What Silicon Valley Bank means for the markets

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Two bank meltdowns trigger a flurry of activity from financial regulators.

• The Federal Reserve will create a term bank financing program that will lend money to SVB. This ensures people can access their deposits above $250,000 and avoids widespread economic fallout.

• Then on Monday morning, regulators shut down Signature Bank — one of the top banks in the cryptocurrency industry — citing systemic risks. All filings will be made in full, according to federal regulators.

• As for the number of jobs in the United States published on Friday, do you remember? – he revealed that growth in non-farm payrolls in the United States had slowed to 311,000 in February, down from January’s 504,000 but still above the forecast of 225,000. A sign that the labor market could be cooling , the unemployment rate was higher than expected while wage growth slowed.

• PRO A major inflation report and any potential fallout from SVB’s troubles will be what investors expect next week. “It will be a major market mover and set the tone for the market,” said Michael Arone, chief investment strategist at State Street Global Advisors.

The February jobs report was supposed to be Friday’s news. Then, a banking crash occurred. Difficult to do better in terms of impact. There’s a lot to unpack today, so bear with me.

Let’s start with the original protagonist of the day, the jobs report. At first glance, this is not promising for people who worry about inflation. The number of jobs created was higher than the Dow Jones estimate. But go below the surface and cracks in the foundation become apparent. The average hourly wage did not rise as much as expected, while the unemployment rate rose to 3.6%, above expectations of 3.4%. In short: good news, bad news, if you are an investor. “There’s something for everyone,” as Liz Ann Sonders, chief investment strategist at Charles Schwab, puts it.

The jobs data alone was mixed enough for the Federal Reserve to consider raising interest rates by half a percentage point. But wait, a bank has collapsed! And not just any regional bank, but Silicon Valley Bank, the benchmark for venture capital-backed tech startups. We can consider SVB as the first (high level) victim of rising interest rates.

But the good thing – if there can be a good thing from a bank meltdown – is that regulators have decided to step in to protect deposits. The move suggests the Fed recognizes the potential for broader contagion in the economy and may slow its hikes, just so as not to inadvertently cut more banks. (Example: As this bulletin went to press Monday morning, financial regulators announced they were closing a second bank, New York-based Signature Bank.)

That could explain why markets fell less sharply on Friday than they did earlier in the week when Fed Chairman Jerome Powell suggested higher rates were on the table. On Friday, the Dow Jones Industrial Average lost 1.07%, the S&P 500 fell 1.45% and the Nasdaq Composite lost 1.76%.

Of course, the markets could still digest the shock waves before selling. But I suspect hopes of lower rates following the collapse of SVB could keep markets afloat. Similarly, CNBC’s Jim Cramer argued that nothing is more deflationary than the collapse of an indebted bank – which could remain the hand of the Fed. Indeed, the 2-year Treasury yield – reflecting investors’ interest rate expectations – plunged 46 basis points in two days, the biggest move since the 2008 financial crisis.

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