A major inflation report and fallout from Silicon Valley Bank hang over markets in week ahead

Published Fri, Mar 10 20233:30 PM ESTUpdated Fri, Mar 10 20236:13 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

February's consumer inflation report should be a big driver for markets in the week ahead, as investors watch for continued fallout from the shutdown of SVB Financial Group's Silicon Valley Bank. The consumer price index report on Tuesday is the last major inflation data ahead of the Federal Reserve's March 21 and 22 meeting. Other important data in the week ahead includes February's retail sales and the producer price index, both on Wednesday, and consumer sentiment Friday. "It will be the last CPI report before the Fed meeting. I think it will be a market mover and set the tone of the market and volatility next week," said Michael Arone, chief investment strategist at State Street Global Advisors. Silicon Valley Bank's troubles overshadowed nearly everything else in markets Thursday and Friday, as investors sought safety in the bond market and sold bank stocks. The 10-year Treasury yield , which recently topped 4%, fell to 3.69% by Friday afternoon. Meanwhile, the 2-year Treasury yield posted its biggest two-day drop since 2008. Yields move opposite price. SVB came under pressure after disclosing Wednesday that the bank had lost $1.8 billion on asset sales and was seeking more capital. "Markets are shooting first and asking questions later," said Arone. The failure of the bank is the largest since the financial crisis and second largest after the collapse of Washington Mutual in 2008. Shares of major banks were hit hard on Thursday, but as they steadied or saw smaller losses Friday, investors took aim selectively at smaller and regional banks . First Republic, for instance, was down nearly 10% Friday afternoon, and PacWest was off 35%. KRE 1Y line regionals "This could be a symptom of Fed tightening and so now there's a fear of some contagion. You're seeing names like First Republic and others down also," said Arone. "Investors are starting to wonder if this will be a more systemic problem. I'm not so sure yet. I think it's too early to tell. I think Silicon Valley Bank has a particular clientele that have suffered, as a lot of those businesses are unprofitable, high-growth startups. Arone said he currently doesn't see any signs that SVB's problems will become a bigger issue for the banking system. But investors are watching for ripple effects from the failed bank, which was oriented toward California tech companies and venture capital firms. Silicon Valley Bank was shut down by regulators Friday morning, as a run on deposits thwarted its efforts to raise new capital. As of the end of December, SVB had roughly $209 billion in total assets and $175.4 billion in total deposits. The Federal Deposit Insurance Corp. said insured depositors will have access to their money no later than Monday morning and branches will reopen at that time. "This is hard-wired, the fear of systemic risk, and we should be fearful of it because we've had a lot of financial crises," said KPMG chief economist Diane Swonk. But she said the concerns about banks will not sway the Fed's interest rate hiking, and that the central bank would not change policy plans unless markets seize up. Swonk is in the camp that expects the central bank to ramp up its rate hiking to 50 basis points after raising rates by just a quarter point at the last meeting. US10Y 1Y line 1o "Barring a full seizure in financial markets, anything the Fed does at this stage of the game, from the Fed's perspective, could stoke a more entrenched inflation," she said. "They're data dependent. Financial stability matters. They're going to be weighing those things, but to take away a quarter point, given how the data is coming in, that's a high threshold." The fed funds futures market was giving roughly 37% odds to a 50 basis point hike on March 22 as of Friday afternoon , according to CME Group's FedWatch tool. A basis point equals 0.01 of a percentage point. Those odds had been as high as 70% before the Silicon Valley Bank news began to hit the market. "The contagion fears in the financial sector have priced out more aggressive Fed assumptions," said Ben Jeffery, U.S. rates strategist at BMO Capital Markets. Fed Chair Jerome Powell, in congressional testimony this week, said the Fed could have to raise rates more than anticipated — and that launched a big move higher in yields which reversed. Now inflation data is being watched carefully since a very hot number could mean the Fed will become more aggressive. A much stronger-than-expected 311,000 jobs were added in February, but investors focused on the fact that average hourly wages rose less than expected, taken as a good sign for inflation. According to Dow Jones, economists expect CPI to rise by 0.5% or 6.1% on a year-over-year basis. That compares to a 0.5% increase in January and an annual pace of 6.4%. "It could come in a little hotter. The retail sales are likely to come in a little higher than expected, even after a hot January," Swonk said. She added that Friday's February jobs report has given some clues as to how other data might look. "You have retail sales and inflation, and both could be higher than expected." As for market developments, Swonk said she is watching bond exchange-traded funds in particular as investors worry about banks. "The place I'm most concerned about particularly in the Treasury market is the fact that we have ETFs being used as [bank] collateral and we don't know what's in all of those ETFs. Because it's opaque, it's an unknown unknown," said Swonk. Stocks closed out the week with sharp losses. The S & P 500 fell 4.6% to 3,861. Financials were the worst performing major sector, down 8.5% for the week. Week ahead calendar Monday Earnings: Gitlab, BuzzFeed Tuesday Earnings: Lennar, Vacasa, Volkswagen 6:00 a.m. NFIB small business survey 8:30 a.m. CPI (February) 5:20 p.m. Fed Governor Michelle Bowman Wednesday Earnings: Adobe , Oatly, Five Below, Pager Duty 8:30 a.m. Retail sales (February) 8:30 a.m. PPI (February) 8:30 a.m. Empire State manufacturing (March) 10:00 a.m. Business inventories (January) 10:00 a.m. NAHB survey (March) 4:00 p.m. TIC data (January) Thursday Earnings: FedEx , Designer Brands, Lands' End, Dollar General, Signet Jewelers, Jabil 8:30 a.m. Initial jobless claims 8:30 a.m. Housing starts (February) 8:30 a.m. Import prices (February) 8:30 a.m. Philadelphia Fed manufacturing survey (March) 8:30 a.m. Business leaders survey (March) Friday 9:15 a.m. Industrial production (February) 10:00 a.m. Consumer sentiment (March preliminary)