Market Note – March 13, 2023

By Hightower Great Lakes on March 13, 2023

Federal Response to SVB Failure was Appropriate, Protects Customers

We wrote extensively on the situation in Friday’s Special Edition Market Note.

On Sunday, a joint statement from the Fed, the FDIC and the Treasury indicated decisive action to protect SVB customers and Signature Bank customers, while closing both entities.

Decisive action included, 1) making depositors whole, 2) invoking systemic rule and shutting down Signature Bank, and 3) creating a new liquidity facility enabling banks to access funds at par (not marked to market) to meet liquidity needs.

These actions are meant to prevent contagion and underscore that “the U.S. banking system remains resilient and on solid foundation.”¹ Senior management, shareholders and unsecured bondholders will not be protected. Depositor accounts below $250,000 are insured by the FDIC’s Deposit Insurance Fund.

Uninsured accounts will be supported by the Fed’s new Bank Term Funding Program (BTFP) and its loan commitments will be backstopped by $25 billion from the U.S. Treasury’s Exchange Stabilization Fund. The BTFP is available to any eligible financial institution, not just these recent two that failed, and offers fixed-rate loans up to one-year and valued at par.

Unlike SVB and Signature Bank, systematically important financial institutions (SIFI) are much better capitalized, diversified, and maintain $1.7 trillion in excess customer savings. The financial sector may not outperform near-term in the stock market, given the volatility and market fears, but excess capital and diversified assets will protect the big banks.

The concentrated customer-base and non-diversified revenue placed these two regional banks (and perhaps others too) at a risk that is idiosyncratic to the broader banking industry. Nonetheless, to protect the broader markets, the startup and technology industries, and confidence in the financial systems, this action is a very big deal and regulators got it right.

Jobs Market Strength Continues

Last week’s jobs report was overshadowed by the Silicon Valley Bank (SVB) failure. Jobs and wages continue to be a major factor in the Fed’s monetary policy decision-making, and we’re quite sure they paid attention to the elevated new nonfarm payrolls and continued wage pressure.

Last week, Fed Chair Powell spoke hawkishly about the potential to move rates higher than expected and return to a faster pace of rate hikes. Despite these comments, we think that since Friday’s SVB fallout, the Fed

will change its tune. There is still work to do on inflation, but the Fed does not want to break the economy by continuing to implement the fastest rate-hike regime in history.

Our overall impression of the labor market is that it remains tight, strong hiring trends continue and there are still roughly two jobs available for every job seeker.

There is a growing amount of data to support softening inflation and the beginning stages of a cooling labor market – specifically, a slower pace of wage increases and uptrend in unemployment and layoffs. We don’t want extremes in either direction – we want sustainable levels of employment and wage growth and there remains a long journey until 2% inflation.

February new nonfarm payrolls increased +311,000 and job openings were 10.8 million, both figures higher than expected and underscore a tight labor market. ADP employment survey was also better-than-expected as job opportunities reflect resilient economic and consumer demand. Leisure and hospitality services continue to drive job creation, supported by retail, health care and government job growth.

Chart 1: New Monthly Payrolls Growth Has Slowed, Remains Indicative of a Healthy Jobs Market²

The unemployment rate inched higher to 3.6% but remains very low. The pace of wage growth cooled, measured by hourly earnings +0.2% m/m and +4.6% y/y. Initial claims for unemployment insurance increased throughout February and into March.

Challenger Gray & Christmas releases a monthly job cuts report, and layoffs in February reached its highest monthly level since 2009 – 410% more job cuts this year, compared to February 2022. This is also the highest measurement of job cuts in the first two months of the year since 2009.

Chart 2: Initial Claims and Unemployment Historically Low, Expected to Rise³

A strong jobs market allows the Fed to continue its hawkish stance. We anticipate the Fed will raise another 25 bps in March, and the SVB failure is contributing to tightening financial conditions. Today (Monday), the Fed governors are holding an expedited closed-door meeting to review their rate policy, which follows Friday’s SVB failure – the largest bank failure since 2008.

This week, we gather more inflation data with CPI and PPI, as well as consumer strength indicators like retail sales and housing data.\

Bond Markets React to SVB Failure, Signaling the Fed Cannot Continue to Sustain Hiking Rates

Last week, Chairman Powell spoke to the Senate where he testified that inflation trends were accelerating again, and he is prepared to increase the pace of rate hikes.

Treasuries sold off through the middle of the week in response, before reversing sharply as Powell’s comments became overshadowed by higher-than-expected jobless claims, layoffs and SVB failure.

After peaking at -108 bps, its widest point since February of 1980, the 2/10yr spread closed the week at -90 bps as the potential for 50 bps in March abated. High Yield Spreads increased from +412 bps to +478 bps, the fastest rise since September of 2022.

Chart 3: Higher Yields Through February (Hawkish Fed, High Inflation) Contrast with Sharp Drop Last Week⁴

The Week Ahead

Earnings – Wednesday: LEN, ADBE. Thursday: DG, FDX.

Economics – Tuesday: CPI (February). Wednesday: Retail Sales (February), PPI (February). Thursday: Building Permits and Housing Starts (February), Philadelphia Fed Index (March). Friday: Industrial and Manufacturing Production (February).

Return for Selected Indices⁵

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Click here to read last week’s Market Note (3/10).

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: The Federal Reserve. As of March 12, 2023.

² Source: FactSet (chart). As of March 12, 2023.

³ Source: FactSet (chart). As of March 12, 2023.

⁴ Source: FactSet (chart). As of March 12, 2023.

⁵ Source: Bloomberg. As of March 12, 2023.