As we head toward today’s opening bell, U.S. stock futures are suggesting a sharply higher start to the session. In overnight trading, markets in Asia took sizable hits, but the major European indexes have moved into positive territory. Elsewhere, oil prices have fallen, with West Texas Intermediate down 1.9%, to around $73.35 a barrel.
Yesterday’s whipsaw market, in the wake of the bank ‘contagion’, left many investors asking “what next?” First and foremost, the threat of continued volatility remains. Namely, a large number of banks could still face liquidity issues in the days ahead. To be sure, the Federal Deposit Insurance Corporation’s (FDIC) move to protect all the deposits at the former Silicon Valley Bank (SVB) and Signature Bank (SBNY) was a big step toward stemming a possible panic. Under normal circumstances, the FDIC only covers depositors for up to $250,000. This was a big issue, as SVB included many venture capitalists and private equity firms among its clientele, as well as start-up businesses that would have been in dire straits if unable to access their funds.
Although the FDIC has not promised to backstop other lenders, namely small and regional banks, the Federal Reserve Board said that it will provide additional funding to eligible depositary institutions. This is designed to bolster the capacity of the banking system to safeguard deposits, and keep money and credit moving through the economy. The move is not a bailout, in that the funding will come through loans of up to one year, with U.S. Treasuries, agency debt, and mortgage-backed securities put up as collateral. While the Department of the Treasury will make up to $25 billion available under the program, it does not expect to draw on the funds.
Meanwhile, the bank run created a rush to buy U.S. government bonds. As a result, yields on two-year Treasuries (which move inversely to prices) fell by more than half a percentage point. This was the biggest two-day move in more than 45 years. Also, the average rate on 30-year fixed mortgages made a similar-sized move downward since reaching a little over 7% about a week ago.
Understandably, this makes the Federal Reserve’s goal of taming inflation even more challenging. Recall that the lead bank has been raising interest rates in order to slow down demand, and thus ease inflation. Most recently, officers of the lead bank had hinted that the pace of increases might have to ratchet back up to half a percentage point at its next meeting (scheduled for March 21-22).
Part of the reason Silicon Valley Bank collapsed was that it incurred losses on Treasuries that it was forced to sell. Will the Fed double-down on its money tightening initiative and risk the possibility of more banks collapsing, or will it ease off the monetary brakes temporarily until lenders stabilize? Goldman Sachs (GS), for one, believes that it will be the latter. The consensus, however, is calling for another quarter-point hike next week.
In the meantime, this morning we received the latest inflation data. The Consumer Price Index (CPI) for February was in line with expectations, showing an increase of 0.4%, down slightly from the 0.5% uptick in January. On a 12-month basis, the index increased 6%, down from the 6.4% registered through January. More economic news is on tap tomorrow, including the Producer Price Index for February, where an increase of 0.3% is expected, versus the 0.7% advance recorded in January. Thursday brings last month’s numbers on housing starts and building permits, both of which are expected to come in flat with the January readings.
By the numbers, stocks ended Monday’s volatile session in mixed fashion, with the Dow Jones Industrials slipping 90 points, or 0.3%, the S&P 500 was off 5 points (0.2%), while the tech-focused NASDAQ gained 49 points, or 0.5%.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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