Bulls and bears alike had something to be happy about this morning as investors mulled over the latest jobs data. The Dow, S&P, and Nasdaq Composite all opened slightly lower before racing lower still through the morning. By noon, however, the market was able to stage a midday comeback despite a significantly better-than-expected headline jobs gain as the indexes pared back their losses before rushing lower once more.
The US economy added 311,000 jobs last month according to the Bureau of Labor Statistics (BLS), beating the 225,000 job estimate with ease. This was the 10th straight “beat” for the report. But instead of sinking, stocks were buoyed by the data, as unemployment unexpectedly rose right alongside payrolls, hitting 3.6% (up from 3.4% in January) while wage growth missed. Wages climbed by 0.2% month-over-month (MoM) vs. +0.3% expected. Year-over-year (YoY), wages were up 4.6% vs. 4.7% expected.
Bulls ignored the headline jobs figure, instead focusing on unemployment and wages. Economists were split on the data.
“February’s extremely strong jobs report exceeded expectations — and, following January’s blowout report, means the Fed will likely follow through with Powell’s statement in his semiannual congressional testimony about accelerating the pace of rate hikes,” wrote Bloomberg chief US economist Anna Wong, who has had a good track record of predicting the Fed’s moves over the last year.
“That said, there are some signs of weakening in the print — Hours worked slowed, and average hourly earnings cooled faster than expected – that are consistent with our read that the labor market is softening. Still, with inflation elevated, the Fed will have to take the data in this report at face value. We have upgraded our baseline to a 50-basis-point hike at the March FOMC meeting.”
TD Securities strategist Priya Misra offered a less bearish take:
“I guess it lowers pressure on the Fed to go 50bp but the labor market is still strong and wages are running at 4.6% (far greater than the 3.5% that the Fed needs),” Misra wrote.
“The Fed will not stop hiking until they see the labor market weaken so we think that the 2s10s curve should flatten. We should see the market keeping some risks of a 50bp hike in March. Not a bad report for risk assets but financials loom larger.”
Finally, Inflation Insights founder Omair Sharif saw it as a moderately bullish report:
“This report screams soft landing and looks to be a pretty good one for the Fed,” quipped Sharif.
Investors seemed to think that, too, as they brought the indexes off their session lows.
But the big story of the day came from Silicon Valley Bank (NASDAQ: SIVB), which cratered 50% yesterday after the bank announced that it needed to sell more stock to raise funds. After being unable to do so, the bank was then advised to seek a buyer this morning. SIVB shares raced another 66% lower in premarket trading.
The stock was halted immediately prior to regulators seizing the bank. SIVB got in trouble due to the nature of its business; the bank specialized in (often fickle) venture-capital firms and tech startups. It also had massive exposure to fixed-rate Treasury yields, which caused the bank to carry a large unrealized loss that started to snowball late last year. Rate hikes amplified these losses and when SIVB scrambled to mitigate this exposure, it cost the bank billions to transition from longer-term Treasurys into shorter-term ones.
Prior to that transition, unrealized losses climbed to $16 billion as of Q3 2022. That’s a lot of dough, and it was a big problem for the bank as shareholder equity was only $15.8 billion at the time, putting SIVB’s total equity underwater compared to unrealized losses. Rates continued rising, making these losses even bigger, all while SIVB stuffed them under the rug (so to speak) as it refused to let go of these investments.
That’s what prompted SIVB’s recent $21 billion security liquidation, which the bank announced yesterday. It sold longer-term Treasurys to reinvest those funds in shorter-term Treasurys. It made sense as a long-term play, but it also came at a great cost to the bank. The mere announcement of this gambit, alongside its attempted $2.5 billion stock sale, prompted a run on SIVB, completely draining its vaults.
SIVB went from a red-hot bank to a completely defunct one in roughly one year. Back on 12/31/21, SIVB had barely any unrealized losses. Prior to that, the bank rarely carried a loss over from quarter to quarter.
Some analysts pointed to SIVB as a “canary in the coal mine,” saying that contagion could reach into other small banks. Others argued that the SIVB meltdown wouldn’t have bigger implications.
SIVB was the 18th largest bank in the United States, and although it had more Treasury yield exposure than any other bank, it wasn’t alone in carrying massive unrealized losses. Bank of America (NYSE: BAC) is sitting on an unrealized loss-to-equity ratio of roughly 40%. That’s the second highest behind SIVB, which is currently over 100%. Next is State Street (NYSE: STT) at 27% and Wells Fargo (NYSE: WFC) at 25%.
Smaller, regional banks are obviously more at risk of collapsing than global ones. And though they may not have Treasury yield exposure like SIVB did, they own a different kind:
Commercial real estate exposure.
The “work-from-home revolution” has led to a significant rise in commercial real estate loan defaults, in which regional banks tend to have more exposure than bigger banks. As rates rise and a recession hits, defaults could easily accelerate, causing unrealized losses to pile up for small banks in the same way that Treasurys dinged SIVB.
Regional banks would be able to survive this financially, but if confidence in these banks wanes enough, they could face a series of cascading bank runs, triggering a widespread financial crisis.
And so, while there was still plenty of focus on the jobs report today, traders rightfully reacted more to the SIVB blowup, which ruined the midday rally and threatens to plunge the market into a severe selloff.