2023 Weekly Views

Highlights

SVB

The FDIC announced mid-day on Friday it will assume control of Silicon Valley Bank, effectively shutting the institution down. The action came after the company failed to consummate a planned capital ($1.25bn Equity and $500m Convertible) and couldn’t locate a willing buyer. This would be equal to 16% of SVB’s market cap. The FDIC says that “uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors”. SVB focuses on servicing emerging to middle-market growth technology companies that are usually backed by venture-capital firms. Over 40% of deposits are coming from start-ups where the cash burn accelerated. As start-ups pulled out their deposits, SVB was forced to sell assets at a loss. Silicon Valley Bank’s CEO pointed to the expectation of higher rates and persistent client outflows as to why the lender incurred a one-time $1.8bn loss on a security portfolio sale.

Market update

SVB failure

The S&P 500 closed the week at 3,861.59, -4.55% lower. The Dow Jones closed at 31,909.64, -4.44%, with the Nasdaq lower by -4.71%. The volatility index VIX closed the week at 24.80 up from 18.49. The Euro Stoxx 600 slipped -2.26%.

The 10-year UST closed at 3.70% down from 3.95% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -125bps. US Corporate Bond spreads: Investment Grade widened 4bps at 199bps and High Yield widened 9bps at 464bps. German 10-year Bunds yield closed at +2.51% down from +2.72% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 164bps and High Yield spreads tightened 13bps at 444bps.

The US Dollar Index (DXY) appreciated +0.05% last week and closed at 104.58. The Euro closed at 1.0643 (+0.08% weekly); the Yen appreciated +0.62%, closing at 135.03 and the Swiss Franc appreciated +1.66%, closing at 0.9207. Gold closed at $1,868.26 appreciating +0.63%. Oil was lower, Brent closed at $82.78 (-3.55%) and WTI at $76.68 (-3.77%).

Macroeconomy

Powell testimony

During his testimony before Congress, he advised that “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”. Powell also added 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”. Powell reiterated the message that “although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”. The key takeaway was clearly Powell’s openness to larger hikes again and the fact that he also pointed to a higher terminal rate as well.

Jobs report

The US economy added 311k jobs in Feb. according to the Establishment survey, above the 225k print forecast and higher than “whispers” of 275-300k. Jan. and Dec. job additions were revised down by 34K in aggregate. Notable job gains occurred in leisure and hospitality, retail trade, government, and health care. Leisure and hospitality added 105k jobs in Feb., like the average monthly gain of 91k over the prior 6 months. Employment declined in information and in transportation and warehousing. The unemployment rate jumped to 3.6%, up from 3.4% in Jan. and ahead of the 3.4% forecast. The participation rate ticked higher to 62.5% (up from 62.4% in Jan and above the 62.4% forecast). Wage growth was a bit cooler than anticipated at +0.2% m-o-m and +4.6% y-o-y (vs. consensus at +0.3% and +4.7%, respectively). The softer wage growth coupled with a shorter workweek (34.5 hours vs. the St 34.6 and down from 34.6 in Jan.) shows take home compensation dropping below expectations.

US budget proposal

President Biden unveiled the administration’s initial 2023 budget proposal yesterday afternoon. The $6.9tr budget proposal is viewed as an opening bid to House GOP members, who are expected to negotiate it down in the upcoming debt ceiling negotiations. The proposal increases funding on an array of government programs, including making Medicare more solvent, lowering prescription drug prices, and trimming the deficit by $3tr over the next decade. The deficit cutting is mostly coming in the form of higher taxes on capital gains (25% on those making over $1mn), a new tax bracket of 39.6% on every dollar made over $400k, a minimum 25% on billionaires, and hiking the corporate tax rate from 21% to 28%.

Central banks

The Bank of Japan (BOJ) left its key interest rate unchanged at -0.1%, while maintaining its YCC (yield curve control) policy. In his last meeting as the BOJ’s Governor, Haruhiko Kuroda made no surprise move and lent support to the central bank’s long-standing ultra-dovish monetary policy. The Bank of Canada left rates unchanged at 4.5%, following a run of 8 successive hikes over the previous year. The move was in line with expectations, since the BoC had already announced a pause at their previous meeting. Looking forward, the statement said they were “prepared to increase the policy rate further” if required to get inflation back to target, and investors still expect the next move to be up, with another 25bps hike fully priced in by the September meeting. The Reserve Bank of Australia (RBA) hiked interest rates but argued that inflation had peaked. The 25bps increase to 3.6% was a record 10th consecutive hike but the RBA seems to be guiding away from a series of hikes in the months ahead. ECB will meet on Thursday this week. Investors have almost fully priced in a 50bps increase (97%), but there’s a bit more doubt over what they’ll do in May still, with 50bps considered the most likely outcome. Last week, ECB official Villeroy expects inflation to peak in the first half (1H) and reiterated and said “we will bring inflation toward 2% by the end of 2024 or beginning of 2025 – that’s a commitment, not just a forecast”.

What to watch

• Monday: US ISM manuf. index (Apr.)
• Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
• Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
• Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
• Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)