March 10th, 2023
It was another tough week for markets as Fed Chairman Jerome Powell’s comments before Congress, a hotter than expected jobs report and a late-breaking announcement that the FDIC had seized control of tech-lender, Silicon Valley Bank, combined to rattle investors’ nerves. In his remarks before the Senate Banking Committee, Powell prepared markets for the eventuality that rates are likely to rise above the 5.10% forecast and that the bank may do so in larger increments going forward than the 25 bps that the market anticipates. He cited an “extremely tight” jobs market along with a recent spate of strong economic reports as mounting evidence the central bank’s job to contain inflation is still far from done. Friday’s jobs report gave us the latest snapshot of the labor market, which only reinforced Powell’s view. Payroll gains exceeded estimates by over 90K as companies added 311K to their payrolls during February. Bulls found some slight comfort within the report as wage gains rose less than expected and the unemployment rate ticked slightly higher. Still, it was a very hot print that normally would have gotten a lot more attention if it were not for the spectacular events unfolding in California as former tech-banking darling, Silicon Valley Bank (SVB), collapsed. SVB’s lending portfolio catered towards start-up and venture capital firms, who have higher than normal withdrawal rates even under normal circumstances. The combination of higher rates, customer drawdowns and anemic deal flow forced the bank to take large losses on its bond portfolio as it raised liquidity to satisfy clients’ cash demands. Once investors and customers became aware of the bank’s losses, this set in motion a classic run on the bank, culminating in the second-largest bank failure in U.S. history. While SVB’s problems are highly idiosyncratic, it served as a powerful reminder to investors over the potential dislocations higher rates can have on companies’ business models and asset valuations. By week’s end, the S&P 500 had shed -4.55%.
Markets See Jobs Report as Cup Half Full
The headline figure from Friday’s jobs report showed nonfarm payrolls increasing by 311K in February. This handily beat estimates of 225K. Although February’s gains were lower than January’s blistering pace of 504K, the jobs market still remains incredibly hot with monthly hiring activity happening at a pace nearly twice that of pre-pandemic norms. Leisure and hospitality, retail, and professional and business services led the hiring gains. While the hiring numbers were still well above normal, bulls chose to focus on the fact that wage gains rose less than expected and the uptick in the unemployment rate. Wages rose 0.20% month-to-month, below the 0.40% estimate. The unemployment rate increased to 3.60%, up from January’s 3.40%. The higher unemployment number, however, was a function of more 25-54 year-olds rejoining the labor market, resulting in the labor force participation rate rising to 62.50%. This is its highest level since March 2020. The Job Openings and Labor Turnover Survey (JOLTS) report was also released this week. It too showed strong hiring demand with hiring outstripping separations by 6.4 million and 5.9 million, respectively. While job openings fell by 410K to 10.824 million in January, there were still nearly two job openings available for every individual who might be looking. Markets really took the jobs reports in stride by focusing on those metrics that showed softening, but the Fed is likely to view these reports as being far too hot for comfort.
Prior to Silicon Valley Bank stealing the show on Friday, it was Powell’s semiannual testimony on Capitol Hill that had been the center of attention for investors this week. The Fed Chairman used the occasion to drive home the message that the central bank remains committed to its fight against inflation and he continued to link the central bank’s concern with inflation explicitly to the strength in the labor market. January’s strong 504K payrolls (albeit slightly downwardly revised) has now been followed by another solid 311K gain in February, and with businesses expecting demand to pick up in 2H 2023, the wind remains to the back of the labor market. Powell’s comments should not have come as a surprise. Higher for longer has been the Fed’s mantra since the beginning of the year, but it was Powell opening the door to 50 bps future hikes that served as a wakeup call for markets this week and which stirred investors. Next week’s inflation report will be the final reading that is likely to determine whether we see a 25 or 50 bps hike coming out of the March FOMC meeting, but in so far as the Fed has linked inflation with jobs, this week’s reports are likely far too hot for comfort. Silicon Valley Bank’s implosion topped off the week and brought to light the risks some specialized lenders face. The fallout should be contained but the lesson for everyone should be to never have more than the FDIC limit exposed at any given institution ($250K per depositor/co-owner/beneficiary, per insured bank).
The Week Ahead
Inflation and the consumer take center stage. We’ll see if rising prices force consumers to rein in their spending.
This Sunday marks the beginning of Daylight Saving Time (DST). Americans who live in states that observe the twice yearly clock changes will set their clocks ahead one hour. The change officially takes place at 2:00AM local time, but many people set their clocks forward before they go to bed on Saturday night.
The U.S. Senate unanimously passed a bill called the Sunshine Protection Act last year to put an end to the twice-annual changing of the clocks. The legislation hit a brick wall in the House and was reintroduced this year as the Sunshine Protection Act of 2023 by Senator Marco Rubio who called for Congress to “lock the clock.” If the bill passes, it would take effect in November 2023. That would mean Americans would not “fall back” in November and instead, DST would become the new permanent standard for all U.S. states all year, so this Sunday could be the final time Americans change their clocks. The federal bill still needs to make its way through the House of Representatives before it can be signed into law by President Biden. The earlier version of the bill met with resistance last year by lawmakers who called for more research and additional discussion on the topic.
A year-round DST means the sun would rise and set an hour later than we’re used to, so we would have darker mornings and longer daylight in the evenings. For example, the sun typically rises around 7:15 a.m. and sets around 4:30 p.m. on the first day of winter in New York City. Permanent DST would change sunrise to 8:15 a.m. and sunset to 5:30 p.m.
While the longer evening daylight hours may be enjoyable, some people might not see the sun until hours after they wake up, which means commuting to work or heading to school in the dark. The U.S. attempted a permanent DST in the 1970s amid a national energy crisis. Year-round DST was supposed to last two years, but public support fell, and it ended in October that same year.
Over the last nine years, state legislatures have considered more than 500 bills or resolutions to address time change concerns, and at least 19 states have already enacted legislation or resolutions to stay on DST permanently if Congress were to allow such a change. In some cases, surrounding states would have to enact the same legislation according to the National Conference of State Legislatures. Hawaii, Arizona, Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam and the Northern Marianas do not observe DST.
Last week, Senator Rubio said “Locking the clock has overwhelming bipartisan and popular support. This Congress, I hope that we can finally get this done.” We’ll be watching the clock to see what happens.