Weekly Market Report: March 17, 2023
Markets continued to move erratically last week with the first clear casualties (SVB, SBNY) of this Fed tightening cycle on display all week. Because bank failures and bailouts aren’t enough, we saw ample geopolitical risk currents and clear evidence of P&L stress in some hedge fund circles adding some price- insensitive buying and selling noise to the fold. In short, we had markets trading on a significant amount of illiquidity and fear this week. By the end of the week, equity markets saw the S&P 500 net a 1.43% gain while small caps fell 2.64%. Developed and emerging international equity markets were down 2.14% and 0.61% respectively thanks in part to U.S. banking volatility jumping across the pond (Credit Suisse). Bond yields fell sharply in a bear steepener with 2yr yields cratering 0.79% and 10yr and 30yr yields falling 0.31% and 0.10% respectively. Oil prices fell nearly 13% taking WTI crude down to $66.74 while the USD weakened slightly given the recalibrated FOMC outlooks.
Market Anecdotes
- As often said, the Fed will hike until something breaks and it seems banks have emerged as the first of those things with SVB and Signature Bank now occupying the second and third largest failures in U.S. history. Markets have moved quickly to recalibrate expected hikes.
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A look at the banking industry reveals several important considerations including that despite significant industry consolidation, small and medium size banks are significant commercial, consumer, and C/R real estate lenders – likely a primary reason why historically banking crises are often intertwined with global recessions.
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A critical issue addressed early last week saw the U.S. Treasury and Federal Reserve enable the FDIC to stand behind SVB and SBNY uninsured depositors. However, comments from Secretary Yellen on Thursday attempted to walk back the blank check concept for depositors.
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SNB and European policy makers brokered an emergency megamerger over the weekend with UBS acquiring Credit Suisse for approximately $3b. The Swiss government provided $9b in loan loss reserves. The SNB provided CSFB a $54b line followed by $100b to UBS to get the deal done.
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FRC received a vote of confidence with 10 national banks depositing $30b on the lender’s balance sheet for at least 120 days, likely putting the significant real estate lender in a position to meet depositors at the door with cash in hand.
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SVB is in a class by itself from a risk management perspective in that they seemingly had none. A look at the mark to market impact rising rates had on their reserves (bonds) is staggering.
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The record 2yr/10yr bull steepener we saw last week was historic (largest 3-day move since 1982) but it should be noted that reports of macro hedge fund Brevan Howard being forced to close out positions added real fuel to the fire.
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The ECB delivered an expected 50bps rate hike to 3.0% and in doing so, did a very good job buying time to assess the fallout of the U.S. banking situation and its leap across the pond.
Economic Release Highlights
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February’s headline and core CPI measured 6.04% and 5.53% YoY with 0.37% and 0.45% MOM readings. February’s headline and core PPI measured 4.58% and 4.40% YoY with -0.15% and -0-00% MOM readings.
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February Retails Sales fell 0.4%, just below forecasts for a -0.3% decline and on the back of a two year high 3.2% surge in January.
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U of M Consumer Sentiment came in short of consensus and fell from 67.0 to 63.4 in March.
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February MOM Housing Starts (+10%) and Permits (+14%) came in significantly above expectations.
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U.S. Industrial Production was flat 0% in February following a 0.27% January.
