What Silicon Valley Bank Means for Markets

This report is from today’s CNBC Daily Open, our new international markets newsletter. CNBC Daily Open brings investors up to date on everything they need to know, wherever they are. Do you like what you see? You can subscribe here.

Two bank collapses trigger a flurry of activity from financial regulators.

• The Federal Reserve will create a Bank Term Funding Program that lends money to SVB. This ensures that people can access their deposits above $250,000 and prevents widespread financial fallout.

• Then on Monday morning, regulators shut down Signature Bank — one of the main banks of the cryptocurrency industry — citing systemic risk. All deposits will be made whole, according to federal regulators.

• As for the US jobs number released on Friday – do you remember that? — It revealed that U.S. nonfarm payroll job growth slowed to 311,000 in February, lower than January’s 504,000 but still more than the forecast of 225,000. In a sign that the labor market may be cooling, the unemployment rate was higher than expected while wage growth slowed.

• PRO A big inflation report and any potential fallout from SVB issues will be what investors are looking for next week. “It will be a big market move and set the tone for the market,” said Michael Arone, investment strategist at State Street Global Advisors.

The jobs report in February was supposed to be Friday’s news event. Then a bank crash happened. Hard to beat it in terms of impact. There’s a lot to unpack today, so bear with me.

Let’s start with today’s original protagonist, the jobs report. At first blush, it’s not promising for people worried about inflation. The number of jobs created was higher than the Dow Jones estimate. But go below the surface, and cracks in the foundation become apparent. Average hourly earnings did not increase as much as forecast, while the unemployment rate rose to 3.6%, above expectations of 3.4%. In short: Some good news, some bad news, if you’re an investor. “There’s something for everyone in there,” as Liz Ann Sonders, investment strategist at Charles Schwab, put it.

By itself, the jobs data was mixed enough for the Federal Reserve to consider raising interest rates by half a percentage point. But wait – a bank crashed! And not just any regional bank, but Silicon Valley Bank, the go-to for venture-backed tech startups. We can think of SVB as the first (high-profile) victim of higher interest rates.

But the good thing – if there can be a good thing from a bank collapse – is that regulators decided to step in to protect deposits. The move suggests the Fed recognizes the potential for broader contagion in the economy and may slow the recovery, just so it doesn’t bring down more banks inadvertently. (Example: As this newsletter went to press Monday morning, financial regulators announced they were shutting down another bank, New York-based Signature Bank.)

That may explain why markets fell less sharply on Friday than they had earlier in the week, when Federal Reserve Chairman Jerome Powell hinted higher interest rates were on the table. On Friday, the Dow Jones Industrial Average lost 1.07%, the S&P 500 fell 1.45% and the Nasdaq Composite fell 1.76%.

Of course, markets can still digest the shock waves before selling off. But I suspect that hopes of lower interest rates as a result of SVB’s collapse may keep the markets afloat. Likewise, CNBC’s Jim Cramer argued that nothing is more deflationary than the collapse of a debt-laden bank — which can hold the Fed’s hand. In fact, the 2-year Treasury yield – which reflects investors’ expectations of interest rates – fell 46 basis points in two days, the biggest move since the 2008 financial crisis.

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