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Macro in March

TL;DR

• The Fed hiked rates 25bps to a 4.75%-5% range, adding "some additional firming may be appropriate." This statement was interpreted as more dovish than the Fed’s previous stance of “higher for longer.” The market is now pricing in a pause in May and 25bps of cuts at the following five meetings, potentially indicating a recession.
• Numerous sizable regional banks faced extraordinary withdrawals, with SVB, Signature, and Silvergate all “failing” to varying extents
• A 166-year-old financial establishment, Credit Suisse, collapsed following years of fiscal mismanagement
• The Fed and global central banks established urgent initiatives to reinforce dollar liquidity and stabilize the financial industry while grappling with persistent inflation
• Russia revealed their intention to employ the Chinese yuan for global commerce (a possible initial move that might challenge the dominance of the US dollar)
• The Federal Reserve's preferred core Personal Consumption Expenditures (PCE) measure reported a monthly increase of 0.3% (down from 0.5%) and a yearly increase of 4.6% (vs. 4.7% expected), marking the smallest increase since October 2021. 
• Liquidity continues to surge. Although the Fed's balance sheet contracted by approximately $28 billion at the end of March, it expanded it by around $366 billion in early March in response to the banking crisis. Furthermore, China injected a net CNY 850 billion ($125 billion) in the past week to manage quarter-end liquidity and mitigate volatility from its still-struggling domestic economy. This massive influx of liquidity is expected to continue driving risk assets and cryptocurrencies.

The recent failures of Silicon Valley Bank, Signature Bank, and the voluntary liquidation of crypto-focused Silvergate Bank have caused significant turbulence in the banking sector. The Federal Reserve's aggressive rate hikes have pushed deposits away from banks in search of higher money market yields, resulting in liquidity and solvency issues.

To mitigate the crisis, US Regulators and the Fed guaranteed deposits at the affected banks and introduced the Bank Term Funding Program (BTFP), offering up to one-year liquidity in exchange for eligible collateral. However, this solution is only short-term, as banks continue to face deposit outflows and become increasingly dependent on Fed liquidity.

Subsequently, other banks such as Credit Suisse and First Republic Bank experienced financial stress, with the Swiss National Bank providing a CHF 50 billion liquidity backstop for Credit Suisse and major US banks committing to deposit $30 billion to support First Republic Bank. The Fed now faces a challenging decision between tackling inflation or supporting the financial system. With the Fed's balance sheet expanding significantly due to banks tapping into various liquidity facilities, the prospect of further rate hikes while simultaneously providing liquidity for the struggling banking sector appears unlikely. The unfolding crisis reinforces the original narrative that gave rise to cryptocurrencies, making the case for decentralized finance even stronger.

Silvergate Bank, which has played a pivotal role in the cryptocurrency industry, announced its decision to enter voluntary liquidation, citing recent industry and regulatory developments. However, industry experts believe that the move will have a minimal impact on the digital asset ecosystem. Another specialist bank that investors should monitor is Silicon Valley Bank, which is facing a capital shortage.

Silicon Valley Bank (SVB) experienced extreme stress last month. Reports emerged regarding SVB's exposure to interest rate risk on $91 billion in bonds, leading to a sale of a $21 billion bond portfolio resulting in a significant loss of $1.8 billion. To cover these losses, SVB announced a $2.3 billion share sale.

The bank's financial instability prompted a run on accounts beginning last week, with customers withdrawing over $40 billion in two days. Credit agencies cut SVB's credit ratings, causing market pressure that erased $80 billion in market cap across other US banks. The bank's stock price fell by 60%, followed by an additional 22% after hours. Companies are advised to withdraw from SVB amidst the ongoing turmoil.

In an effort to prevent bank runs and help companies maintain payroll and operations, the Biden administration guaranteed on Sunday that customers of the failed Silicon Valley Bank (SVB) and Signature Bank will have access to their money starting Monday. This comes after SVB's voluntary liquidation and Signature Bank's shutdown, which were the third and fourth bank collapses in under a week. The Federal Deposit Insurance Corporation (FDIC) will make all deposits, including uninsured money, whole, and the Federal Reserve will provide additional funding for eligible financial institutions to prevent runs on similar banks in the future. The move was well-received by investors, with Dow futures up nearly 300 points, S&P 500 and Nasdaq futures up 1.3%. The regulators emphasized that US taxpayers will not be responsible for the failed facilities, but shareholders and holders of unsecured corporate bonds will not be protected.

Wrapping up the banking drama, New York-based Signature Bank, which serves several clients in the crypto industry, was closed by state regulators, according to a statement by the Federal Reserve. This marks the third bank collapse in under a week, following Silvergate Bank's voluntary liquidation and Silicon Valley Bank's shutdown on Wednesday and Friday, respectively. The Federal Depository Insurance Corporation (FDIC) has taken receivership of the bank to protect depositors, according to the New York Department of Financial Services Superintendent Adrianne Harris. The Federal Reserve, FDIC, and U.S. Treasury Department have issued a joint statement that all depositors who used Signature would be made whole, outlining actions the federal regulators would take to protect depositors in Silicon Valley Bank.