Good morning, its Monday the 12 of March, and I’m Roland from Milford.
The key economic news was non farm pay rolls in the US which were much stronger than the market expected. Employment increased by 311k jobs vs 205k expected.
The monster January job adds of over 500k were also not revised down by much which was a surprise.
The unemployment rate however ticked up to 3.6% vs 3.4% expected as the participation rate increased – this is a positive development given the participation rate in the US had remained stubbornly low.
In addition, average hourly earnings grew only 0.2% m/m vs 0.3%
So the market remains very tight but at least for February it didn’t flow through to wages.
Earlier in the week Federal chair Jerome Powell testified in front of congress. Generally this is political posturing however he restarted his hawkish narrative, highlighting they would accelerate rate hikes if they had to.
This saw US 2yr bond yields jump to over 5% – the highest level since 2007.
This saw a sell off in risk assets globally which was exacerbated by the issues in the US regional banking sector we will discuss later.
The RBA domestically raised rates by 25bps which was inline with market expectations. They did however change the commentary in their statement which suggested they were considering a pause in the near future.
This is on the back of the monthly inflation data and the weaker employment print.
We believe seasonality impacted the employment statistics, and the monthly inflation data is wrought with issues. The monthly inflation print measures less than half of the quarterly statistic and is skewed to goods rather than services and as we’ve seen globally the inflation risks lie services not goods.
We believe the RBA is trying to engineer a soft landing which may prove to be difficult if the US continues to raise rates and we pause as the rate differential will lead to some currency implications.
The Bank Of Japan held rates at -0.1% in Kuroda’s final meeting as the BoJ governor. There was some speculation he’d step away from the ultra easy monetary policy he has been responsible for given global inflation issues however this was not the case.
He now hands the reigns over to oo way da after 10yrs as governor.
As I’m sure you’ve deduced we are seeing rate paths and central bank policies diverge globally – in fact we’ve had 290 global rate hikes over the past 12 months.
The key equity news
Was the spectacular collapse of Silicon Valley bank in the US. If it is to fail it would become the 2nd biggest bank collapse in history. We will spend a bit of time on this:
Silicon valley bank was the key bank for venture capital firms and tech companies particularly start ups. They had $169b of these deposits and 40% were with start ups.
As companies were unable to raise fresh capital they were continually drawing down on these deposit
The issue was SVBs assets were invested in long duration instruments like government bonds and mortgage backed securities. They actually had the highest concentration of these securities of any bank. Now given the rapid rate rises these are all worth a lot less however you don’t realise that loss unless you sell them on the market. Because they were going into deposit outflow they had to sell these assets at significant losses.
They announced some of these losses after they sold a $21b portfolio at a $1.8b loss. They also announced a share proposal to raise $2.3b of funds to cover this loss and shore up the BS.
This spooked its depositors who started to withdraw funds at an accelerating rate which would of course require SVB to sell even more assets at steep losses to fund these withdrawals.
The shares fell 60% on Thursday and were in a halt on Friday. The preference shares are trading at 2 cents as it is very likely equity holders will get nothing.
The FDIC has taken control of the bank to ensure an orderly winding down of its assets. The FDIC insures deposits upto $250k. Now unfortunately >96% of the banks deposits are not insured or exceed this limit.
The insured deposits will be paid on Monday however the uninsured deposits will receive a receivership certificate for their claims. They will be paid but the payment will likely be delayed and they may not receive their entire deposit. These certificates can be traded and will likely be traded at discounts.
In terms of other implications the obvious concern is whether this causes contagion and sees other banks fail.
There are an estimated >$600b of unrealised losses sitting in the US banking system.
However the large US banks are extremely well capitalised relative to the GFC.
The risk is we see a run on the smaller banks that don’t have as much liquidity as the big banks but very few had the same risky exposure to tech start ups that SVB had.
We saw yields fall on Friday given there was a flight to quality and many are now questioning whether the fed can raise rates much higher given the stresses appearing in the system.
We will see banks compete more aggressively for deposits so they don’t themselves experience heightened deposit withdrawals.
Another question is does credit become less available? This has far reaching implications if so – an example are commercial real estate businesses that are highly geared – if the banks no longer lend to these businesses many could fail.
There are also likely serious implications for the US start up scene given how many companies exposed to that sector will be caught up in this issue.
Finally there’s a scenario the govt. steps in to ensure there is no contagion. At this stage there is a lot of uncertainty – we do know however that the banks are in a much better position than pre GFC.
We saw CARsales raise $500m to buy an additional 40% stake in Webmotors, the #1 online auto market place in Brazil. CAR had owned 30% since 2013 so this increases thewir stake to 70%.
They over raised and recuded their gearing to 1.9x.
The acquisition is expected to be EPS accretive in time.
We also saw XRO announce 7-800 layoffs as they look to control costs more effectively. This equates to about 15% of their workforce. They also announced they expect to have a lower cost to revenue ratio than expected in FY24. XERO rallied 11% on the news.
Looking to the week ahead:
We will be focused on the outcome of the SVB debacle and will closely monitor any developments to detect potential contagion risks.
In the US we get a wave of economic data including CPI where the market expects 0.4% m/m inflation, the monthly PPI metric which is expected to increase 0.3% m/m and finally retail sales which are expected to fall 0.3% m/m.
In NZ, quarterly GDP data will be released with the market expecting 3.3% annual GDP growth.
Here in Australia we have February employment data. Employment is expected to increase by 48.5k and the UR is expected to fall to 3.6%.
Thanks for listening, and we’ll see you next week.
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