Weekly Market Commentary March 13th to March 17th 2023
Much of investors’ attention this week was drawn by the headline blitz relating to the closures of Silicon Valley Bank (SVB) last week and Signature Bank over the weekend. Both banks were put into receivership by regulators, who quickly took steps to calm depositors by guaranteeing access to deposits at both institutions, including amounts beyond the FDIC insurance level of $250k. Depositors were made whole by the guarantee, but officials were quick to point out that equity and bondholders would not be protected, to avoid use of the word “bailout”.
The most critical step taken to protect against systemic risk was the creation of a lending facility called the Bank Term Funding Program (BTFP). The new program allows any banking institution to swap fixed income securities (at their par value rather than lower market value) for immediate cash over the next year. This step was instrumental in calming concerns about other banks facing challenges meeting potential withdrawal demands. The sale of securities at depressed values (thanks to rapidly increased interest rates over the past year) in order to meet a rapid run on deposits was the key catalyst that led to SVB’s collapse, the largest bank failure since 2008.
As the week progressed, First Republic Bank (a regional bank) and Credit Suisse (a large global institution) received capital infusions. In the case of First Republic, $30B was provided by a consortium of large U.S. banks working with the U.S. Treasury Department. Credit Suisse received a $50b infusion from the Swiss National Bank.
It is our assessment that the steps taken to deal with strained confidence in the banking system are prudent, particularly the establishment of the BTFP program. We are monitoring the dynamic situation very closely and continue to scrutinize exposures within portfolios to optimize the balance of risk and return, avoiding overreaction while ensuring our confidence in the financial strength of all companies we invest in on behalf of our clients is of the highest quality.
We at Plimoth Investment Advisors are confident in the stability of our parent company, BayCoast Bank. BayCoast is a mutual (not publicly traded) bank that has been in business for over 170 years. The bank is well capitalized, in a good position related to liquidity, and in good financial health. Unlike the institutions described above, 100% of all deposits at BayCoast Bank are fully insured. Accounts with balances exceeding the $250k FDIC insurance limit, are fully insured by the DIF (Depositors Insurance Fund). This protection is unique to Massachusetts state-chartered community banks which participate in the DIF program. We are also in close contact with our custodian bank, Northern Trust, and are confident in the stability of the 130-year-old institution. Northern is a Category II institution under the Federal Reserve’s regulatory framework, making it among the 10 most scrutinized banks in the world and held to the highest liquidity and capital standards.
The Consumer Price Index rose roughly inline with expectations in February, higher by 0.4% and 0.5% at the Core (ex-food and energy) level. On a year-on-year basis the headline rose 6.0% and Core 5.5%. Shelter costs continue to be the largest component of growth in the measures. Producer Prices fell unexpectedly last month, -0.1% versus 0.3% expected, and the unchanged Core reading was equally lower than expected.
Retail Sales declined 0.4%. Non-store retailers (ecommerce) and health and personal care stores were the only bright spot showing modest growth. Readings for the December and January months were revised modestly higher. When netted with the February data, consumer spending is off to a reasonable start in the first quarter.
U.S. Treasury rates blazed a swift trail not seen in decades and the probabilities for the next Fed rate move ran the gamut. At the close of trading on Friday, there was a 59% probability of a 25 basis point hike in the Fed Funds Rate next week. The 2-Year U.S. Treasury closed the week at 3.83% from an extremely wide range of 4.85-3.71%. The 10-Year closed the final session at 3.42% creating a narrowing of the inversion of the Treasury curve over the course of the week.
U.S. equities were led on a wild ride by bank stocks. When all was said and done, the S&P 500 closed the week higher by 1.4% to 3,916. Technology stocks led the gains, driving the NASDAQ Composite Index higher by 4.4%.
All eyes will be on the Fed announcement on rate policy next week. Key economic releases include Durable Goods Orders and Existing and New Home Sales.