Week in Review: Hawkish Fed and Bank Jitters

Hawkish testimony from US Federal Reserve Chair Jerome Powell earlier in the week and strong job openings in the U.S. saw major global indices retreat over the week. 

Federal Reserve Chair Jerome Powell testified before a House Financial Services hearing indicating that interest rates may need to go higher and remain in a restrictive territory for an extended period. The higher for longer approach saw expectations of the feds fund rate increase with the peak or terminal rate now close to 5,75%. 

Friday’s job report which showed an increase of 311,000 nonfarm jobs in February, well above consensus expectations of around 200,000, added to the Fed’s higher for longer interest rate path. The unemployment rate rose unexpectedly, however, from a January five-decade low of 3.4% to 3.6%. There also was some good news on the inflation side, as average hourly earnings rose 4.6% from a year ago, below the estimate for 4.8%. Leisure and hospitality, retail and government led job creation by sector. January’s nonfarm payrolls gain of 517,000 was revised down to 504,000, while December’s total was also revised down to 239,000, a decrease of 21,000 from the previous estimate.

All eyes will now be on next Tuesdays U.S. consumer price data, ahead of the Fed’s 22 March rate-setting meeting, to see whether there is enough evidence of easing inflation pressures to convince the Fed to raise rates by 0.25% rather than 0.5%.

Financials led the declines within the S&P 500 with concerns growing throughout the week about the health of SVB Financial, or Silicon Valley Bank, with customers withdrawing $42 billion of deposits by the end of Thursday. The collapse started on Wednesday when the technology-oriented regional bank was forced to sell and realize losses in securities held on its balance sheet in order to meet capital requirements. Within 48 hours a run-on deposits caused SVB to be shuttered by regulators, with trading in SVB stock halted on Friday. SVB is the largest banking failure in U.S. since the 2008 financial crisis and the second largest ever. The U.S. banking system, following a prolonged period of stringent oversight in the aftermath of the Global Financial Crisis, appears to be significantly better capitalized than it was in past crises, including 2008, but nevertheless the failure sent ripples through the global financial system on growing concerns that the aggressive Fed tightening cycle may be beginning to have undesirable economic side effects.

Major U.S. indices ended the week sharply lower with the benchmark S&P 500 Index down 4.5%, the Dow Jones off 4.4% and the Nasdaq off 4.7% as risk off sentiment took hold.

In the U.K. the economy grew by 0.3% in January, official figures showed on Friday, exceeding expectations as it continues to fend off an inevitable recession. The U.K. remains the only country in the G-7 (Group of Seven) major economies that has yet to fully recover its lost output during the Covid-19 pandemic. On the inflation front, U.K. inflation slowed to an annual 10.1% in January, continuing to shrink after hitting a 41-year high of 11.1% in October but staying well above the Bank of England’s 2% target. The UK’s FTSE 100 Index lost 2.50% for the week.

In Europe, shares tracked global markets lower amid concerns of risks in the banking system, the pan-European STOXX Europe 50 Index ended the week 1.5% lower.

Earlier in the week Beijing set an economic growth target of around 5% this year at the National People Congress (NPC). On Friday Chinese leader Xi Jinping gained an unprecedented third term as president as was widely expected, delegates also formally reappointed Xi as chairman of the Central Military Commission. Signs of weakening demand and a lower than expected growth outlook saw the Shanghai Stock Exchange Index decline by 2.95%, the worst weekly loss in more than two months.

Japan’s stock markets registered modest gains for the week, with the Nikkei 225 Index rising 0.78%, as the Bank of Japan made no changes to its monetary policy at the final meeting chaired by outgoing Governor Haruhiko Kuroda.

Bitcoin fell below $20,000 on Friday hitting a near-two month low after a sell-off in risk assets and the collapse of Silvergate, a crypto-focused bank, which announced it would wind down operations due to the fallout from the implosion of FTX, also weighing on crypto prices.

Market Moves of the Week:

On Monday night South African President Cyril Ramaphosa announced his much anticipated cabinet reshuffle. Paul Mashatile, newly elected deputy president of the ANC was installed as deputy president of South Africa, as was widely expected. A new minister of electricity was announced, Kgosientso Ramokgopa, the former mayor of Tshwane. Ramokgopa has been tasked with ending rolling blackouts by overseeing the fix on Eskom and bringing new energy to the grid. South Africa suffered its worst power cuts in 2022, and 2023 is so far looking even darker.

The South African economy contracted more than expected in the last quarter of 2022, as an escalation in rolling power cuts contributed to most sectors from agriculture to mining shrinking. Figures from Statistics South Africa showed gross domestic product contracted 1.3% in the fourth quarter compared to the previous three months in seasonally-adjusted terms. Analysts had predicted a 0.4% contraction in the October-December period. GDP growth increased by 2.0% in 2022.

Rating agency, S&P Global on Wednesday downgraded its outlook on South Africa to “stable” from “positive”, citing infrastructure constraints and the severe power crisis. It also revised down its real GDP growth forecast for 2023 to 1% from 1,5% previously.

The JSE All-Share Index tracked global markets lower for the week. Resources (-4.05%) were sharply lower, followed by financials (-1.89%) and industrials (-1.57%). The rand gained the most in more than a month on Friday after the US dollar weakened as US jobs data came in stronger-than-expected but lower than in January, ending the week approximately 1% stronger at R18.33/$.

Chart of the Week:

Following testimony from Fed Chair Jerome Powell the predicted feds fund rate moved higher, pointing to a higher terminal rate (using the Bloomberg World Interest Rate Probabilities function). This implied policy rate contrasts sharply with Powell’s last press conference on Feb. 1st .