Economy

Yellen met with officials from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency on Friday to discuss developments with SVB, which does business as Silicon Valley Bank, Treasury said in a statement.”Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event,” it said.California banking regulators on Friday closed SVB, appointing the FDIC as receiver to protect depositors at the startup-focused lender. Cecilia Rouse, who chairs the Council of Economic Advisers, told reporters at the White House that the U.S. banking system was fundamentally different and stronger than it was during the 2008 financial crisis, and regulators were prepared to use the “better tools” they have developed to protect investments.    Rouse said the Federal Deposit Insurance Corp had stepped in very quickly to protect the deposits of up to $250,000.     “Our banking system is far more resilient than it was in 2008. We’ve learned a lot. We’ve got better tools,” she said.     She noted that banks now had to undergo stress tests and hold more capital than during the last crisis.     “We put in guardrails, and our regulators have much visibility into the banking sector than they did a decade ago.”     In testimony earlier on Friday before the U.S. House of Representatives Ways and Means Committee, Yellen was asked about SVB’s situation and said: “There are recent developments that concern a few banks that I’m monitoring very carefully. And when banks experience financial losses, it is and should be a matter of concern.” More

A top Federal Reserve official has said he is “open to any outcome” regarding the central bank’s conundrum over whether to revert to half-point interest rate rises in the face of unexpectedly strong economic data.Speaking with the Financial Times on Friday, Richmond Fed president Thomas Barkin, who has previously been an advocate of quarter-point rate rises, said he had not made a decision about the forthcoming increase.However, he said that “on any particular meeting, I’ve always said I’m open to any outcome”, noting that he would “never take something off the table”.“Last time we chose to move it up 25 [basis points]. Just because you’ve moved it 25 at one meeting doesn’t mean that is what you have to move at every meeting.”Barkin’s comments echo similar sentiments this week from Fed chair Jay Powell, who indicated his openness to reintroducing half-point rate rises if warranted by incoming data. Reports on inflation and spending are due to be released next week.They come as the Fed faces a particularly troublesome decision over whether to change course following a series of data releases showing that inflation remains stubbornly high despite the central bank’s historic monetary tightening campaign.Since last March, the Fed has raised its benchmark rate from near-zero to just below 4.75 per cent, repeatedly moving in half-point and three-quarter-point increments until shifting down to a more traditional quarter-point pace in February.Barkin’s comments come on the heels of the latest jobs report, which showed the US economy registering yet another month of robust gains. In February, payrolls swelled by more than 300,000, a step down from the roughly half a million positions added the previous month, but still well in excess of the level Fed officials deem to be in line with cooling economic activity.The stronger-than-expected jobs growth was tempered by figures showing slower wage growth and higher unemployment as more people entered the workforce.Barkin, who was speaking on the final day before the “blackout period” ahead of the March 21-22 meeting — when officials’ public communications are limited — said February’s jobs data provided a mixed picture.“It didn’t give much of a signal of demand deceleration, but it did give a stronger signal on the supply normalisation.”He said he would be watching closely for further evidence as to whether January’s data, which suggested renewed economic momentum and higher price pressures, was a one-off or the start of a more worrisome reacceleration.“Philosophically, you wouldn’t want to overreact to any one round of data. On the other hand, when you see it happening multiple times, maybe it is a trend.”He reiterated that he “like[s] the fact that we’re on a more deliberate path here than we were last year”, referring to the more measured pace of recent rate rises, saying such cautiousness gives the Fed time to understand how its actions are impacting the economy.According to CME Group, the odds of a half-point rate rise have fallen rapidly over the past day, against the backdrop of the implosion of tech lender Silicon Valley Bank, which was shuttered by banking regulators on Friday in the second-largest bank failure in US history.

Asked about the potential implications of SVB’s collapse for the Fed’s monetary campaign, Barkin said he is chiefly focused on economic demand, on which financial stability “may or may not have an impact”.Barkin, who will not be a voting member on the Federal Open Market Committee until next year, pushed back against the notion that there was an “upward limit” on how high the Fed’s policy rate may need to rise this tightening campaign.“I would continue to respond until we get inflation under control,” he said, adding that he would not be “surprised” if officials’ projections due to be published later this month will be revised higher than the 5.1 per cent level forecast in December. More

NEW YORK (Reuters) – A critical inflation report next week will test a U.S. stock market already consumed by worries over Federal Reserve hawkishness and potential fallout from the largest bank failure since the financial crisis.Friday’s mixed U.S. jobs report eased some worries about big rate hikes, days after Fed Chair Jerome Powell warned that policymakers may raise rates higher than expected if upcoming data showed the economy remains hot after nearly a year of tightening.A hotter-than-expected consumer price report on Tuesday, however, could reignite fears of jumbo-sized Fed rate hikes like those that rocked markets last year. That would be unwelcome to a market on tenterhooks following this week’s failure of SVB Financial Group, which does business as Silicon Valley Bank.“There is uncertainty revolving around the inflation report and there is a lot of confusion caused by SVB’s failure and worry that it might be a bigger problem,” said Robert Pavlik, senior portfolio manager at Dakota Wealth. “The market is dealing with confusion and uncertainty in a very short time frame.”The S&P 500 sank on Friday, bringing the weekly loss to 4.5%. After a big rebound in January, the benchmark index is now clinging to a 0.6% gain for 2023.Investors are growing nervous that the Fed’s campaign to fight inflation by ending the era of cheap money has exposed cracks in the economy that could widen if it ratchets up its rate hikes.Traders were on guard for signs of contagion in the financial sector and beyond in the wake of troubles for SVB and crypto-focused Silvergate, which this week disclosed plans to wind down operations and voluntarily liquidate.”The concerns emanating from the financial sector are rippling across the market in general,” said Michael James, managing director of equity trading at Wedbush Securities. “When you combine the debacle of Silvergate with the collapse of Silicon Valley Bank … that’s creating a ripple effect of concern for the overall market stability.”On Friday, markets appeared to be dialing down their expectations for Fed hawkishness, pricing in a 40% chance that the central bank will raise rates by 50 basis points at their March 21-22 meeting, according to CME’s Fedwatch tool. Those odds stood at around 70% as recently as Thursday, but abated on Friday after investors saw the employment data and gained more clarity on the extent of SVB’s troubles. Late on Friday, yields on two-year U.S. Treasuries, which closely follow Fed policy expectations, were on track for their biggest two-day basis-point drop since September 2008.“The Fed now has very clear evidence that they are having an impact on the financial system and the economy — rate hikes are starting to bite – and while that’s not enough to give them pause, it is something they will take into consideration,” wrote Mark Haefele, Chief Investment Officer at UBS Global Wealth Management in a Friday report.Rate expectations could again change dramatically if the CPI report for February comes in above the year-over-year increase of 6% expected by analysts polled by Reuters. The consumer price report is followed the next day by more inflation data, on producer prices.While moderation of annual inflation from a peak of 9% last year to current levels was the “easy move”, going from 6% to 3% will be more difficult, said John Lynch, chief investment officer for Comerica (NYSE:CMA) Wealth Management.FOCUS ON INFLATIONMarkets have been more volatile on average on CPI days over the past year, with the S&P 500 moving an average of 1.8% in either direction on those days against an average 1.2% daily move overall in that time frame. Midday on Friday, S&P 500 Index options implied that the CPI print would move the index 1.8% in either direction in the hour following the data release, according to Optiver data. Volatility surged on Friday, with the Cboe Volatility Index, known as Wall Street’s fear gauge, hitting its highest level since late October amid a broad equities selloff.Besides signs of falling inflation, reassurance for investors could come if it became clearer that SVB’s issues were unlikely to spread. “If banks are saying that their finances are in good shape and they are not seeing the same issues to that extent, then that would go to stabilizing the market a bit,” said James Ragan, director of wealth management research at D.A. Davidson. More

The government has briefed U.S. companies about the plan and told them it expects to announce the restrictions as early as next month, the report said.The Biden administration plans to coordinate with the Netherlands and Japan, according to the report. This week, Dutch government said it plans new restrictions on semiconductor technology exports to China to protect national security.Chinese foreign ministry spokesperson Mao Ning said on Thursday that China was firmly opposed to the restrictions as a means “to intervene and limit normal economic and trade exchanges between Chinese and Dutch companies.”The U.S. had imposed a slew of export restrictions late last year including a measure to cut China off from certain semiconductor chips made anywhere in the world with U.S. equipment. More

Shares of the bank were halted on Friday, after they tumbled 66% in premarket trading.Silicon Valley Bank is the first FDIC-insured bank to fail in more than two years, the last being Almena State Bank in October 2020.Silicon Valley Bank had about $209 billion in total assets and about $175.4 billion in total deposits, as of Dec. 31, 2022. The main office and all branches of Silicon Valley Bank will reopen on March 13 and all insured depositors will have full access to their insured deposits no later than Monday morning, according to the statement.The startup-focused lender had 17 branches in California and Massachusetts, the FDIC said. More

PARIS (Reuters) – British Prime Minister Rishi Sunak said on Friday that his government would prioritise reducing the country’s debt over cutting taxes in next week’s budget, which would also focus on other goals such as reducing inflation.Sunak has sought to restore Britain’s fiscal credibility after the tax-cutting plans of his predecessor Liz Truss sparked a crisis in Britain’s bond market and forced her resignation in October, propelling him into Downing Street.But some in his Conservative Party are keen for tax cuts in the budget on Wednesday, so that they can take effect well ahead of the next national election, expected next year.Asked if he was comfortable that the tax burden was near a record high, and if he would prioritise cutting taxes as the economic picture improved, Sunak said: “Over time, I’ve been very clear my ambition is to cut people’s taxes.”But while he said better-than-expected growth data released earlier on Friday showed the economy’s fundamentals were strong, he added that the COVID-19 pandemic and the impact of the war in Ukraine had had “a major damaging impact not just on the economy but on our public finances”.”The economic priorities are to halve inflation, reduce debt and grow the economy. Those are the right priorities and I’m confident that the chancellor’s budget will deliver on all of those,” Sunak told reporters on a trip to Paris.”That is the focus of our policy and that’s the thing that people want to see … halving inflation is critical.”Britain’s inflation rate is widely expected to fall as the impact of last year’s surge in energy prices fades. The Bank of England forecast last month that inflation would fall to 3.0% in 12 months’ time, down from 10.1% in January.”Inflation is the worst tax of all,” Sunak said. “That’s what’s causing everyone the problems, so actually, it’s right that we focus on reducing inflation and our plans are working and it’s important we stick to them.” More

The Federal Reserve is anxiously parsing incoming data as it decides between a small or a large rate move this month.Federal Reserve officials received a complicated signal from February’s employment report, which showed that job growth retained substantial momentum nearly a year into the central bank’s campaign to slow the economy and cool rapid inflation. But it also included details hinting that the softening the Fed has been trying to achieve may be coming.Policymakers have raised interest rates from near zero to above 4.5 percent over the past year, and Jerome H. Powell, the Fed chair, signaled this week that the size of the central bank’s March 22 rate move would hinge on the strength of incoming data — making Friday’s employment report a critical focal point for investors.But the figures painted a complicated picture. Employers added 311,000 workers last month, which were more than the 225,000 expected and a sign that the pace of hiring has cooled little, if at all, over the past year. At the same time, wage growth moderated to its slowest monthly pace since February 2022, and the unemployment rate ticked up slightly.“It’s exactly what I wasn’t hoping for, which is a mixed report,” said Michael Feroli, chief U.S. economist at J.P. Morgan.That makes determining the Fed’s next steps more challenging.Officials raised rates in large three-quarter-point increments four times in 2022, making borrowing sharply more expensive in hopes of restraining a hot economy. But they had been slowing the pace of adjustment for months, stepping down to half a point in December and a quarter point in February. Policymakers thought they had reached the point where interest rates were high enough to significantly cool the economy, so they expected to soon stop raising rates and simply hold them at a high level for a while.But data from early 2023 have surprised the central bank. The labor market, inflation and consumer spending all showed unexpected signs of strength, which made policymakers question whether they might need to raise rates by more — or even return to a faster pace of adjustment. That’s why central bankers have been looking to incoming data from February for a sense of whether the robust January figures were a one-off or a genuine sign of strength.Employers added 311,000 workers last month, which were more than expected and a sign that the pace of hiring has cooled little.Hiroko Masuike/The New York Times“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Mr. Powell told lawmakers this week, emphasizing that “no decision has been made on this.”Friday’s figures suggested that hiring is genuinely resilient: Employers added more than half a million workers in the first month of the year, even after revisions.But the slowdown in wage growth could be good news for the central bank. Officials have been nervously eyeing rapid wage gains, fretting that it will be difficult for inflation to cool when employers are paying more and trying to make up for those climbing labor bills by passing the costs along to consumers.That said, a closely watched measure of wages for production workers who are not managers — rank-and-file employees, basically — held up. Wage data bounce around, and economists often watch that measure for a clearer reading of underlying momentum in pay gains.Priya Misra, head of global rates strategy at TD Securities, said she thought the report made the size of the Fed’s next rate move a “tossup.” The pace of hiring is likely to suggest to officials that the labor market is still hot, but the other details could give them some room to watch and wait.“It’s not an obvious slam dunk for 50,” Ms. Misra said, referring to a half-point move.The upshot, she said, is that investors will need to closely watch the Consumer Price Index report that is scheduled for release on Tuesday. The fresh figures will show how hot inflation was running in February, giving central bankers a final critical reading on where the American economy stands heading into their decision.“It makes this the most important C.P.I. report — again,” Ms. Misra said.Economists in a Bloomberg survey expect monthly inflation readings — which give a clearer sense of iterative progress on cooling price increases — to slow on an overall basis, but to hold steady at 0.4 percent after volatile food and fuel prices are stripped out.The State of Jobs in the United StatesThe labor market continues to display strength, as the Federal Reserve tries to engineer a slowdown and tame inflation.Mislabeling Managers: New evidence shows that many employers are mislabeling rank-and-file workers as managers to avoid paying them overtime.Energy Sector: Solar, wind, geothermal, battery and other alternative-energy businesses are snapping up workers from fossil fuel companies, where employment has fallen.Elite Hedge Funds: As workers around the country negotiate severance packages, employees in a tiny and influential corner of Wall Street are being promised some of their biggest paydays ever.Immigration: The flow of immigrants and refugees into the United States has ramped up, helping to replenish the American labor force. But visa backlogs are still posing challenges.One challenge is that the numbers will come out during the Fed’s pre-meeting quiet period, which is in place all of next week, so central bankers will not be able to tell the world how they are interpreting the new data.Further complicating the picture: Glimmers of stress are surfacing in the banking system, ones that are tied to the Fed’s rapid rate moves over the past 12 months. Silicon Valley Bank, which lent to tech start-ups and failed on Friday, was squeezed partly by the jump in interest rates.That development — and the possibility that it might herald trouble at other regional banks — could also matter to how the Fed understands the rate outlook.“It shows us: No, we haven’t really digested all of the effects of what the Fed has done so far,” said Aneta Markowska, chief financial economist at Jefferies. “There’s still a lot of policy pain in the pipeline that hasn’t hit the economy yet.”William Dudley, a former president of the Federal Reserve Bank of New York, said there are probably other banks that loaded up on longer-term assets when rates were low and are now suffering from that as short-term borrowing costs rise. That makes those older assets less attractive — and less valuable — if a bank has to sell them to raise cash.But he said that Silicon Valley Bank was probably an extreme example, and that it’s possible the whole situation will have blown over by the time the Fed meets next.“By a week and a half from now, this whole thing could be over,” he said. He added, though, that he didn’t have much clarity on how big the Fed’s next rate move would be, in any case.“I am totally confused about the Fed at this point,” he said. More

Two and a bit months in, how is 2023 shaping up in financial markets? Bank of America sums it up well with a (sadly anonymised) quote from an investor: “Like watching a mad donkey thrashing around in a field bouncing off all the fences.”If anything, this may be a little harsh on mad donkeys, although in fairness, they have been thrown off their stride at least in part by a factor that nobody could have predicted: the weather.US Federal Reserve chair Jay Powell acknowledged as much this week. Kicking off his annual testimony to Congress on Tuesday, he set the scene on economic conditions and noted that data from the opening months of 2023 has been upbeat.“Employment, consumer spending, manufacturing production and inflation have partly reversed the softening trends that we had seen in the data just a month ago,” he said, adding that “some of this reversal likely reflects the unseasonably warm weather in January in much of the country”. This helped to put the notion of higher-for-longer US interest rates back on the agenda, dealing a new blow to bond prices. Mother Nature is not entirely responsible here, of course, but her impact on the likely path forward for the Fed is substantial.January’s data showed that the US economy added more than half a million jobs. February’s numbers, released on Friday, showed it added 311,000 straight afterwards. A pickup in the unemployment rate in February will probably be enough to convince the Fed to raise rates in smaller rather than larger steps, but still, its job of tightening policy is clearly nowhere near done. The smart money has always known that weather matters to markets. It is no coincidence that in 2018, Ken Griffin’s Citadel hedge fund has amassed a 20-strong team of scientists and analysts to make weather forecasts. That world-class knowhow helped Citadel make as much as $8bn out of bets on gas and power and other commodity markets last year alone, part of the fund’s eye-popping 38 per cent gains in 2022.This is an extreme example. But the weather has become a market-moving factor that pops up in conversation with fund managers more frequently now than at any other time I can recall, particularly regarding the unusually mild spell that helped Europe to dodge a nasty recession-inducing fuel bill over the winter. Robert Dishner, senior portfolio manager on the multi sector fixed income team at Neuberger Berman, is not spending his days poring over squiggly lines on weather maps. “We don’t have a team of meteorologists,” he says. “But we do pay attention. I have a chart on my screen of gas and electricity prices.”It all plugs in to the single biggest driver of every asset class in the world in the aftermath of the pandemic lockdowns. “We have to understand, what does it mean for headline inflation?“Twenty-five per cent of the gilts market is inflation-linked, so it matters,” Dishner said. His colleague Simon Matthews, who focuses on high-yield corporate debt, said weather, and its impact on fuel costs, are key to his assessment of default risks among risky companies. “Energy was one of the biggest themes that company management teams were talking about last year,” he says. “If you don’t get your energy hedging right, it’s a meaningful impact on your [earnings].” Now that we no longer have the rising tide of easy money lifting all boats in the credit markets, this type of company-specific strategy is much more important.

The weather-related impact on interest rates also bit in to broader markets this week through another channel, when California-based Silicon Valley Bank, a small, tech-focused lender, suffered a large loss relating to its holdings of US Treasury bonds and was closed by regulators.A happy-go-lucky market that felt like the Fed had its back would probably brush off SVB’s woes for what they were: SVB’s problems were rooted in SVB’s business model. Instead, we ended up with a selloff in bank stocks across the US and later in Europe, feeding on the notion that other much bigger banks may face similar strains if they mark down the value of bonds on their books.Fund managers almost universally agree that narrative is vastly overblown.SVB was small, with a “very concentrated deposit base”, says Amundi’s head of European equity research, Ciaran Callaghan. It was “not prepared for deposit outflows, didn’t have the liquidity at hand to cover deposit redemptions, and consequently was a forced seller of bonds that drove an equity raising and created the contagion. This is very much an isolated, idiosyncratic case.”But the constant whipsaw action in bond markets right now shows the mood is “skittish”, says Craig Inches, head of rates and cash at Royal London Asset Management. The weather maps can’t tell you when and when a heavily tech-dependent US provincial bank will stumble, although some lavishly compensated meteorology nerds at hedge funds could try to figure it out. But this is all a reminder that any marginal factors such as technical curiosities or freakishly warm winters can really end up making a difference in a market on edge about what the Fed will do [email protected] More