Investors were pulled in two directions on Friday as the collapse of a small California bank raised concerns about the health of the banking sector, while fresh data on the labor market gave some reason for optimism about the economy.
Tollu-Mullu turned out to be a tumultuous day. Shares opened with small gains before collapsing. By midday, the S&P 500 was down about 0.7 percent.
Despite the volatility in the stock market, the root cause remained the same: Wall Street’s overarching concern was about how much higher interest rates could go and what that would mean for the economy. While the stress on bank stocks reflected the pain so far from those rate hikes, the jobs data signaled the pace of future interest rates.
“The economic story is consistent. Rising interest rates slow the economy, and that hurts the U.S. economy,” said Lauren Goodwin, an economist at New York Life Investments. “What’s happening to the banking sector is indicative of what investors fear will happen to other parts of the economy if interest rates continue to rise.”
Ahead of choppy trading on Friday, Federal Reserve Chairman Jerome H. The outlook turned darker this week after Powell told lawmakers. Higher interest rates weigh on stock prices, and central bank actions could push the economy into recession.
Friday’s jobs report for February eased those concerns somewhat. Investors focused on slower wage growth and a rise in unemployment, in part because more people are returning to the labor force, two data points that suggest the central bank’s efforts to slow the economy and rein in inflation may be working.
Some analysts said the numbers would ease pressure when the central bank meets later this month, and bets in financial markets are leaning toward a small quarter-point rate increase, as opposed to the half-percentage-point hike that was favored earlier in the week.
“I think most people would agree it’s not going to happen,” Christina Hooper, chief global market strategist at Invesco, said of the possibility of a big rate hike in March.
However, others are less confident that the latest data on the jobs market will be in the hands of the central bank. Ron Temple, Lazard’s chief market strategist, said below the headline numbers that signs of wages continuing to rise and strong hiring remain a concern for parts of the labor force. The U.S. added 300,000 new jobs in February, nearly 100,000 more than economists had forecast.
“It’s still the fastest pace of job creation,” Mr. Temple said.
Investor views point to the potential decision-making influence of next week’s reading on consumer price inflation in determining what the central bank might do when it meets later this month.
Concerns about the state of the financial system are being added to the Fed’s deliberations as investors and depositors rush to pull their money out of Silicon Valley Bank, a major bank for start-ups.
Santa Clara, Calif.-based SVB said on Wednesday it needed to take immediate steps to raise its funding amid a gloomy environment for start-ups and other technology companies. The report triggered a slide in bank stocks that spread across the banking sector in general and led to whipsaw movements in government bond markets.
On Friday morning, Silicon Valley Bank was closed Under the control of the Federal Deposit Insurance Corporation. The KBW Nasdaq Bank Index fell another 2 percent, while shares of other smaller banks fell sharply. First Republic Bank in San Francisco and Signature Bank in New York each fell more than 20 percent. Trading was more steady on Friday at major banks such as JPMorgan Chase and Bank of America, which fell on Thursday.
Treasury Secretary Janet Yellen testified before the House Ways and Means Committee on Friday and said she was monitoring the situation involving the Silicon Valley bank. “I mean, you mention Silicon Valley Bank, there are recent developments about some of the banks that I’ve been following very closely. When banks face financial losses, it should be a matter of concern.
Alan Rapport Contributed report.