Fording When the Current Strengthens

Markets experienced a volatile week on continued banking contagion concerns. The move was positive, but relatively varied across the indices, as the S&P 500 gained 1.6%, the Dow Jones 0.13%, and the NASDAQ 4.0%. Bond Markets rose, as banking concerns continued to change the Fed rate hike narrative. The Bloomberg Agg rose, and 0.64%. alternatives also fared well in the flight to safety, with Bitcoin futures up 10.6%, gold up 3%, and silver up 2.46%. The week ahead looks to continue with strong upstream currents from the banking sector plaguing the overall market.

The failures of Silicon Valley Bank, Signature Bank, and Silvergate Bank, which occurred as bank runs forced long-term asset liquidation, and the risk of contagion, especially in US regional banks, drove policymakers and regulators to implement strong measures to shore up the banking market. The FDIC insurance cap of $250,000 was increased for all depositors at the failed banks, and the Federal Reserve introduced a liquidity facility for banks. These efforts failed to ease market concerns. In Europe, Credit Suisse, after being plagued by scandals and management failures, plunged on solvency fears following the failure of SIVB. The Swiss National Bank extended a 50 Billion Euro lending facility to Credit Suisse, which initially eased concerns, but the bank continued to deteriorate. UBS, on Sunday, agreed to acquire Credit Suisse in a $3.25 Billion deal orchestrated by Swiss regulators to merge the two largest Swiss banks. Of note, though, UBS has covenants on the merger and some Credit Suisse bondholders are considering legal action, so the outcome is unknown.

Economic data last week gave the FED room for weaker policy action. Tuesday saw CPI come in at the consensus of 6.0% (not seasonally adjusted, year over year), and Core CPI come in at 5.5% (not seasonally adjusted, year over year). This is the lowest print in a year and an indicator inflation continues to abate. Wednesday saw a weak PPI (Producer Price Index) print, with PPI (not seasonally adjusted, year over year) coming in steeply under consensus at 4.6%—further proof price pressure is weaking. Thursday saw jobless claims come in below estimates, indicating the resilience of the labor market continues. In the week ahead, the FOMC meets and announces their policy decision. Prior to the failure of SIVB, markets had anticipated a 50bps hike, but now markets are roughly 40/60 on either no rate hike or 25bps. In a greater shift, market consensus now sees nearly a 1-in-3 chance of a 100bps rate cut by year end.

In geopolitical events, the weekend was busy for Russian President Vladimir Putin, as the leader visited Russian-occupied Mariupol in Ukraine, saw the International Criminal Court issue a warrant for his arrest for alleged war crimes in Ukraine, and hosted Chinese President Xi Jinping in Moscow. In France, President Macron forced through pension reform, pushing back the retirement age from 62 to 64, causing widespread rioting across the nation and igniting a no-confidence vote that will be held this week. In the United States, The Biden administration approved the Willow Project, which will produce oil in Alaska’s North Slope and looks to see US oil production increase by 180,000 barrels/day.

The path forward in markets is not clear in the face of conflicting policy drivers on inflation, employment, and banking stability, but we remain nimble and able to move the boat out of the water when the current is too strong to go against. Turning financial sector holdings to cash for a time allows the boat to ford beside the rough stream, and we anticipate dropping back into the water soon. Isaiah 43:2 states, “When you pass through waters, I will be with you; through rivers, you shall not be swept away. When you walk through fire, you shall not be burned, nor will flames consume you.” As fear and overreaction threaten us, we find strength that the journey of building a faithful legacy is not one we walk alone.

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