Financial markets on watch for SVB contagion risk

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news the global financial landscape has been changed by a large bank failure in the US.

The sudden and unexpected demise of Silicon Valley Bank (SVB) over the weekend has has drawn quick comparisons to the 2008 failure of Washington Mutual (WaMu). When WaMu failed in 2008 it had US$309 bln in assets. SVB has US$209 bln today and will be the largest US bank failure since WaMu. But WaMu's assets were 3.1% of all commercial banks at the time. SVB is 'only' 0.9% today. Still, it wasn't WaMu alone that triggered the GFC; it was the first of a cascade that included much more connected institutions like Bear Stearns, and famously Lehman Bos. In 2023, the only other bank involved so far is the dodgy crypto outlier Silverlake. On their own, they won't cause a crisis. But they will stress the whole banking system that needs depositor confidence to avoid a run. Every investor and regulator remembers the GFC banking crisis.

The FDIC has taken over SVB and is looking for a buyer. Final bids are due today.

For some perspective, in 2008 the largest American bank was JPMorgan Chase with assets of US$2.175 tln. WaMu was 14% of that. As at the end of 2022, the largest American bank is still JPMorgan Chase with assets of US$3.773 tln. Before it failed, SVB listed assets that were 7.5% of that. ANZ NZ has assets of US$120 bln (NZ$195.6 bln). Neither SVB (nor ANZ !) are globally systemically significant on their own

Prior to the GFC, US banks had total assets 10.3 times larger than their shareholder funds. In 2010, that swelled to 12.7 times. By the end of 2022 this was back to 10.7 times, having improved sharply since 2019. (In New Zealand it is 11.9 times now.)

Will these levels 'guarantee' there will be no immediate US banking crisis. Of course not, but it does seem unlikely unless there is some other trigger. SVB and Silverlake's woes should easily be contained by both State (CA) and Federal (FDIC) regulators. They know how to do that. And it isn't just the US caught up by the SVB failure. The British are working on a scheme to aid their UK clients.

This crisis has side-lined the news of the strong February labour market gains.

The US non-farm payrolls were stronger than expected, with the headline number swelling by +311,000 when +205,000 was expected, on a seasonally-adjusted basis. Their strong labour market just keeps on growing and confounding all analysts. Digging deeper into the actual data, their workforce is now touching 154 mln which is 1.1 mln more than in January. This is data from employer payrolls. If we use the household survey which takes in unincorporated sole traders as well, the employed workforce is 159.7 mln and it also expanded by just over +1 mln in February from January. Either way, the demand impetus has risen by more than +1 mln people in February, showing why the Fed's efforts to tamp things down have been insufficient so far.

Bolstering this swelling is that their participation rate is rising, as the healthy jobs market draws more people into employment. That shift is even faster than the jobs growth, and their jobless rate ticked up to 3.6%, although that is still very low.

The unexpectedly strong jobs numbers on their own were read as likely to bring a strong Fed response at their next rate review (Thursday, March 23, NZT).

But SVB might change that. And the partisan negotiations for the debt limit expansion might too. They lurk like a cancer on their political system.

Also, the US CPI data due Wednesday (NZT) should also have a big influence on the Fed's decisions.

Across the northern border, Canadian payrolls were expected to be unchanged in February after some sharp January growth, and this is what happened, although the actual result was a bit more positive than analyst estimates.

In Japan, the outgoing Bank of Japan governor Kuroda defended his monetary easing policies after his final Bank of Japan monetary policy meeting, claiming success that their economy is nearing the bank's elusive goal of sustained +2% inflation.

Producer prices in Japan increased by +8.2% in February from a year ago, slowing from a +9.5% rise in January. This was less than the expected +8.4% rise and was the lowest producer inflation since October 2021. Of some concern is that the shift in February from January was deflation at almost a -5% rate. They haven't had that in almost 30 months.

China's banks extended ¥1.81 tln in new yuan loans in February, down from a record ¥4.9 tln in the previous month but above market expectations of ¥1.5 tln. It was also the largest amount of new bank loans for a February month since at least 2004. (For reference, China's total bank debt is now 337% of China's GDP ! That compares with the equivalent US level of just 88%, and New Zealand at 209%.)

And the Party's National Congress delivered a surprise for their central bank watchers. The respected technocratic head was not replaced with a Xi loyalist as was widely signaled. Rather, he gets a slate of Xi loyalists as deputies. Extending the surprise, they also retained the current Finance minister. Elsewhere however, it is the hardline lineup expected.

Indian industrial production rose in January by +5.2% from a year ago, slightly beating the +5% rise expected. This is on top of a good +4.7% rise in December.

We should also note that the La Niña weather pattern is ending and we are moving to more normal climate patterns for the next few months. But later in the year El Niño may well return. At least, that is what the weather scientists are predicting.

And staying with natural phenomena, keep an eye on erupting Indonesian volcanoes. Like the Tonga eruption, this could have global weather implications.

Also watch out for 'eruptions' in Australia, as electricity bills are about to jump by about +20%.

The UST 10yr yield starts today at 3.70% and down -1 bps from Saturday which was a huge -22 bps dump from Friday. 

On Wall Street, the S&P500 ended its Friday session down -1.5% and a -4.8% skid for the week. Fears of the Fed's response to the jobs data was compounded by the SVB risks. Markets could well be nervous when they open on Wall Street tomorrow, but we should note that the S&P500 futures are not indicating that, currently up +1.3% from the actual Friday close.

The price of gold will open today at US$1868/oz and up +US$4 from Saturday. The gain from a week ago has been +US$21/oz.

And oil prices start today -50 USc softer at just over US$76.50/bbl in the US. The international Brent price is still just under US$82.50/bbl. These levels are a -US$3 drop in a week.

The Kiwi dollar is softer, now at 61.3 USc. Against the Aussie we are up ¼c at 93.3 AUc and our highest of the year. Against the euro we are little-changed at 57.7 euro cents. That leaves the TWI-5 little-changed at 70.1. A week ago it was at 70.8.

The bitcoin price has recovered from this time Saturday, now at US$20,619 and up +3.5%, so about half of Saturday's fall. And volatility over the past 24 hours has been low at +/-0.9%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.