I tried this format a week ago—looking “beyond the numbers” to what the data really means—and the feedback was good. So, here we go again.
Two moments mattered this week—one pretty good, all things considered, and the other bad, potentially very bad. Let’s start with the good one.
February Jobs Report: A Still Healthy Market
The jobs report came in on Friday, March 10, and it pretty much hit the sweet spot the Fed and markets have been looking for. The headline number was higher than expected, which could have been bad news, signaling more inflation ahead. But in the context of the rest of the report, the number was much softer, which is a good thing.
First, the headline number was in line with the previous trend, suggesting that last month’s report was an outlier and that job growth is still chugging along but not accelerating. This was further emphasized by a downward adjustment in last month’s figure.
Second, looking at the household survey, we see more signs of softening. Both the unemployment and underemployment numbers ticked up as the household job growth numbers came in much weaker than the establishment survey and the labor supply increased. In addition, the average weekly hours worked fell, which signals a significant overall drop in labor demand. Unsurprisingly, we also saw wage growth decline.
Combined, the weakening hourly labor demand, the decline in jobs reported by the household survey, the rise in the supply of workers, and the slowdown in wage growth are more than enough to offset the rise in the headline number.
Bottom line? This report suggests the labor market is still healthy but softening, which is good news for rates. Case in point: The yield on the 2-year and 10-year U.S. Treasury notes was down substantially on Friday. The data may even be soft enough to keep the Fed to a 25-basis-point increase at the next meeting. This is good news and a big change from where we were even a few days ago.
Silicon Valley Bank Closure: An Isolated Incident?
The bad news comes from the banking industry. Silicon Valley Bank, a major bank based in—wait for it—Silicon Valley, which caters to tech firms and startups, was forced to raise capital and was later closed by the FDIC.
The bank’s need for cash forced it to sell securities that had declined in value, creating an accounting loss that apparently made the bank insolvent. While this is a big deal on its own, the bigger question is whether it will extend to other banks. So far, that doesn’t appear likely. The U.S. banking system is, in general, very well capitalized, and SVB was hit hard by problems in the tech industry and by startups in particular.
This looks very much like an isolated incident, but we don’t really know yet. So far, the process has been working as expected, and there are no real signs of systemic risk. While there’s nothing to worry about yet, this is an indicator that financial risks are rising, so it bears watching, which I’ll be doing going forward.
Have a great weekend!