Major U.S. stock indexes finished in a mixed yet mostly positive fashion last week as pressure on the banking sector gained steam.
Encouragingly, monthly consumer inflation declined, though the Silicon Valley Bank and Signature Bank stories dominated the headlines.
Tallying last week, the S&P 500 added 1.43%, the Nasdaq 100 gained 5.83%, and the Dow Jones Industrial Average was nearly flat, decreasing by 0.15%.
After the fall of two U.S. banks, Silicon Valley Bank (SVB) and Signature Bank, First Republic Bank began to show signs of stress last week, and 11 banks pledged $30 billion in deposits to save the institution. The First Republic Bank story is still developing.
Is what’s happening with SVB and Signature a government bailout? That remains open to interpretation.
President Biden has said that taxpayers won’t foot the bill. However, the U.S. government is covering depositors beyond the FDIC limits at SVB and Signature, saving tech companies and startups with deposit balances beyond $250,000. At this time, it is being called a non-tax-payer funded bailout.
Where will the money come from then? More details should develop this week.
Big Tech Rally
A couple of bank failures and large-cap tech rallied in a big way. What gives? Hey, things don’t always make sense at face value! But there is always logic at some level. Large-cap tech investors love the fact that profitable tech giants like Apple hold large reserves of cash and have somewhat limited exposure to the financial sector.
But the core of the strength in large-cap tech last week had to be dramatic expectational shifts in the future interest rate path of the Fed.
Looking beyond this week’s March Fed meeting, future meetings could result in a halt to rate hikes or perhaps even result in rate cuts, according to some analysts. It is too early to know with any level of certainty at this time. But the market sure loved large-cap tech last week.
With banks at the forefront of the market’s mind last week, the usual top-priority Consumer Price Index (CPI) data was overshadowed. The latest data for February showed inflation falling to an increase of 6.0% year over year, in line with market expectations.
The 6.0% rise was the lowest annual increase since September 2021 and marked the eight strength month of declines.
On a monthly basis, consumer prices advanced 0.4%, following a 0.5% rise in January. Core inflation, which excludes food and energy, rose by 0.5% month-over-month in February and was 5.5% higher on a year-over-year basis.
Government Bonds Rally, Yields Sink
Flight to safety sent investors to bonds last week. Bond yields, especially on the short end of the yield curve, sunk lower; the 2-year yield posted historic declines amid an investor flight to safety bid and anticipation of a potential shift in the Fed rate hike narrative.
The 10-year yield finished at 3.396% last week, closing the week some 8.12% lower than the previous week’s close of 3.696%. A big move.
Fed Meeting This Week
It is finally time for the highly anticipated March Fed meeting this week. The interest rate decision on Wednesday has to be the most highly anticipated Fed meeting in recent history.
There is a split crowd among market participants. Some are calling for no hike based on stress in the banking sector and lower inflation data. Others argue that rate hikes must continue to ensure inflation and stagflation are tamed, even with the rising stress for U.S. banks.
It feels like the Fed is in a proverbial pickle.
Rate Hike Probabilities
We often cite the CME FedWatch tool when discussing interest rate probabilities. The accuracy has been high historically, but there has been volatility in the Fed Funds futures contracts that provide these probabilities.
At the close of last week, the CME FedWatch tool favored a 25 basis point hike (62% chance), and the zero-rate hike probability showed a 38% chance.
The data is dynamic and will likely change multiple times before the Fed meeting.
ECB Raises Rates
Ahead of this week’s U.S. Fed meeting, the European Central Bank (ECB) raised rates by 50 basis points last week despite the recent financial turmoil.
The rate hike takes the ECB’s benchmark rate from 2.5% to 3.0%. Will the U.S. Fed remain aggressive too?
Weekend Developments and Test of Resolve
Reminiscent of 2008, weekend banking activities are alive and well again, with news breaking that UBS will buy Credit Suisse.
Speaking of news, the steady drumbeat of headlines over the past week has rattled investors, and rightly so. But as long-term investors, it’s important to keep in mind that financial markets have cycles: expansions, contractions, booms, and inevitable busts.
The Fed’s rapid rate hike path to battle inflation has produced some casualties, but industry-specific risks are one of the critical reasons a diversified portfolio stands the test of time.
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