Stock markets have weakened after last week’s failure of Silicon Valley Bank and Fed Chairman Jerome Powell’s testimony before Congress. The US Dollar declined. The yield on the 10-year US Treasury note has fallen back from above 4% last week to 3.5% today (Monday).
On Tuesday Powell said that the task of bringing inflation back to the long-term target of 2% might have to include raising rates higher than previously anticipated and at a faster pace, adding that the process “is likely to be bumpy”.
Friday’s stronger-than-expected US jobs report provided little evidence to counter that view showing an increase of 311,00 jobs in February although the data was mixed with the rate of unemployment rising unexpectedly. Markets are now pricing in a strong chance of a further 0.50% hike in interest rates this month and the odds may get higher depending on tomorrow’s (Tuesday) US CPI data.
Interestingly, some commentators have speculated that last week’s collapse of Silicon Valley Bank could provide a reason for the Fed to take a less aggressive stance – not wanting to add further risk to the system.
Over the course of the week, concerns about the Californian bank’s health were steadily increasing. As more and more worried customers began pulling their deposits the bank was forced to sell securities to try and meet its capital requirements realising large losses from its investments in long-dated US government bonds. Trading was halted in SVB stock on Friday morning and the bank was placed into receivership, the biggest bank failure since 2008. Fears of contagion were swiftly answered by the US government guaranteeing all customer deposits at the bank.
In a separate move announced today Silicon Valley Bank UK has been sold to HSBC in a deal arranged by the UK government after talks with the Bank of England and HSBC bosses
The UK economy bounced back more than expected in January with GDP growth of 0.3%, after shrinking 0.5% in December. This coming Wednesday, Chancellor Jeremy Hunt will present his Spring budget, and the Office for Budget Responsibility (OBR) will publish its forecasts for the next five years.
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