<p>The point of hiking interest rates is to inflict economic pain. In a perfect world, it would be spread evenly and fairly, the economy would slow just enough to bring inflation back into balance.</p><p>But interest rates are a famously blunt tool.</p><p>As it stands, the burden falls highest on people in precarious positions: those who borrowed too much and can’t make the payments. We collectively accept that families will suffer to bring inflation under control.</p><p>What if, instead, that burden fell on banks and venture capital?</p><p>Would that be a good thing? Sure. Those are supposed to be the risk takers in an economy.</p><p>Is it what’s going to happen? I’m not so sure.</p><p>In a perfect world, venture capital would get cleaned out and banks would tighten lending. That would mean the Fed wouldn’t need to hike as much and it would give those indebted consumers are fighting chance of survival.</p><p>The problem for the Fed and Treasury is that it’s tough to contain a banking crisis. If they allow the fire to spread — like officials did with Lehman Brothers — it could get out of hand quickly. My belief is that the financial crisis didn’t need to happen. It would have been expensive but a quicker combination of rate cuts, QE and government money would have been far cheaper than what unfolded. That lesson hasn’t been forgotten in Washington.</p><p>So what will happen?</p><p>Maybe I’m cynical this is an easy choice for the Fed and Treasury: They’ll save the banks and hang consumers out to dry. </p><p>Squeezing the economy slowly with rate hikes is a tried-and-true method where policymakers can feel like they’re in control. A banking crisis is playing with fire.</p><p>In a future post I’ll write about why the Fed and Treasury should resist the impulse to race to the rescue.</p>

This article was written by Adam Button at www.forexlive.com.

<ul><li><a target=“_blank“ href=“https://www.forexlive.com/centralbank/odds-of-a-50-bps-hike-on-march-22-fall-to-28-20230310/“>Odds of a 50 bps hike on March 22 fall to 28%</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/technical-analysis/wti-crude-oil-futures-settle-at-7668-20230310/“>WTI crude oil futures settle at $76.68</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/held-to-maturity-bonds-are-about-to-be-a-big-problem-20230310/“>“Held to maturity” bonds are about to be a big problem</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/why-contagion-from-the-silicon-valley-bank-collapse-is-a-certainty-20230310/“>Why contagion from the Silicon Valley Bank collapse is a certainty</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/baker-hughes-us-oil-rig-count-2-to-590-20230310/“>Baker Hughes US oil rig count -2 to 590</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/the-opportunity-to-get-that-5-yielding-2-year-is-now-deep-in-the-rearview-mirror-20230310/“>The opportunity to get that 5% yielding 2-year is now deep in the rearview mirror</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/european-equity-close-dax-touched-a-one-year-high-this-week-the-closed-20230310/“>European equity close: DAX touched a one-year high this week the closed</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/fdic-takes-control-of-silicon-valley-bank-20230310/“>FDIC takes control of Silicon Valley Bank</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/whats-the-second-line-of-defense-in-the-regional-bank-rout-20230310/“>What’s the second line of defense in the regional bank rout?</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/silicon-valley-bank-unlikely-to-find-a-buyer-report-20230310/“>Silicon Valley Bank unlikely to find a buyer – report</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/technical-analysis/the-us-jobs-report-is-out-the-usd-is-down-it-more-than-jobs-as-banking-concerns-increase-20230310/“>The US jobs report is out, the USD is down. It more than jobs as banking concerns increase</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/Education/the-persistence-of-inflation-in-the-eurozone-did-not-pass-unnoticed-by-the-markets-20230310/“>The persistence of inflation in the Eurozone did not pass unnoticed by the markets</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/centralbank/odds-of-a-50-basis-point-fed-hike-fall-after-non-farm-payrolls-20230310/“>Odds of a 50 basis point Fed hike fall after non-farm payrolls</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/shares-of-silicon-valley-bank-halted-with-news-pending-20230310/“>Shares of Silicon Valley Bank halted with news pending, down 63% premarket (Updated)</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/canada-february-employment-218k-vs-100k-estimate-20230310/“>Canada February employment 21.8K vs 10.0K estimate</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/us-february-non-farm-payrolls-311k-vs-205k-expected-20230310/“>US February non-farm payrolls +311K vs +205K expected</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/technical-analysis/the-gbp-is-the-strongest-and-the-jpy-is-the-weakest-as-the-na-session-begins-20230310/“>The GBP is the strongest and the JPY is the weakest as the NA session begins</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/forexlive-european-fx-news-wrap-currencies-keep-the-focus-on-payrolls-20230310/“>ForexLive European FX news wrap: Currencies keep the focus on payrolls</a></li></ul><p>The markets have been waiting for the jobs report what seems like forever. Not only was it delayed because February is a short month and the BLS felt that the 10th was doable – the 3rd was not, but the Fed Chair’s testimonies on Tuesday and Wednesday heightened market anxiety and anticipation. </p><p>And then Silicone Valley Bank rumblings started to permeate in the markets, and today, the regulators came in and closed down the 16th largest bank, and took control via a new entity. Overall, was the 2nd biggest bank failure. The shares of SIVB are down -$66.55 on the day or -62.76% at $39.50. The stock traded as high as $763.32 in November 2021. On February 2, 2023, the price traded as high as $348.06.</p><p>The FDIC said that the depositors would have access to their funds on Monday. Those with deposits greater than the FDIC insured limit of 250,000 would get receivership certificates for the uninsured balances. Those businesses will unlikely get the money out soon, unless a knight in shining armor comes in to bail the bank out sooner rather than later. The total of on insured deposits is about $151 billion. Ouch</p><p>The bank is the 16th largest in the US with $209 billion in assets.</p><p>What now ?</p><p>What was not good for SVB may not be good for other banks. </p><p>In short, SVB owned government bonds and other qualified debt instruments. Those assets lost value as a result of the Fed’s aggressive tightening . When startup companies start to fail or burn cash over the last year, the deposit base started to dwindle. Moreover speculative funding into the bank started to slow down at the same time. </p><p>In order to cover the shortfall and to meet withdrawl requests, SVB was forced to sell government bonds at a loss and realize that loss. The bank tried to sell stock. When word of that got out, credit agencies looked to lower the rating. The stock price started to move to the downside. The stock issuance plans blew up, and the house of cards started to crumble as other depositors – especially those with assets over the FDIC insured $250,000 – looked to withdraw all their funds, and send their balances to larger money center banks. Of course SVB stopped that. The FDIC was forced to step in. </p><p>Other regional banks may not have the exposure of SVB, but that does not stop depositors from liquidating their accounts and moving their funds to bigger banks instead. If those smaller regional banks banks are forced to liquidate their bond holdings, they too may be forced to realize losses that they cannot sustain.</p><p>The story is far from being over. The only thing from keeping that story going is that the markets are now closed. </p><p>Today, what the markets started to price in was that the Fed is likely to slow down their tightenings in order to stabilize the financial system. </p><p>So instead of a 50 basis point hike in March – which would be all but guaranteed given the US jobs data today which showed a higher than expected increase in nonfarm payroll jobs of 311,000 – rates plummeted on the expectations that the Fed would keep the hike to 25 basis points. Moreover, the terminal rate which was looking toward 5.75% (with some estimates pushing toward a 6% terminal target), has moved back to the downside as well. </p><p>Looking at the US debt curve the two-year note led the move to the downside in yields. The longer end was less impacted but they too were down double digits. Looking at the yield curve:</p><ul><li>2-year note 4.588%, -31.2 basis points.</li><li>5 year note 3.966% -25.3 basis points</li><li>10 year bond 3.702%, -22.2 basis points</li><li>30 year bond 3.710%, -16 basis points</li></ul><p>For the trading week, </p><ul><li>The 2 year yield reached a high of 5.085%. It is down -27 basis points on the week which is the sharpest fall since November 7, 2022</li><li>The 10 year yield year yield reached a high of 4.089% last week. For this week it is down 25.2 basis points</li><li>The 30 year yield reached a high last week of 4.047%. This week the yields down -16.4 basis points.</li></ul><p>In the US stock market, concerns about a contagion sent stocks sharply to the downside:</p><ul><li>Dow Industrial Average fell -345.22 points or -1.07% at 31909.65</li><li>S&amp;P index fell -56.73 points or -1.45% at 3861.60</li><li>NASDAQ fell -199.46 points or -1.76% at 11138.90</li></ul><p>For the trading week all the major indices were sharply lower:</p><ul><li>Dow Industrial Average fell -4.44%, the largest decline since the week of June 13, 2022</li><li>S&amp;P index fell -4.55%, the largest decline since the week of September 19, 2022</li><li>NASDAQ index fell -4.71% which was the largest decline since the week of October 31, 2022</li></ul><p>In the currency market, in what was a volatile day for the greenback, the CHF is the strongest and the AUD is ending as the weakest of the major currencies. The USD was the weakest and is still lower on the day, but sellers shifted focus to the AUD in risk-off flows. The CHF was the beneficiary of flight to safety flows.</p><p>For the trading week, the USD was mixed versus the major currencies with gains against the commodity currencies (risk off in those currencies), and declines versus the JPY and CHF. The greenback was little change verse the EUR and the GBP. </p><ul><li>Unchanged vs the EUR</li><li>Fell -0.54% versus the JPY</li><li>Up 0.10% vs the GBP</li><li>Fell -1.57% vs the CHF</li><li>Rose 1.69% vs the CAD</li><li>Rose 2.73% vs the AUD</li><li>Rose 1.43% vs the NZD</li></ul>

This article was written by Greg Michalowski at www.forexlive.com.

<p>US equities were hit hard today and the S&amp;P 500 virtually erased its gains for the year in the second day of selling. Stocks tried to rally early on a higher US unemployment rate but worries about banks led to heavy selling in the latter half of the day as Silicon Valley Bank was taken over by the FDIC.</p><p>There was a big divergence in US indexes as the Russell 2000 was clobbered by heavy exposure to regional banks:</p><p>Daily changes:</p><ul><li>S&amp;P 500 -1.45%</li><li>Nasdaq Comp -1.7%</li><li>DJIA -1.1%</li><li>Russell 2000 -3.0%</li><li>Toronto TSX -1.6%</li></ul><p>Weekly changes:</p><ul><li>S&amp;P 500 -4.5%</li><li>Nasdaq Comp -4.7%</li><li>DJIA -4.4%</li><li>Russell 2000 -8.1%</li><li>Toronto TSX -3.9%</li></ul><p>The weekly chart of the S&amp;P 500 still doesn’t look too bad but it will need to hold the late-December lows. Tuesday’s CPI report will go a long way towards determining which way it breaks.</p><ul><li>S&amp;P 500 -1.1%</li><li>Nasdaq Comp -2.4%</li><li>Russell 2000 -3.4%</li><li>Toronto TSX -0.7</li></ul>

This article was written by Adam Button at www.forexlive.com.

<p>What would have to happen for the Federal Reserve to hike rates by 50 bps on March 22?</p><p>First, there would need to be a sublime resolution to the current bank run. That’s not impossible but it’s tough to imagine that the mood could switch so rapidly that the Fed wouldn’t feel bruised or feel that the episode didn’t put downward pressure on the economy.</p><p>Second, CPI would need to be high. How high? The consensus estimates on headline and core are both +0.4% and I’m guessing at least 0.6%.</p><p>Given that, the Fed funds futures market has dropped the implied probability of a 50 bps hike to 28% and that’s from +70% just two days ago. For me, that still sounds too high but you can see why the market would be reeling.</p><p>The point of moving in 25 bps, in Powell’s words, is so the Fed can ‚feel‘ its way ahead. That’s generally via economic data but it’s also based on events like this that show where the risks lie. </p><p>A tougher question is what to do about the dot plot. </p>

This article was written by Adam Button at www.forexlive.com.

<p>The price of WTI crude futures are settling at $76.68. That’s up $0.96 or +1.27%</p><p>The low today reach $74.77. The high extended to $77.11. The lower dollar/lower rates help to send the price back to the upside. Other commodities also gained with gold up $36 or 1.99%. Silver was up $0.42 or 2.13%.</p><p>For the trading week, the price is down $-3.10 or -3.87%.</p><p>Looking at the daily chart below, the price highs for the week extended above the 100 day moving average – and closed above – for the first time since November 2022 (it was only for one day then). Like back in November, the price could only close above the 100 day moving average for one single day (Monday). On Tuesday the price moved sharply lower.</p><p>Today’s gains were the first after three days to the downside.</p><p>In the bigger picture, it would take a move above the 100 day moving average (currently at $79.53) and staying above that moving average to give the buyers more control. On the downside, and upward sloping trendline connecting recent lows cuts across at around $73.64</p>

This article was written by Greg Michalowski at www.forexlive.com.