People walk past Dah Sing Bank’s electronic display in Hong Kong, Friday, March 10, 2023. Asian stock markets followed Wall Street lower on Friday ahead of an update on US employment amid concerns about possible further interest rate hikes. (AP Photo/Louise Delmotte)
By STAN CHOE (AP Business Writer)
NEW YORK (AP) — Fear rattled Wall Street and stocks tumbled Friday on worries about what will break next under the weight of rising interest rates after the biggest U.S. bank failure in nearly 15 years.
The S&P 500 fell 1.4% to cap its worst week since September. That’s despite a much-anticipated report on Friday showing wage gains for workers slowing and other signs Wall Street wants to see of cooling pressure on inflation.
The Dow Jones Industrial Average fell 345 points, or 1.1%, while the Nasdaq dropped 1.8%.
Some of the market’s sharpest declines again came from the financial industry, where shares fell for a second day.
Regulators seized Silicon Valley Bank in a surprise move at midday after shares in its parent, SVB Financial, fell more than 60% this week. The company, which served the industry around startup companies, was trying to raise money to alleviate a crisis. Analysts have said it was in a relatively unique situation, but it has still led to concerns that a wider banking crisis could erupt.
Friday’s struggles came amid what strategists in a BofA Global Research report called “the tumbling sentiments of March.” Markets have been jittery on concerns that high inflation is proving difficult to tame, which could force the Federal Reserve to accelerate its rate hikes again.
Such increases can undercut inflation by slowing the economy, but they drag down the prices of stocks and other investments. They also increase the risk of a recession later.
Higher rates tend to hit investments seen as the riskiest and most expensive, such as cryptocurrencies and the furore surrounding money-losing Silicon Valley startups, the hardest.
“There are starting to be cracks showing,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth. “The SVB is a warning to the Fed that their actions are starting to have an impact.”
The Fed has already raised interest rates at the fastest pace in decades and taken other steps to reverse its massive support for the economy during the pandemic. It effectively pulls money out of the economy, something Wall Street calls “liquidity,” which can tighten the screws on the system.
“This is a warning sign that liquidity is draining and the most vulnerable areas are starting to show it, which tells me that the rest of the economy is not too far behind,” Schutte said.
Wall Street already gave up hope in February that interest rate cuts could come later this year. Concerns then flared this week that interest rates are set to go even higher than expected after the Fed said it could accelerate the size of its rate hikes.
Friday’s jobs report helped quell some of those concerns, leading to some up-and-down trading. Total hiring was warmer than expected, which may be a sign that the labor market remains too strong for the Fed’s liking.
But the data also showed a slowdown from January’s astonishing hiring rate. More importantly for markets, average hourly wages for workers rose by less in February than economists expected.
That’s crucial for Wall Street because the Fed is focusing on wage growth in particular in its fight against inflation. It worries that too high gains could cause a vicious cycle that worsens inflation, even as raises help workers struggling to keep up with rising prices at the register.
Among other signs of a cooling but still resilient labor market, the unemployment rate rose and the percentage of Americans with or looking for work rose slightly.
Such trends mean traders are pulling back on bets that the Fed will later backtrack to a 0.50 percentage point hike later this month. They are now largely betting the Fed will stick with a more modest 0.25 point hike, according to CME Group.
Last month, the Fed slowed to that pace after earlier hikes of 0.50 and 0.75 points.
Such expectations, along with worries about banks, helped send Treasury yields sharply lower.
The yield on the 10-year Treasury note fell to 3.69% from 3.91% late Thursday, a sharp move for the bond market. It helps set interest rates for mortgages and other important loans.
Some of the sharpest declines on Wall Street came from bank stocks on worries about who else might suffer a cash crunch if interest rates stay higher for longer and customers withdraw deposits. That would create pain because a flight of deposits could force them to sell bonds to raise cash, just as higher interest rates drive down prices for those bonds.
In addition to SVB Financial’s struggles, Silvergate Capital also said this week that it is voluntarily closing its bank. It served the crypto industry and had warned that it could end up “less than well capitalized.”
Share losses were greatest in regional banks. First Republic Bank fell 14.8 per cent. It filed a statement with regulators to reiterate its “strong capital and liquidity positions.”
Charles Schwab lost another 11.7% after falling 12.8% on Thursday “as investors stretched for read-throughs” from the SVB crisis, according to analysts at UBS. The analysts called them “logical but shallow” because of differences in how companies get their deposits.
Larger banks, which have been stress-tested by regulators since the 2008 financial crisis, fared better. JPMorgan Chase rose 2.5 percent.
Overall, the S&P 500 fell 56.73 points to 3,861.59. The Dow lost 345.22 to 31,909.64 and the Nasdaq fell 199.47 to 11,138.89.
AP Business Writers Joe McDonald and Matt Ott contributed.