Silicon Valley Bank’s failure highlights the pressure of rising funding costs. The Fed backstop on deposits at SIVB and SBNY reduces the likelihood of more regional bank failures, but the pressure on a banks underlying business model remains acute.
The Fed’s decision to provide liquidity has markets speculating the central bank may elect to leave rates unchanged when it meets next week..
Yesterday, we discussed the negative impact on bank deposits and assets from the Fed’s QT operations. The Fed’s QE program resulted in rapidly rising bank deposits and support for asset values as the central bank became the largest source of demand for bonds.
In a clear signal from banks, US large cap and regional bank indices are down ~10% for the week after cautious management presentations at a sell-side conference on Monday.
Multiple factors combine to create a challenging outlook for equities. Yesterday’s testimony from Fed Chair Powell triggered a ~1.5% sell off in the S&P 500 (SPX) and further yield curve inversion
Longer-dated bond yields have limited room to lift from current levels given hawkish rate expectations and the potential for a more benign February Jobs Report this Friday.
US equities are mostly higher into a busy week of macro catalysts.
At current levels, the S&P 500 (SPX) is essentially unchanged from where it stood last April when terminal rates were at ~3%.
At current levels, the S&P 500 (SPX) is essentially unchanged from where it stood last April when terminal rates were at ~3%.
Short-term support is in focus as the global disinflation cycle is challenged by recent hotter-than-expected inflation data including US ISM as well as German, France and Spain CPI.
