March 14, 2023
Hello Tuesday. Maybe, just maybe, the banking situation is calming down. Shares of hard-hit regional banks are up significantly in pre-market trading. Oh, and fresh inflation data is due at 8:30am.
Today's newsletter is 948 words, 4 minutes.
1 big thing: Things just got weird
A rush to safety in the bond market. A modest rally in tech stocks. And still-simmering worries about banks. Things were getting a bit weird yesterday, Matt writes.
Driving the news: The major stock indexes were somewhat resilient yesterday, despite massive jitters about the health of many large regional banks after the collapse of Silicon Valley Bank and Signature Bank over the last few days.
- The S&P 500 slipped 0.2% — after staying in positive territory most of the day. The tech-heavy Nasdaq composite rose 0.5%.
Yes, but: Regional bank shares plunged, despite steps the government took on Sunday evening to bolster the financial system.
- The most notable drop was First Republic Bank, a California lender, which, like SVB, has a large number of deposits that are above the FDIC's $250,000 limit. It collapsed by more than 60%.
What they're saying: "The market remains highly uncertain and uncomfortable with the funding profile of many U.S. banks," said Terry McEvoy, an analyst covering regional banks for brokerage firm Stephens, based in Little Rock, Ark.
💭 Our thought bubble: At first glance, it can be hard to square the idea of a simmering banking crisis with a stock market hanging in there. But there's a certain logic to it.
- Markets seem to be making a bet that the flare-up of a banking crisis likely marks the beginning of the end of the Fed's recent run of rate hikes.
- That picture is backed up by prices from the Fed funds futures market, where investors slashed the odds that the Fed will hike rates by a half-percentage point at its next meeting (more on that below).
- The outperformance of tech stocks — which benefit hugely from lower interest rates — further underscores the fact that expectations of lower rates, or at least fewer Fed hikes, are giving the markets a lift.
What we're watching: The release of the Consumer Price Index for February.
- The broadly watched inflation gauge could complicate the situation for Fed chair Jerome Powell, as he tries to balance the still-unfinished fight against inflation against the risk that more rate hikes push the banking system closer to the edge.
2. Catch up quick
3. 🪦 The half-point hike is dead
Worries about wobbly banks may have put an end to the recent era of beefy Fed rate increases, Matt writes.
State of play: In the market for Fed funds futures, prices now suggest there is zero chance of a half-percentage point raise when the central bank next announces changes on March 22.
- Flashback: Last Wednesday the exact same market was placing roughly 80% odds on such a move after Fed chair Powell seemed to open the door to such a move in congressional testimony.
What happened: The collapse of Silicon Valley Bank — and then New York's Signature Bank — both seemingly entangled in the fallout from the Fed's rate hikes over the last year.
Worth noting: The market's not pricing in a pause just yet — it's betting the Fed raises rates by a quarter-point next week.
4. Biggest one-day move since 2001
Money flooded into U.S. government bonds on Monday, Matt writes.
What happened: The yield on the two-year U.S. Treasury note plunged by more than half a percentage point (bond yields go down as prices go up).
- That may not sound like much — but in the world of government bonds, moves of this magnitude are incredibly rare.
- The last time we saw a one-day move this large was on Sept. 17, 2001, when markets first reopened — and then tumbled — after the Sept. 11 terrorist attacks.
- Besides that, the only day that comes close is Oct. 21, 1987, in the aftermath of the stock market crash.
What it means: It's hard to say exactly — there are a lot of competing motivators at play.
- Clearly, ongoing worries about the banking system give people plenty of reason to park some cash in Treasuries, a traditional port of call for investors during panicky periods.
- The plunge also likely reflects expectations that the Fed's rate-hiking days are numbered — as well as the unwinding of complex trades that have been upended by the market turmoil.
5. Size matters
To see two bank failures in one year, as we have thus far in 2023, isn't that unusual. It's the dollar amounts that are eye-popping, Emily writes.
Why it matters: The size of Silicon Valley Bank is likely making it more difficult for regulators to find a buyer, which would usually be the ideal scenario for regulators cleaning up after a collapse.
- There aren't many financial institutions large enough to acquire a big regional bank with more than $50 billion in assets, current FDIC chair Martin Gruenberg said in remarks at Brookings in 2019
The big picture: The two bank failures of 2023, Signature Bank and Silicon Valley Bank, had combined total assets of $319.36 billion.
- Most bank failures are way smaller. Over 98% of banks that have failed since 2007 had assets under $10 billion, explained Gruenberg back then.
- Of note: A failed bank is one that's been taken over by regulators — so Silvergate Bank, which announced last week that it's liquidating, doesn't count.
What to watch: The FDIC is trying again to auction off SVB after a similar effort failed over the weekend.
- This time the agency has a carrot to offer acquirers. The Wall Street Journal reports that regulators can now provide a would-be buyer "deal-sweeteners such as loss-sharing agreements."
Was this forwarded to you? Subscribe here for your own daily dose.
Markets is edited by Kate Marino and copy edited by Mickey Meece.