The labor market put in another strong performance in February, gaining 311k jobs vs. expectations of 200k-250k. It was the second consecutive month of big job gains, but the y/y growth downtrend remains intact. Leisure and hospitality once again led the way, gaining 105k, about one-third of the headline. However, it is the only major private industry that has yet to recover all of its pre-pandemic jobs. Private industries in total now have 16% more jobs than they did before Covid, but leisure and hospitality are still down about 5%. The -4k loss in Manufacturing was the fourth weak reading in a row, confirming that manufacturing is in contraction, as I’ll discuss below.
There seemed to be more job losses spread across industries as shown in the chart below, and I had not seen that in a while. That led me to look at a somewhat overlooked labor market measure in the third chart, called the job diffusion index, where 50% indicates an equal balance between industries with increasing and decreasing employment. It now stands at 56% and is the lowest since it reached the post-pandemic peak of 85% last February. It means that the number of industries with job gains is now only slightly outpacing those with losses.
Federal Reserve Chairman Jerome Powell gave his semi-annual testimony to Congress this week and suddenly turned more hawkish. In the testimony, he warned that “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.” Furthermore, he said, “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.” In other words, higher and faster. Financial markets quickly raised the probability of a 50 bps hike at the next meeting to almost 70% vs 30% the previous day. But his comments were based on one month’s data. A month ago he said “The disinflationary process, the process of getting inflation down, has begun” and he gave us the smallest rate increase in seven meetings. Give us a break Jay. Is it “higher and faster based on one month’s data” or is it “disinflation and slower hikes”?
Next week brings a lot more critical data that may cement the Fed’s decision, including Consumer Price inflation, Producer Price inflation, and retail sales.
There’s a lot more to catch up on so let me just summarize some of the last two week’s data.
On the downside:
· Orders for core durable goods fell to 4.3% y/y, the lowest of the post-pandemic era. A year ago it was 11.5%.
· The ISM manufacturing index remained in contractionary territory for the fourth consecutive month, with the critical new orders component staying in contraction for the sixth straight month.
· Consumer confidence fell from 106.0 to 102.9 as the future expectations component of the survey fell sharply from 76.0 to 69.7. The split between consumers’ assessments of the present vs. the future, which is a very strong indicator of a recession, fell from -75.1 to -83.1, the lowest level in 22 years.
· Housing prices fell for the sixth consecutive month. This is bad because of the rapid loss of home values. On a y/y basis, the Case-Shiller home price index has fallen from an outrageously high 20.8% ten months ago to 5.8% currently, but that’s still above the long-term average of 3.8%.
· Weekly jobless claims (on a 4-week rolling average basis) have risen to 197,000/wk vs. 189,000/wk five weeks ago.
· Job separations and layoffs rose a gigantic 16.3% in a single month. Over the past ten months, they have risen at an annualized rate of 38.8%.
· Job openings by several measures continue to decline:
On the upside:
· Manufacturing industrial production gained 1.0% m/m but the y/y rate is a limp 0.3%.
· Pending home sales soared an incredible 8.1% m/m, the highest (ex-pandemic) in almost 13 years. However, the y/y rate is a gruesome -24.1%
· The ISM services index remained in expansionary territory – it has been in contraction for only one month since Covid. The new orders index was very strong at 62.6
· Housing prices fell for the sixth consecutive month. This is good because it will eventually help lead to recovery in the housing market and represents a deflation of the housing bubble as opposed to a more dangerous bursting.
· The Fed’s Beige Book of anecdotal economic activity, published eight times a year, showed an improvement in Q1:
But all of that, all of that, might take a back seat now. Silicon Valley Bank (SVB), which was a major source of venture capital funding in the technology industry, collapsed. SVB, which was the country’s 16th biggest bank by assets, said it had to sell bonds it owned at a $1.8B loss, and now needed $2.25B of new capital. Then there was basically a run on the bank by panicked depositors, and very quickly the lights went out. It was the biggest bank failure since the global financial crisis in 2008. All this came two days after Silvergate, a major lender to the crypto industry, announced it was going to wind down its operations and liquidate.
The FDIC immediately closed SVB and took receivership. So why did SVB have to sell the bonds at a loss? Simple – the Fed has been raising interest rates, and as a result, the value of the bonds fell – bond prices and interest rates move in opposite directions. We’ve seen how the Fed’s raising rates has sent both the housing and manufacturing sectors into recession, and now it is showing up in a bank failure – let’s hope it stays a bank failure, not a lot of them – that’s the biggest concern.
According to CNBC “roughly 95% of SVB’s deposits were uninsured, according to filings with the SEC”. However, U.S. Treasury Secretary Janet Yellen said “we are concerned about depositors and are focused on trying to meet their needs” and that she has been working “to address the situation in a timely way”. If Yellen can announce today, Sunday March 12th, a few hours from this writing, that a plan has been developed to make all depositors whole, the situation could calm down substantially. If the FDIC also announces that it has found a buyer for the bank, that would also help a lot. IF those things don’t happen by the time many of you read this, the stock market may well be under pressure. And if the situation worsens, it could conceivably force the Fed to pause hiking at the March 22nd meeting.
· Strong headline employment gains, but with slowing inflationary growth and a sharp increase in the share of industries with job losses.
· The Fed can’t seem to make up its mind about the meeting on March 22nd.
· Some good data, but more bad.
· However, the bank failure is the most important thing happening right now.
Addition to the report: Relief – a plan to make SVP depositors whole
As worries over the failure of Silicon Valley Bank (SVB) continued over the weekend of March 11-12th, yesterday (Sunday, March 12th) we wrote in the afternoon: “If (Treasury Secretary) Janet Yellen can announce today, Sunday, a few hours from this writing, that a plan has been developed to make all depositors whole, the situation could calm down substantially.” At 6:15 that evening, she came through for us. She issued a joint statement with Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg, outlining a plan to stabilize the banking sector.
- First, all SVB depositors will be made whole and will have access to their funds this morning. A similar plan will cover Signature Bank, which was also closed over the weekend.
- To give the banking sector time to stabilize, shore up their balance sheets (their own finances) to make sure they can re-pay depositors, and reduce risk to the banking system, the Federal Reserve will make loans available to banks for one year.
- This plan is not a bailout such as was done in 2018. It does not rescue the bank at the taxpayers’ expense. The plan incurs no loss to taxpayers. Instead, depositors will be made whole from an assessment of banks. The statement from the Treasury also said nicely, but with a sly grin of authority, “senior management has also been removed.”
- The stock market appears relieved for the moment and opened up strong in the morning. Regional bank stocks however are getting crushed over concerns that they may have managed their own finances in a manner similar to SVB. But trading is very volatile, and since trading is driven by humans who are emotional and thus impossible to predict, so is the market at the end of the day.
- A huge segment of investors has also fled to safety, buying up massive amounts of Treasury securities, driving their prices up and yields down (bond prices and yields move in opposite directions). The interest rate on the 2 year Treasury note has plummeted over the past three days around 50 bps (0.50%) from 4.6% to 4.1%. That’s the biggest decline since the 1987 stock market crash, which was another example of a flight to safety.
- Markets now price in the probability of a 25 bps hike at around 84% at the Fed’s meeting on March 22nd. The probability of a 50 bps hike went from 40% on Friday to 0% today. At the moment there is still a 16% probability of a 0% hike.
- Upcoming data including consumer inflation (CPI), producer inflation (PPI), and retail sales should be carefully watched as they could determine the Fed’s next move.
- Three banks have been closed, (Silvergate, SVB, and Signature Bank), and others may come, so the problems may not be completely over. But the current plan is very helpful and clearly lessens the risk of a cascade of failures.
- However, in the longer term, the plan could be interpreted as “kicking the can down the road”, that is, just deferring problems. Today we will take that deal.
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