Silicon Valley Bank – One bad apple doesn’t spoil the bunch
On Friday, Silicon Valley Bank (‘SVB’), a Californian bank capitalizing $16bn, has been taken over by the FDIC, following a wave of deposit outflows. Markets looked at the event as a potentially systemic for the US and global banking sector. We disagree with this interpretation of events.
SVB stress is due to the specific deposit mix and poor liquidity management, made possible by the favourable accounting treatment of securities available to smaller banks in the US. Major US banks do not share any of these features. These have a more diversified, stable deposits base, higher quality liquidity balances and a securities books accounted for at fair value on an ongoing basis. As a result, the read-across is miscalibrated and any broad weakness an opportunity to buy the high quality names in the sector.
Over the weekend, Signature Bank (‘SBNY’) was shut down too, and US regulators stepped in to fully guarantee SVB and SBNY deposits. The Fed also announced a new lending facility to provide extra funding to regional banks, to prevent any spill over effects. Broader markets entered risk-off mode since last Thursday afternoon and US 2Y yields rallied by 65bps to 4.4% by Monday morning, off the recent highs of 5.05%.
ECB Preview – 50bp hike but focus on guidance
We expect the ECB to hike the deposit rate by 50bp to 3.0% on Thursday, and signal that further rate hikes are coming. Core inflation at 5.6% had surprised to the upside recently, adding pressure for the committee to stay on course while maintaining their balancing act of using a meeting-by-meeting approach.
One of the most hawkish council members Robert Holzmann recently discussed terminal rates up to 4.5%, but we think the current consensus in the ECB is lower and hence expect a terminal rate of 4%. In addition, key focus lies on the revisions of quarterly forecasts: Headline inflation in 2023 should be revised down from 6.3% amid a sharp fall of gas prices from €140 in December to €50 today. However, we see upside risks for the previous 2023 core inflation forecast of 4.2%.
We’ll also watch the 2025 long-term inflation forecast closely – as the initial headline estimate of 2.3% in December had surprised on the high end. In line with recently improving economic data, GDP forecasts may be revised higher as recessionary fears abate. Markets are pricing 45bp, or a 80% chance of a 50bp hike, and currently estimate the terminal rate near 3.7%.
US Data – Mixed data makes 25bp hike likely
Last week’s employment data was mixed, whereby nonfarm payrolls at 311k beat consensus of 225k but the unemployment rose by 0.2% to 3.6% and wage growth slowed by 10bp to 0.2% MoM. ADP employment and JOLTS job openings surprised to the upside too, but the vacancies/unemployed ratio fell slightly to 1.9x and the quits rate fell to 2.5%, the third decline in a row.
Within JOLTs, particularly construction job openings fell sharply from 488k to 248k, which can be interpreted as a leading indicator for the economy. Powell’s testimony on Tuesday had initially sparked a selloff as he said the FOMC is open to accelerating pace, but we don’t think job market data this week was strong enough to justify that. Key focus this week lies on US CPI: Consensus sees headline inflation falling by 0.4% to 6% YoY, and core inflation falling by 0.1% to 5.5%. A print in line should confirm a 25bp hike on March 22nd, but following the recent rally our view on US duration is now more balanced and following SVB there is also a chance the Fed pauses.
Algebris Investments’ Global Credit Team
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