Tucker Financial Weekly Market Review: March 10, 2023

Markets last week were focused on Jerome Powell taking the mound with a relatively limited, but closely watched, set of economic reports – right up until we witnessed the second largest bank failure in U.S. history. A highly anticipated February jobs report and semi-annual FOMC Chair congressional testimony quickly took a back seat when a classic run on the bank took down Silicon Valley Bank in the back half of the week. Market reactions to the anticipated and unanticipated events during the week amounted to sizable 5%- 8% losses in U.S. equity markets, effectively wiping out all of the gains in 2023. Non-U.S. (-3.15%) and emerging (-4.3%) equity markets held up relatively better with a surging/softening USD ending relatively flat on the week. Strong demand for U.S. treasury bonds took interest rates down sharply across the curve pushing the 10 yr UST yield from 3.97% down to 3.70%.

• Silicon Valley Bank (‘SVB’) failure was unquestionably the biggest news last week as one of the most storied early stage (VC) oriented banks experienced a classic bank run bringing the lender to its knees. As of Friday’s close, the broader market context remains unclear but a domino effect in the near term remains a key concern.

• The highly anticipated jobs report, while mixed, was generally positive for markets with job creation exceeding expectations but this ‘good news’ anxiety was somewhat offset by ‘bad news’ relief of an increasing unemployment rate and soft hourly earnings and hours worked.

• Powell delivered his semi-annual monetary policy report to the Senate Banking and House Financial Services Committees last week where he signaled more rate hikes to come and reiterated the FOMC policy course will be data driven as they move forward.

• Beyond the obvious SVB related volatility, the recent market swoon is primarily associated with pricing in a higher for longer policy from the Fed. The terminal rate has increased nearly 50bps in recent weeks with pricing for a 50bps hike in March rising to 68.3% by the end of the week.

• The inverted 3mo/10yr yield curve may be the most alarming recession predictor but as Jonathan Golub, US equity strategist at Credit Suisse Group AG, pointed out last week in every instance the recession didn’t start until the slope began to steepen and timing varied widely.

• Bloomberg made note of the record pace ($261b) of stock buybacks to begin the year with JP Morgan pointing out two thirds of that figure is spread across only five companies.

• Now over one year past the Russian invasion of Ukraine, it is remarkable that natural gas prices in Europe are below pre- invasion levels which can be largely attributed to a relatively mild winter and aggressive efforts to ramp up storage.

• The oil & gas capex cycle has turned up sharply with the EIA reporting U.S. producers have increased E&P spending by 36% YOY. Importantly, hawkish central bank policies represent a risk to the aggressive spend cycle happening across the energy sector.

• For those unaware, Wall Street did of course pay someone millions of dollars to manufacture a clever alternative to the ‘TINA’ term, deeming ‘TARA’ the new world order. The truth is comparing stocks to treasuries is misguided if your return horizon is around 10 years.

• China’s annual legislative session opened last week and while Covid reopening initiatives bring hopes of increasing consumption and growth, the Party seems more focused on hawkish national security and maintaining relatively tight economic policy (underwhelming stimulus).

• The February Employment Report tallied 311,000 jobs, above the spot consensus of 223,000 but within the forecast range of 160,000-325,000. The Unemployment rate increased more than expected (2bps) to 3.6% as did the Labor Market Participation rate (1bps) of 62.5%. Average Hourly Earnings of 0.2% MOM and 4.6% YOY were both 1bps softer than consensus forecast.

• January’s JOLT Survey reported 10.824mm, above the 10.6mm forecasted but down from the prior month reading of 11.234mm. Quit rates declined but remained very elevated thanks to high wage increases being captured by changing jobs.

• Factory Orders in January declined 1.6%, relatively in line with the expected 1.8% decline and in the middle of consensus forecast range of -1.0% – -3.7%.