Silicon slip

A good week for

• Bonds rallied +1 to +2%, led higher by gilts
• Japan was the only equity region to deliver gains in sterling terms, rising +1%

A bad week for

• US equities weakened around -5%, led lower by financials
• Emerging markets, the UK and Europe also suffered declines

Banks

Banks sold off last week in the wake of news that a US bank was experiencing difficulties. Silicon Valley Bank (SVB) had clients predominantly in the tech sector, resulting in a surge in deposits in recent years, but limited loan opportunities. The Bank opted to invest these deposits in US government bonds. However, the decline in the value of government bonds coincided with a weaker period for the tech sector resulting in a surge in deposit withdrawals. SVB then sold its government bonds at the prevailing market price, which was somewhat lower, creating a need to recapitalise. Events at SVB raised concerns that other banks may be effected, with the US financial index declining around 10% over the week. While SVB is unusual in having a very concentrated client base, US regulators have stepped in to ensure that other banks do not experience liquidity problems. The Federal Reserve has offered two liquidity provisions, both of which allow banks to use as collateral assets valued at par rather than the market value.

US federal reserve

SVB’s plight has raised questions as to whether the Fed will continue to tighten monetary policy. Earlier last week, Fed Chair Jerome Powell gave testimony to Congress, sending a hawkish message. Powell remarked that rates may have to go “higher than previously anticipated” and that the Fed would tighten policy faster if the “totality of incoming data” warrant it. This led markets to price in a greater probability of a 0.5% rise in interest rates at the next meeting. However, SVB’s financial difficulties in part came about due to monetary policy tightening faster than it had anticipated. In addition, other banks may now tighten credit conditions, which could weigh on economic growth. These factors have led to some to expect the Fed to slow down the pace of tightening.

US labour market data

One data print closely watched by the Fed is the labour report. On Friday, February’s employment and wage data were published, again painting a mixed picture. The number of payroll employees rose by 311,000 in February, decelerating from January’s 504,000, but well ahead of economists’ expectations. This could suggest that the labour market is more resilient than expected. However, other details pointed to some easing. Participation increased to 62.5%, contributing toward higher unemployment of 3.6%. In addition, the monthly increase in wages decelerated to 0.2%. The January Job Openings and Labour Turnover Survey also sent conflicting signals, with a rise in job openings in January, at the same time as the number of voluntary job switchers fell sharply, and redundancies rose. While nascent signs of labour market weakening will be welcome to the Fed, unemployment remains close to record lows. At the same time, the impact of monetary tightening already done may not yet have fully transmitted through the economy.

China

China’s National People’s Congress took place last week, providing more continuity than expected. As anticipated, congress members voted unanimously to reinstate Xi Jinping as party leader for a third term and many of the most important roles went to current or former members of the elite Politburo Standing Committee, the party's highest echelon of power. However, unexpectedly, central bank governor Yi Gang and finance minister Liu Kun also remained in post, despite having reached retirement age of 65. This decision was interpreted as an effort to reassure markets. The congress also had a message of reassurance for private enterprise, pledging equal treatment for private and state owned business and business friendly measures. However, officials endorsed a more moderate growth target of 5% in 2023, suggesting that stimulus measures will be carefully evaluated.

UK GDP

Closer to home, January’s GDP growth figures showed a rebound in the UK economy, with a month-on-month rise of 0.3%. This follows December’s -0.5% decline. However, beneath the surface, the details are less positive. The rebound was primarily driven by fewer strikes in January than December, and the resumption of the football season after December’s World Cup. Beyond services, manufacturing contracted by -0.4%, and construction by -1.7%. Growth in February is expected also be impacted by strike action.

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