Bank Failure Pressures Stocks

Bruce Blythe, Ticker Tape Contributor

(Friday market close) U.S. stocks ended modestly lower Friday after touching a two-month low earlier in the day as a bank failure shook the financials sector. The collapse of Silicon Valley Bank—the largest U.S. bank failure since the 2008 financial crisis—upstaged a jobs report suggesting that although the labor market remains tight, the Federal Reserve’s interest rate campaign may be sapping some employment-linked inflationary pressures.

“Silicon Valley Bank’s failure made waves across the financial markets,” said Collin Martin, fixed income strategist at the Schwab Center for Financial Research. “However, the U.S. banking system is still relatively healthy. Capital ratios, a measure of banks’ ability to cover their loans, have declined over the last year but are still at adequate levels ”

Meanwhile, although markets are still pricing in additional Fed rate hikes at upcoming policy meetings, concerns about the financials sector have helped push down the expected “peak” rate, he added.

The following is a round-up of today’s market activity:

• The S&P 500® index ended 56.73 points (1.5%) lower at 3,861.59; the benchmark’s lowest close since Jan. 5.
• The Dow Jones Industrial Average® (DJIA) fell 345.22 points (1.1%) to 31,909.64.
• The Nasdaq Composite® ($COMP) fell 199.47 points (1.8%) to 11,138.89.
• The 10-year Treasury note yield was down about 22 basis points at 3.704%.
• April WTI crude oil futures were up 84 cents at $76.56 per barrel.
• The U.S. Dollar Index was down 0.7% at 104.58.
• The Cboe Volatility Index® was up 2.19 points at 24.8.

The Federal Deposit Insurance Corp.’s decision to shutter Silicon Valley Bank came a day after the bank, once a top lender in the tech sector, failed in an attempt to raise new capital. The bank’s collapse weighed heavily on shares of regional banks, though large institutions held up better.

Rate hikes still on the table

The bank failure overshadowed the Labor Department’s February employment report, which showed stronger-than-expected payroll growth but also an increase in unemployment and labor force participation rates, suggesting some loosening in the job market.

The Labor Department reported nonfarm payrolls rose by 311,000 jobs month over month in February, compared to the Bloomberg consensus estimate of a 225,000 rise. January’s figure was reduced to a gain of 504,000 from the initial 517,000. The unemployment rate rose to 3.6% compared to expectations for it to remain at January’s 3.4% level. Average hourly earnings rose 0.2% from the month before, below expectations and January’s 0.3% reading.

While the mixed signals from the jobs report eased expectations for additional Fed rate hikes to some extent, a half-percentage point increase later this month “is still on the table, despite all of today’s volatility,” said Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research.  

There was “something for everyone” in the February jobs report, Kevin said. “Payrolls were hotter and there was not a major revision to January’s surge, but the unemployment rate moved higher and average hourly earnings were a bit softer.” However, earnings for lower-wage workers “are still growing too fast for the Fed to be comfortable,” he said.

As of Friday’s close, the probability of a half-percentage-point rate hike after the Fed’s next policy committee meeting March 21–22 fell to 39.5% compared with 75% on Thursday, according to the CME FedWatch Tool. Jobs numbers may influence any further Fed actions, but next week’s inflation and retail sales data also likely will shape the central bank’s thinking.