Investors were pulled in two directions on Friday as the collapse of a small California bank raised concerns about the health of the banking sector, while fresh data on the labor market offered some reasons for optimism about the economy.
The push-and-pull made for a turbulent day. Stocks started with a small gain before falling back. By midday, the S&P 500 had dropped by around 0.7 percent.
Despite the swings in the stock market, the root cause remained the same: the overarching concern on Wall Street is still over how high interest rates might go, and what that means for the economy. The jobs data informed the pace of interest rate increases to come, while the stress in bank stocks reflected the pain inflicted by those interest rate increases so far.
“The economic story is consistent. Interest rate hikes are slowing the economy and that is weighing on the U.S. economy,” said Lauren Goodwin, an economist at New York Life Investments. “What is happening to the banking sector is indicative of what investors fear could happen to other parts of the economy if interest rates continue to go up.”
Ahead of Friday’s turbulent trading, the outlook had turned gloomy this week after the Federal Reserve’s chair, Jerome H. Powell, told lawmakers that the central bank might have to raise interest rates more than it expected, and possibly at a faster clip. Higher interest rates weigh on stock prices, and raise the risk the Fed’s actions might tip the economy into a recession.
Friday’s jobs report for February assuaged those concerns somewhat. Investors honed in on slower wage growth and an increase in unemployment, in part because more people are coming back to the labor force, two data points that suggest the Fed’s effort to slow the economy and rein in inflation may be working.
Some analysts said the numbers would take the pressure off the Fed when it meets later this month, and bets in financial markets tilted back toward a smaller quarter point rate increase, as opposed to a larger half a percentage point raise that had been favored earlier in the week.
“I think most would agree that won’t happen,” Kristina Hooper, chief global market strategist at Invesco, said of the possibility of a larger rate increase in March.
However, others are less hopeful that the latest data on the jobs market would stay the Fed’s hand. Ron Temple, chief market strategist at Lazard, said that beneath the headline numbers were signs that wages continue to rise for portions of the labor force and that robust hiring remained a cause for concern. The U.S. added over 300,000 new jobs in February, nearly 100,000 more than economists had predicted.
“It’s still a scorchingly hot pace of job creation,” said Mr. Temple.
Investors split views point to the potential deciding influence of next week’s reading on consumer price inflation for determining what the Fed is likely to do when it meet later this month.
Adding to the Fed’s deliberations are concerns about the state of the financial system, as investors and depositors rushed to pull their money from Silicon Valley Bank, a prominent bank for start-ups.
SVB, based in Santa Clara, Calif., said on Wednesday that it needed to take immediate steps to shore up its finances amid a darkening environment for start-ups and other tech companies. The statement prompted a plunge in the bank's shares, that spilled over into the banking sector in general and led to whipsaw movements in government bond markets.
On Friday morning, Silicon Valley Bank closed and was put under the control of the Federal Deposit Insurance Corporation. The KBW Nasdaq Bank Index fell a further 2 percent, with shares of other small banks sharply lower. First Republic Bank in San Francisco and Signature Bank in New York each fell more than 20 percent. Trading in larger banks, like JPMorgan Chase and Bank of America, which had slid on Thursday, was more stable on Friday.
Treasury Secretary Janet Yellen, testifying before the House Ways and Means Committee on Friday, said she was monitoring the situation involving Silicon Valley Bank. “I will just say, you mention Silicon Valley Bank, there are recent developments that concern a few banks that I’m monitoring very carefully. When banks experience financial losses, it is and should be a matter of concern.”
Alan Rappeport contributed reporting.
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