"POW-POW" POWELL
Fed Chair Powell's hawkish comments last week, suggesting a faster pace of tightening and a higher terminal rate, weighed on risk assets. US February non-farm payrolls justified the view as it implied a still-tight labour market, though overall labour market data mixed.
Towards the end of the week, the troubles around and shut down of small, tech-focused Silicon Valley Bank (SVB) led to contagion as global bank stocks fell sharply.
This week, the SVB fallout is set to remain front and centre after US regulators announced yesterday that SVB depositors would be protected. Elsewhere, February US consumer prices should give a better steer on how entrenched inflation pressures are, while the ECB is expected to tighten by 50 basis points (bps) at its meeting and reiterate its hawkishness.
Last week, the S&P 500 fell by 5.0% (MTD -2.7%, YTD +1.0%) , while the Euro Stoxx 50 fell by 1.8% (MTD -0.5%, YTD +9.4%).
Fed Chair Powell's comments were like a 'mic drop' prior to the Fed communication blackout period (March 11th -23rd), with the next Fed decision coming on March 22nd. Powell stated that "the ultimate level of interest rates is likely to be higher than previously anticipated" and 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." After the speech, the market priced in a 50bps hike at next week's Fed meeting to a range of 5.00-5.25%, having previously projected a 25bps rise.
However, subsequent events around Silicon Valley Bank (SVB), a small, tech-focused bank, led markets to reassess whether the Fed could tighten by this much. SVB had to take significant losses on its portfolio as it sold securities to meet customer deposit withdrawals and was shut down by US regulators on Friday. This led to concerns of contagion and pushed global stocks lower, particularly banks. Regulators announced yesterday that SVB depositors would be protected, which provided some relief for markets early on Monday.
February US jobs data was mixed, with non-farm payrolls showing that 311K jobs were added, well above consensus expectations of 210K. However, average hourly earnings increased by 4.6% yoy, below the projected 4.7%, and unemployment rose to 3.6%.
A more hawkish Fed initially led to falling bond prices (bond prices fall as yields rise) earlier in the week, but this reversed somewhat as concerns over SVB and contagion to the wider the banking sector was seen as limiting further tightening. Indeed, at the end of the week markets had gone back to expecting a 25bps hike at next week's Fed meeting.
The fallout from the SVB collapse is likely to continue this week. Elsewhere, Thursday's ECB meeting will be closely watched, with a 50bps hike and hawkish rhetoric expected. February consumer price data from the US tomorrow will give clearer guidance as to whether the same move will come from the Fed at its meeting next week.
Tue 14th
US - February consumer prices
UK - February labour market report
Wed 15th
US - February retail sales and producer prices, March National Association of Home Builders (NAHB) survey
Europe - Eurozone January industrial production, UK Spring budget annoucement
China - February economic activity data
Thu 16th
US - February housing starts, March business leaders survey
Eurozone - ECB meeting
Fri 17th
US - February industrial production, March consumer sentiment and inflation expectations
This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person.