😵💫🥊 Labor Market and SVB Deliver a Double Blow to the Economy
Hi all,
Happy Sunday! Jerome Powell had some words on the labor market and America’s 16th largest bank was just taken over by officials. It’s been quite an eventful week so let’s not waste any time.
Be sure to check in on Wednesday once more rubble has been cleared from the SVB situation.
Let’s get into it!
— Humphrey, Tim & Rickie
Market Report
Jerome Powell, the Chairman of the Federal Reserve, gave remarks to the Senate Committee on Banking, Housing, and Urban Affairs this past week. He noted strong momentum in labor markets and less disinflation than previously indicated. However, he stated that restoring price stability may require some softening in labor market conditions.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” - Jerome Powell, 3/7/23
Powell also noted the importance of “two or three” data releases to analyze before the time of the March FOMC meeting, stating that “Those are going to be very important in the assessment we have of this relatively recent data”. He’s likely referring to the February payroll numbers this past Friday, and a CPI and retail sales report next week.
Initial unemployment claims in the US rose by 21,000 to 211,000 in the week ended March 4, marking the highest level since December. The median estimate was 195,000 claims.
Small businesses with less than 20 employees have eliminated 594,000 jobs since December 2021, while firms with 20 to 49 workers shed jobs for a second-straight month in February, indicating growing financial pressure on smaller companies as the Federal Reserve hikes interest rates.
Silicon Valley Bank (SVB), which primarily deals with startups and venture capital funds, suffered massive losses on its investment portfolio due to its decision to purchase more than $80 billion in mortgage-backed securities with a duration of 10+ years at a weighted average yield of 1.56% as deposits skyrocketed.
As inflation reached 40-year highs and the Fed raised rates, bond prices collapsed, leading to SVB suffering unrealized losses on its bond portfolio.
This caused deposit outflows, leading to many notable VC firms advising their portfolio companies to withdraw from SVB, contributing to the massive bank run on March 9th.
The contagion didn’t just end with VCs and startups; many publicly traded companies such as Roku and Roblox had cash in SVB, and Circle’s USDC stablecoin reserves were also affected, leading to USDC breaking its peg from the dollar, falling to as low as $0.87.
For a detailed story of SVB and what it means for the banking sector, check out the blog post that Tim wrote: