Payrolls still solid
US nonfarm payrolls beat expectations yet again, adding +311,000 jobs, with the US unemployment rate ticking up to 3.6 per cent on rising participation.
Hourly earnings increased only by 8 cents or +0.2 per cent for the month, however, for the weakest monthly increase in over a year...since February 2022.
The 3-month annualised change in hourly earnings also slowed further to +3.6 per cent.
SVB collapses
Comfortably overshadowing this news, hot on the tail of the failure of crypto bank Silvergate, overnight Silicon Valley Bank (SVB) collapsed and went into receivership.
Depositors tried to withdraw more than US$40 billion on Thursday as fears grew.
Over 97 per cent of depositors by value had total funds above the US$250k insured threshold, reportedly meaning that potentially hundreds of startups will be scrambling to make payroll this month, even if their deposits do prove to be recovered at later date.
Yields have tanked over the past 48 hours, with the US 2-year down 44 basis points, for one of the largest 2-day moves in history (and the biggest since Black Friday in 1989).
Markets are suddenly pricing for interest rates to be cut in the US before the year is out.
Australia’s 1-year bond yield has also dropped very sharply to 3.44 per cent, while the benchmark Aussie 3-year yield is now trading at just 3.18 per cent, which will be positive news for our fixed mortgage rates if sustained.
Markets are increasingly favouring a pause for the Reserve Bank of Australia in April as the contagion risks mount overseas, and a terminal rate pointing to only one more interest rate hike.
Run on the bank
Of course, any bank failure in the absence of a swift bailout might cause significant systemic risks, which may well spill over into concerning challenges for smaller regional banks over the coming days.
SVB had over US$210 billion in assets and is by far the biggest bank failure since the global financial crisis.
It had appeared that rising interest rates had frozen the housing market but not really “broken” anything just yet.
But long and variable lags are a real thing, exposing poor risk management, and the entire narrative has surely been changed by this week.
Source: Business Insider
It’s the second largest FDIC-insured institutional failure after the US$300 billion collapse of Washington Mutual 2008.
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With Australia's 1-year and 3-year yields trading far below today's cash rate target, there's no apparent justification for stress-testing investor borrowers for 9 per cent mortgage rates (if there ever was).
Anecdotally I've heard of two examples of rental properties in Brisbane receiving over 100 applications this week.
We're now getting on average one article per day on rising homelessness and the plight on renters.
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