3/10/23 – That Escalated Quickly – Volatility, SVB, Yields

Friday can be best summed up in the words of Ron Burgundy – “Boy, that escalated quickly… I mean, that really got out of hand fast.”

With Chairman Powell’s testimony before Congress coming just two days before the belated release of the February employment, we expected volatility in the capital markets to spike, but not to the extent that it did on Friday morning.  The market panicked when news broke that Silicon Valley Bank (SVB) was experiencing a mass exit of depositors and it’s plan to raise capital through a secondary equity sale had failed.  While the bank is on the smallish side, investors panicked and sold bank stocks in a classic “sell the rumor” fashion.  Despite the FDIC’s takeover of SVB.  The XLF bank ETF fell more than 8% this week, and we wouldn’t be surprised if it took a week or two for financial stock prices to bounce back.

From a fixed income perspective, the move in rates was equally violent.  Chairman Powell’s testimony before Congress went as advertised, with the Chairman conveying his hawkishness toward monetary policy and giving the investment community every indication that the next move in interest rates would be a 50-basis point hike.  That expectation pushed the yield on the 2-year note through 5%, touching 5.07% on Wednesday afternoon.  The yield spike disappeared entirely by close of business on Friday, with the 2-year closing at 4.59%.  The price action was the same for Fed Fund futures.  Following Powell’s testimony, the October future spiked to 5.68%, but is closing out the week at 5.20%.

Looking to next week the BLS will release the Consumer and Producer price indices, as well as Retail Sales for February.  All will factor in to the FOMC’s rate decision to be released on March 22, but we wonder what impact the run on SVB will have on their decision.  With details scant at this time, there’s no sense in speculating.  But details should begin to leak over the coming week and we will assess it as they become available.

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