A Buzz In The Air Over SVB Financial And February Employment Report

Today is an employment report day, and until 24 hours or so ago, today was supposed to be all about the employment report and the market’s reaction to it. There is another fly in the ointment, though, if you will, and that fly is SVB Financial (SIVB), which has imploded over the last 24 hours or so on concerns about its capital position after experiencing elevated cash burn from its clients.

Yesterday, shares of SIVB plummeted 60%, taking the banking sector and the broader market down with them. Unfortunately, things have not improved this morning for SIVB. The stock is down another 65% in pre-market trading amid a report by Bloomberg that Founders Fund, the venture capital fund co-founded by Peter Thiel, has advised companies to pull their money from Silicon Valley Bank.

We can’t say for certain if there has been a withdrawal run on the bank, but there has certainly been a run on the stock as investors are in a sell-first-ask-questions later mode, cognizant of how quickly a confidence crisis in a bank can destroy its stock.

The debate today is whether SIVB’s issues are SIVB’s issues or the start of a bigger issue for the banking sector. There seems to be an allowance in the stock market for it being more of company-specific problem or at least not a debilitating systemic issue. We say that knowing that the equity futures were little changed this morning even as shares of SIVB were plummeting.

At the same time, though, we can’t ignore the fact that the Treasury market was also rallying at the time SIVB was plummeting in a continued flight-to-safety trade that made it look as if some parties at least thought SIVB’s issues could be a bigger issue. To that end, the 2-yr note yield was down another nine basis points to 4.79% in front of the employment report, after hitting 5.06% before yesterday’s open; and the probability of a 50 basis points rate hike at the March meeting has fallen to 41.0%, according to the CME FedWatch Tool, from 78.6% yesterday.

The yield on the 2-yr note, currently 4.74%, continued lower after the release of the February employment report, which was accented by stronger-than-expected growth in nonfarm payrolls, a larger-than-expected increase in the unemployment rate, and a smaller-than-expected monthly increase in average hourly earnings, although the year-over-year rate increased to 4.6% from 4.4%.

The key takeaway from the report is that it was still a strong report for this point in the Fed’s tightening cycle, and while the SIVB issue is causing a notable distraction, the strength of the report in our estimation is still enough to keep a 50 basis points rate hike on the table for the March FOMC meeting.

Other notable headlines from the Employment Situation Report are as follows:

• February nonfarm payrolls increased by 311,000 (Briefing.com consensus 205,000). The 3-month average for total nonfarm payrolls increased to 351,000 from 344,000.
  • January nonfarm payrolls revised to 504,000 from 517,000
  • December nonfarm payrolls revised to 239,000 from 260,000
• February private sector payrolls increased by 265,000 (Briefing.com consensus 203,000)
  • January private sector payrolls revised to 386,000 from 443,000
  • December private sector payrolls revised to 232,000 from 269,000
• February unemployment rate was 3.6% (Briefing.com consensus 3.4%), versus 3.4% in January
  • Persons unemployed for 27 weeks or more accounted for 17.6% of the unemployed versus 19.4% in January
  • The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.8% versus 6.6% in January
• February average hourly earnings were up 0.2% (Briefing.com consensus 0.3%) versus 0.3% in January
  • Over the last 12 months, average hourly earnings have risen 4.6%, versus 4.4% for the 12 months ending in January
• The average workweek in February was 34.5 hours (Briefing.com consensus 34.6), versus a downwardly revised 34.6 hours (from 34.7) in January
  • Manufacturing workweek decreased 0.2 hour to 40.3 hours
  • Factory overtime decreased 0.1 hour to 3.0 hours
• The labor force participation rate increased to 62.5% from 62.4% in January
• The employment-population ratio held steady at 60.2%

Currently, the S&P 500 futures, down seven points just before the release of the employment report, are up 10 points and are trading 0.3% above fair value, the Nasdaq 100 futures, down four points in front of the report, are up 65 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures, down 85 points in front of the report, are up seven points and are trading slightly above fair value.

There is a lot of buzz in the air after the employment report, only we don’t know if that buzz is because of flies related to SIVB or excitement related to a better-than-feared employment report (meaning it wasn’t as strong as feared). The tape will eventually provide the answer, but it’s fair to say that there is still a good bit of uncertainty in the air.

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Originally Posted March 10, 2023 – A buzz in the air over SVB Financial and February employment report