Weekly Buzz: Banking turmoil, stubborn inflation, and a tough choice for the Fed

17 March 2023
Weekly Buzz 17Mar23 1

🔍 What the current banking turmoil means for the Fed and markets 

The collapse of Silicon Valley Bank (SVB) and closure of Signature Bank last weekend was caused by a combination of their outsized exposure to the US tech sector; rapid interest rate hikes, which caused banks to make losses on long-term government debt; and an asset-liability mismatch, which led to runs on these banks (more on that below). Trouble at Credit Suisse further stoked fears of contagion in the global banking sector.

The US quickly stepped in to backstop its banking sector, and the Swiss central bank has provided short-term liquidity to allow Credit Suisse to continue operations. But these issues illustrate weaknesses in the economy that are being uncovered in part due to aggressive interest rate hikes from global central banks over the past year.

The events in the banking sector are still ongoing, but here’s what our investment team is paying close attention to:

What the bank failures mean for the economy and markets

Given the heightened economic and market uncertainty, consumers and businesses are likely to tighten their belts – damping economic activity. On top of that, the banking sector is likely to protect its balance sheets with stricter lending standards, making it harder for borrowers to access funds – weighing on bank profitability and also on the broader economy. And don’t forget: the impact of the Fed’s rapid 450 bps in rate hikes since last March is still working its way through the economy, so we could still see market volatility in the weeks and months ahead.

Our ERAA®-managed portfolios are well-positioned for the uncertain environment – in December, we reoptimised our portfolios to add exposure to defensive assets like short-duration US Treasuries, global investment-grade bonds, and healthcare equities.

What the events mean for the Fed’s rate hike path 

After these events, markets are now pricing in the possibility of no hike at the Fed’s upcoming meeting and rate cuts starting around mid-year. That contrasts with just a week earlier, when markets were expecting a 50 bps hike this month, and saw limited scope for rate cuts this year. This underscores the Fed’s tricky task of balancing its fight against inflation and safeguarding financial stability.

In our view, those two objectives are not necessarily mutually exclusive. Given that the Fed has a wider arsenal of tools at its disposal to manage financial stability concerns, it could continue to deploy them as it continues to raise interest rates to rein in inflation — as long as inflation remains high.

📈 And stubborn inflation isn’t making the Fed’s job any easier… 

US consumer prices remained elevated in February: the overall CPI gained 0.4% month-on-month in February (or 6% year-on-year). But the pickup in the core inflation reading, which excludes food and energy prices, to 0.5% month-on-month (or 5.5% year-on-year) was more worrying. That’s because it was driven mainly by core services, which tends to be “stickier” than other categories – and is the sort of inflation that the Fed wants to avoid. All eyes are now on what the Fed will decide at its 21-22 March meeting, with markets currently pricing in a 25 bps hike.

A note about your funds at StashAway

Rest assured that your funds andStashAway’s funds have no exposure to SVB. Your funds and securities are held in custodial accounts at HSBC and Citibank. Our own company funds are held at Citibank and are segregated from our clients' funds.

Markets are shaky, so should I just keep my funds in cash?

We don’t advise staying out of the markets with the goal of entering at the “right time”. Timing the market is close to impossible, but if you stick to your long-term plan by investing consistently into your core portfolios, you will be rewarded. For the portion of your net worth that you want to keep as cash, remember that interest rates are still rising, making it even more important to manage your cash well to help beat inflation’s effects. Look for products that earn a rate on your cash while keeping risk low: Our cash management portfolio, StashAway Simple, does both.

Weekly Buzz 17Mar23 2

🎓Jargon buster: Bank run

A bank run happens when many of a bank’s clients withdraw their deposits from the bank at the same time. Usually, this happens when clients worry that the bank will become insolvent (meaning its liabilities – or what it owes depositors and debtors – exceeds its assets).

And that’s what happened to SVB. After it announced that it had sold assets at a $1.8 billion USD loss, and was looking to raise more money to cover a decline in its deposits, its stock price plunged and customers began to withdraw their money.

SVB was especially vulnerable due to its very high share (97%! 🤯) of uninsured deposits – which are more susceptible to flight during times of distress. Notably, customers withdrew $42 billion USD within a single day last week, leaving the bank with a negative cash balance of $1 billion USD.

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Markets might have been shaky, but luckily for you, you can still get attractive yields in any economic environment. Put your cash to work in our Passive Income portfolio – a globally-diversified fixed income portfolio that lets you earn a payout target of 4–6% p.a.

It’s a great way to diversify your portfolios.

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