The digest
Markets sprang into action last week. Investors had been looking for a catalyst, but they probably got more than they expected. Federal Reserve (Fed) Chairman Jerome Powell’s testimony was closely watched, and we also saw the first major bank failure since the global financial crisis. Friday’s release of the February US employment report also brought some market turbulence.
The MSCI World Index finished the week down 3.6%, while regionally, the S&P 500 Index closed down 4.5%, the STOXX Europe 600 Index closed down 2.3% and MSCI Asia Pacific Index was down 2.0%.1
Volatility returned to markets last week, with the CBOE VIX up 34%2 on the week, with the entirety of that move coming on Thursday and Friday. The risk-off moves were seen in fund flows too, with US$18.1 billion going into cash, which brings the year-to-date total to US$192 billion. Also, US money market fund assets surged to an all-time high of US$4.9 trillion.3
All eyes on the United States
Powell testimony
Powell’s two-day testimony to Congress was the first event to get markets moving last week, as he gave a series of hawkish statements which signalled the Fed would be willing to increase the pace of hikes if inflation remains uncomfortably high. Powell was giving his latest testimony at a time of significant scrutiny of the Fed in its attempts to tame inflation whilst maintaining a level of economic growth.
Powell stated: “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.” Yet, he later reiterated that the pace of hikes had not been decided yet. He also noted that the terminal rate is likely to be higher than was anticipated. He said: “Nothing about the data suggests we’ve tightened too much…[on current terminal rate assessment] as I indicated in my testimony, I think the data we’ve seen before—and we still have significant data to see—suggest that the ultimate rate we write down will be higher than in December.”
The odds of a 50 basis-point (bps) hike at the 22 March Federal Open Market Committee meeting were upgraded and the US dollar rallied to new year-to-date highs as risk assets sold off through Tuesday and Wednesday.
Later in the week, with such a focus on employment data, the release Friday of the February employment report was closely watched. The report was mixed, with the market unsure on how to take it overall. The headline nonfarm payrolls umber came in hot at 311,000 (higher than expected), which would usually be supportive of higher interest rates as the jobs market remains resilient. However, the unemployment rate nudged up to 3.6% and average hourly earnings came in at 0.2%—still up, but lower than expectations. As a result, Fed swaps downgraded odds of a 50 bps hike back to under 50%.4 The Fed is now in blackout period until next week’s meeting.
On Tuesday of this week, the February US Consumer Price Index (CPI) report will be closely watched, as it is the last meaningful data release before the Fed meeting and will likely provide key guidance on what we might expect.
Silicon Valley Bank (SVB) collapse
Despite the focus on Fed action last week, the key market mover came on Thursday. Risk assets were rattled after SVB launched a US$1.75 billion share sale to shore up its balance sheet, sparking fears of broader systemic risks to the banking sector. The bank services venture capitalists, with a relatively small percentage of its deposits coming from retail clients. SVB announced the sale of US$21 billion in securities, which had resulted in an after-tax loss of around US$1.8 billion in the first quarter. That particular loss was due to the sale of fixed income securities, which were showing large unrealised losses as a direct result of the Fed’s tightening cycle.
These long-duration bonds are usually safe; however, when the Fed hikes significantly, the value of these securities falls too. These developments have increased focus on large, unrealised losses on banks’ balance sheets and the risk of deposit withdrawals from aggressive Fed tightening and rising yields. The Federal Deposit Insurance Corporation (FDIC) said it will resolve SVB in a way that “fully protects all depositors.”
Shares of SVB closed Thursday down 61% and were suspended on Friday. As fears of contagion gripped the market, the US banking sector was hammered, finishing down 6.5% on Thursday alone. Given the nature of SVB’s business, small-cap stocks struggled in the United States, with the Russell 2000 Index finishing the week down 8%.
There were significant moves in credit markets too. US two-year Treasury yields plummeted nearly 70 bps in the space of three days as markets began to anticipate a Fed pause. Moves of this magnitude in credit markets happen during extreme events. These moves represent some of the biggest moves in US bond yields since Black Monday in 1987.5
So, what is the read-across to Europe? The extent of the market moves last week were a result of an effective bank run as depositors withdrew funds. Investors are naturally worried that other banks could be vulnerable to moves such as this. However, banks hold a portion of liquid assets to prepare for moments like this, and EU banks specifically have comfortable liquidity coverage ratios. While the event will likely bring some regulatory attention, SVB was a fairly niche, tech-focused lender.
Yet, despite various news and investment commentaries noting that this should be a fairly isolated incident, markets are weaker again as we kick off a new trading week. The European banking sector was particularly weak as concerns over credit quality still grips investors. The market is now anticipating a European Central Bank (ECB) peak (“terminal”) rate of 3.394% in October, compared with 3.984% predicted just one week ago—a near 60-bp change in the space of a week.6
Credit spreads have also widened. The German two-year yield fell 40 bps in early trading 13 March, by far the largest one-day decline ever. Also, in the United States, the market has wound back rate hike expectations again, with consensus now for a 25-bps hike in March.
Week in review
Europe
The STOXX Europe 600 Index closed last week down 2.3% but is still trading within the same 4% range it has held since mid-January. On Friday, the index dipped below its 50-day moving average (a key technical marker) for the first time since the very start of the year. There were very few market catalysts originating from Europe last week. On a positive note, European fourth-quarter earnings growth ticked higher again. Also, inflows resumed into European-focused equity funds. Friday’s UK gross domestic product (GDP) data came in a bit stronger than expected at 0.3% month-over-month, lending some optimism to UK equities.
In terms of sectors in Europe last week, given the risk-off move, defensives outperformed cyclicals quite significantly. Unsurprisingly, telcomms utilities and food and beverage stocks outperformed but still finished lower as investors sought safer spaces as the week went on. In terms of the laggards, basic resources gave back all of the previous week’s gains and some. The broad risk-off tone hasn’t helped, but the more conservative growth targets given at the National People’s Congress (NPC) in China over the weekend and the softer Chinese CPI number also influenced the market. Real estate and European banking stocks also fell last week.
United States
The main catalysts for the US market last week were undoubtedly Powell’s testimony before Congress on Tuesday and then the collapse of SVB later in the week.
The S&P 500 Index closed last week down 4.55%, giving back a chunk of its year-to-date gains, dropping down through its 100- and 200-day moving averages (important levels for the technical traders). The smaller-cap Russell 2000 Index declined 8.07%.
Powell’s statement to Congress was tough listening as he highlighted the fact that the Fed still had work to do in controlling inflation and the tight labour market. Stronger employment figures didn’t help the inflation situation.
Financials stocks led the decline lower last week with regional banks hit hard on the back of the SVB news. Trading in the stock was halted Friday morning, and the FDIC then placed the bank into receivership to protect depositors. And then state regulators closed New-York based Signature Bank, underscoring the urgency of extraordinary US efforts to backstop the nation’s banking system and quell mounting concerns among customers about the safety of their deposits.
Asia-Pacific
Asian market lost ground last week, with Chinese equities leading the way lower after the Chinese NPC meeting failed to deliver any meaningful stimulus measures. With that, Hong Kong’s Hang Seng fell 6% and Shanghai’s market fell 3%. By sector, basic materials led declines. In addition, the latest CPI data undershot expectations, increasing by only 1% in February from a year earlier, while the Producer Price Index remained in deflationary mode, dropping by -1.4%. This points to a sluggish economy.
In Australia, the Reserve Bank of Australia (RBA) delivered a 25 bps increase in interest rates, (in line with expectations) taking the cash rate to 3.6%. In a statement, the RBA said “further tightening of monetary policy will be needed” but it could be close to the point of pausing interest rate hikes for now to allow more time to assess the state of the economy.
Japanese markets outperformed last week, with the benchmark Nikkei up 0.8%, as the Bank of Japan kept its policy settings for its negative interest rate and yield curve control programme unchanged. The decision was in line with expectations. The central bank signalled its continued concern over the economy by downgrading its view on exports and production, though it left its overall economic assessment unchanged. It said it would continue to allow 10-year bond yields to fluctuate by 0.5 percentage points above or below its target yield of zero.
Note, it was also confirmed last week that economist Kazuo Ueda will take over from Governor Kuroda on 9 April.
We also need to keep an eye on geopolitical tension in Asia. At the NPC, China’s President Xi Jinping was elected to his third term by a 2,952-0 vote. In his address to the NPC, he reiterated his commitment to a reunification with Taiwan and criticised foreign interference in the region. It was also reported this morning that Xi will travel to Moscow next week to meet Russian President Vladimir Putin. He also pledged to strengthen China’s miliary into a “great wall of steel.” That said, Chinese Premier Li also spoke today and struck a more constructive tone, talking down a “decoupling” of the Chinese and US economies.
Week ahead
Macro week-ahead highlights
- Importantly, Tuesday will see the release of the latest US CPI report.
- In Europe, the ECB takes center stage in the week ahead as it perseveres with the fastest tightening cycle in its history. The focus will be on any signals from the Governing Council on what comes after a likely 50bp interest rate increase on Thursday.
- In the United Kingdom, the spring budget package will likely consist of several temporary policies that take advantage of the space created by the better-than-expected near term borrowing picture.
- UK unemployment data will also highlight why the Bank of England (BoE) is not yet done raising rates, even if it is nearing the end of its hiking cycle.
- Euro-area data are set to show the industrial sector started 2023 on a stronger footing than initially anticipated, as indicated by a rebound in Germany’s output.
- A second reading of euro-area inflation will offer the details needed to better understand the drivers for the increase in underlying price gains and their likely persistence.
Key events
Tuesday 14 March: UK unemployment rate; US CPI
Wednesday 15 March: Sweden CPIF Inflation; Euro-area Industrial Production; UK spring budget
Thursday 16 March: ECB main refinancing rate & deposit facility rate
Friday 17 March: Euro-area final CPI inflation
Monday 13 March
- Eurozone March Economic Survey
- Germany March Economic Survey
- France March Economic Survey
- Italy March Economic Survey
- Spain March Economic Survey
- UK March Economic Survey
- US state employment; New York Fed Consumer Expectations
Tuesday 14 March
- Sweden PES unemployment rate
- Netherlands CPI
- Switzerland producer & import prices
- UK Claimant Count & ILO unemployment rate
- Spain CPI & house transactions
- Italy Industrial Production
- US CPI; NFIB Small Business Optimism
Wednesday 15 March
- UK Chancellor presents spring budget to Parliament
- Sweden CPI
- Norway trade balance
- France CPI
- Italy unemployment rate quarterly
- Eurozone Industrial Production
- US MBA mortgage applications; Core PPI & retail sales; Housing Market Index & business inventories
Thursday 16 March
- Netherlands trade balance & unemployment rate
- Norway GDP
- Spain labour costs
- Italy CPI EU Harmonized
- ECB main refinancing rate & deposit facility rate
- US housing starts & jobless claims
Friday 17 March
- Sweden unemployment rate
- Italy trade balance total
- UK BoE/Ipsos inflation next 12 months
- Eurozone CPI
- US Industrial Production & manufacturing production
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3. Source: Bloomberg, “Stocks will be stuck on Fed until a recession becomes evident, BofA says.” 10 March 2023.” 17 February 2023.
4. Source: Bloomberg. As of 13 March 2023.
5. Source: Bloomberg.
6. Source: Bloomberg, as of 13 March 2023.