Investment Commentary – March 23, 2023

Year to Date Market Indices as of March 23, 2023
• Dow 32,312 (-3.65%)
• S&P 3,989 (2.29%)
• NASDAQ 12,824 (14.92%)
• OIL $70.53(-12.43%)
• Barclay Bond Aggregate (2.85%)
• Gold 1,974 (7.87%)

Fed hikes rates by a quarter percentage point, indicates increases are near an end

WASHINGTON — The Federal Reserve on Wednesday enacted a quarter percentage point interest rate increase, expressing caution about the recent banking crisis and indicating that hikes are nearing an end.

Along with its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not assured and will depend largely on incoming data.

“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.“

That wording is a departure from previous statements which indicated “ongoing increases” would be appropriate to bring down inflation.

While comments Fed Chair Jerome Powell made during a news conference were taken to mean that the central bank may be nearing the end of its rate-hiking cycle, he qualified that the inflation fight isn’t over.

“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” the central bank leader said.

Also, Powell acknowledged that the recent events in the banking system were likely to result in tighter credit conditions, and that was likely why the central bank’s tone had softened.

Still, he said that despite market pricing to the contrary, “rate cuts are not in our base case” for the remainder of 2023.

Fed’s Powell: Silicon Valley Bank management ‘failed badly”

Powell: “SVB’s large base of uninsured deposits, exposure to interest-rate risks made it an ‘outlier'”

“So, at a basic level, Silicon Valley Bank management failed badly. They grew the bank very quickly. They exposed the bank to significant liquidity risk and interest-rate risk, didn’t hedge that risk,” Powell said Wednesday during a press conference that followed the Fed’s announcement of a 25-basis-point interest-rate hike.

“We now know that supervisors saw these risks and intervened. We know that the public saw all this. We know that SVB experienced an unprecedentedly rapid and massive bank run,” Powell continued. “So, this is a very large group of connected depositors, concentrated group of connected depositors in a very, very fast run, faster than the historical record would suggest.”
Powell went on to say that SVB was “an outlier in terms of both its percentage of uninsured deposits and in terms of its holdings of duration.”

Based on its regulatory filings, about 93.8% of SVB’s deposits were uninsured as of the end of 2022, meaning they were in excess of the $250,000 cap on deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC).

SVB was overexposed to long-dated Treasury securities that created substantial interest-rate risk as the Federal Reserve hiked rates to tamp down inflation.

Bond prices decrease as interest rates rise, so SVB had to sell off portions of its bond portfolio at a loss to meet depositors’ demands for withdrawals as their concerns about the bank’s long-term viability mounted.

The announcement of losses from bond sales caused the company’s stock to plummet and sparked concern among depositors who rushed to take their money out, exacerbating the bank’s woes and prompting its failure.

That led to SVB’s closure and seizure by the FDIC, which, in concert with the Federal Reserve and Treasury Department, deemed SVB a systemic risk to the financial system and provided protection for all the bank’s depositors — including those with account balances above the standard $250,000 cap on FDIC deposit insurance.

Market-moving news

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.

Bond price rally: Prices of U.S. government debt surged for the second week in a row, sending yields sharply lower, with the steepest decline coming at the short end of the yield curve. After ending the previous week at 4.59%, the yield of the 2-year U.S. Treasury note fell to around 3.82% on Friday. As recently as March 8, it had been as high as 5.07%.

Inflation moderation: U.S. inflation fell for the eighth consecutive month, slipping to the lowest level since September 2021. The government’s Consumer Price Index recorded a 6.0% annual rate in February, down from 6.4% the previous month and in line with most economists’ expectations.

Oil slick: The price of U.S. crude oil tumbled below $67 per barrel on Friday, slumping to the lowest level in more than 15 months. Oil fell around 13% for the week as instability in segments of the banking industry added to recessionary fears, which could weigh on demand for oil. (Market Indices) (Around the Web & Upcoming Events) (YTD Performance Chart)