered necessary to keep up with growth in the working-age population.
- The U.S. unemployment rate increased to 3.6% in February 2023, up from a 50-year low of 3.4% in January and above market expectations of 3.4%. Average hourly earnings for all employees on U.S. private non-farm payrolls rose by 8 cents, or 0.2%, to $33.09, while markets had expected them to remain at 0.3%. This was the smallest growth in average hourly earnings in a year.
Stocks
- U.S. equities were in negative territory. Financials and Materials led the decline, while Consumer Staples and Utilities outperformed. Growth stocks led value stocks and large caps beat small caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 27 basis points to 3.70% 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.
