Another accident/Zero chance of 50 bps I believe

I said last Wednesday that “We must expand our thoughts past the most interest rate sensitive parts of the economy like housing and autos” in trying to connect the economic dots in how this higher rate regime will infect more things. I also said “now I’m also focusing closely on the private equity and venture capital business, two that have partied on over the last decade plus, that rely on generous investor flows of money and have seen deals struck at ever generous multiples over the many years.” That party was then, SIVB and its causes is the hangover now. If we look back over the past year plus, the interest rate shock therapy thrown on the economy is first infecting all the things that were hot, hot, hot (meme, crypto, housing, and now tech VC) and to come is the collateral damage on everything else. 

SIVB had a major asset/liability mismatch heavily tilted, as we know, to VC and thus is not a systemic issue I believe. That said, we did hear from Keycorp this week too that highlighted their shrinking net interest income because of rising deposit costs and fraying around the edges on the quality of credit (otherwise known by other bankers as ‘normalizing’) but that will be mostly an earnings hit rather than a solvency one. Also, which I keep highlighting, there will be stress in parts of the commercial real estate market and the banks that have outsized exposure to it. 

I said this week that I didn’t think the Fed was going to hike 50 bps in a few weeks after downshifting from 75 to 50 to 25. Today I’ll expand on that and say there is ZERO chance they do. Rate hike odds in the fed funds futures market is at 54% of 50 bps. 

Ahead of the payroll, I’ll repeat the large discrepancy that has grown between what ADP is reporting and what the BLS has. In the 6 months thru February, ADP said about 1.2mm private sector jobs have been added on a net basis. The 5 months thru January, the BLS is almost up to 1.6mm private sector jobs. Today’s estimate for the private sector is for another 215k. Thus, just from a mean reversion standpoint and if these two numbers eventually converge, either the ADP is going to start reflecting a ramping up in its job figure or the BLS is on the cusp of a big downshift. I’m taking the latter. 

Haruhiko Kuroda, the outgoing BoJ Governor, exited with a yawn last night. He couldn’t find enough intellectual energy to even get its deposit rate to zero from .10% on the way out. JGB yields fell sharply in response with 9 and 10 yr yields down about 10 bps and the 40 yr yield lower by 7 bps. The yen is weaker as well and the Nikkei fell by 1.7%, though stocks just followed the US. Now the monetary clean up is being left to Ueda and we’ll get their next meeting in April. 

Japan also reported its February PPI which rose 8.2% y/o/y which is certainly big but the slowest since September 2021 as energy prices are lower and comps are tough. 

For those of us left who still follow gold, Singapore announced that in January they bought the biggest monthly amount ever, purchasing 199 tons. The 2nd biggest was back in 1968 when they purchased 100 tons. Central banks have had a voracious appetite for gold and at some point too, others will.