Futures Tumble As SVB Implosion Spark Global Banking Turmoil; Payrolls Loom

US futures and European stocks pared broader declines earlier sparked by a rush to havens amid concerns about the health of the US banking system following the collapse of Silvergate and the rout that has crushed Silicon Valley Bank, sending it shares down 40% premarket after plunging 60% on Thursday amid a spreading liquidity crisis. The collapse of the lender was sufficiently traumatic to push today’s payrolls report – until yesterday the highlight of the week – off the front page.

S&P 500 futures fell slightly, erasing a bigger drop that pushed eminis briefly below 3,900 setting up the underlying index to extend a rout fueled by liquidity concerns in the banking sector and as investors prepare for the monthly payrolls report.  The benchmark dropped the most in over two weeks on Thursday, with banks slumping as SVB Financial Group took steps to shore up its capital position following losses in its securities portfolio. Nasdaq 100 futures were little changed.

Europe’s Stoxx 600 equity gauge dropped more than 1%, with an index of bank stocks sliding the most since June. Bond markets were also roiled by the SIVB news, sending yields plunging and reversing sharp gains earlier this week following Powell’s hawkish speech. Treasuries extended gains for a second day, driving 10-year yields down by as much as 11 basis points to a three-week low, while German 10-year government borrowing costs were at one point poised for their biggest slump since early February.

In premarket trading, Shares of SVB – a major lender to startup companies – dropped 46% after a record 60% plunge on Thursday after a surprise announcement from SVB that it was holding a $2.25 billion share sale after a significant loss on its portfolio, which included US Treasuries and mortgage-backed securities. Other banks including JPMorgan and Bank of America also inched lower.

However, the big impact of SVB’s woes is that it has investors asking whether this be the start of a much bigger problem as attention turns to risks that may lurk in other financial institutions after the Fed’s steep rate hikes. Some market strategists said that the declines are likely to remain smaller Friday as the risk of contagion from SVB is relatively contained. Their thesis was not helped after several VC titans such as Peter Thiel’s Founders Fund and others advised portfolio businesses to withdraw their money.

“The events around SVB highlight some of the additional risks of financial stress,” said Sarah Hewin, senior economist at Standard Chartered Bank in London. “There is a sense now of the bigger risks to the economy the more the Fed raises interest rates. At the margins it is raising the question of whether the Fed will indeed be able to do a 50 basis-point rate hike this month.”

“I suspect there’s some comfort that SVB’s troubles are not systemic as for the majority of banks — improving interest margins due to rising rates are offsetting losses on their long-duration investment portfolios,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.

Here Are some of the other notable premarket movers:

• Roblox (RBLX US) shares rise 2.2% as Jefferies raises the online games designer to buy from hold, saying it expects continued growth through near-term macro and competitive pressures.
• Caterpillar (CAT US) shares fall 2.1% as UBS cuts the construction-machinery maker to sell from neutral, saying its growth momentum is not good enough to justify its valuation.
• Oracle (ORCL US) fell 4.5% after the software company reported cloud license and on-premise license revenue that was weaker than expected. Overall revenue was essentially in line with the analyst consensus, while adjusted earnings were slightly stronger.
• DocuSign (DOCU US) fell 13% after the e-signature company gave a first-quarter billings forecast that is weaker than expected. Analysts noted that the fourth-quarter results were strong but the company was re- investing much of its cost savings.
• Allbirds (BIRD US) shares slump 22% after the sneaker brand reported fourth-quarter net revenue that missed estimates. Analysts noted a lower-than- expected first-quarter outlook.

Meanwhile, all eyes today are on the jobs report for February, due at 8:30 a.m. in New York. Payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep hiking rates. Median estimate for February change in nonfarm payrolls is 225k after 517k gain in January, while crowd-sourced whisper number is 250k (our full preview is here). For today’s implied post-payrolls move, JPM’s Bram Kaplan estimates the options market is pricing a ~1.4% S&P 500 move for NFP. The bank’s chief economist, Mike Feroli, sees NFP to print around 200k vs 225k survey vs 517k prior and February Unemp rate to be same as Jan’s 3.4%, in line with consensus.

“For the Fed these ripples across the financial system will be something to monitor but they are much more focused on their inflation mandate,” said Georgina Taylor, head of multi-asset at Invesco. “A strong set of data “will keep pressure on the Fed,” she added.

In Europe, banks and financial services are the worst-performing stock sectors, leading the Stoxx 600 down by as much as 1.9%, while bond-proxy utilities was the only sector up. European banks stocks slid on Friday and underperformed the broader market after after US peers plunged following the collapse of Silvergate Capital and concerns around SVB Financial. The Stoxx 600 Banks index dropped as much as 4.9%, the most since June; subindex is down 3.6% at 1:03pm CET, compared to a 1.2% decline for the Stoxx 600 benchmark. Deutsche Bank was the biggest faller in the subindex, down as much as 9.8%; HSBC, Santander, BNP Paribas and ING the other major drags on the index. UBS fell as much as 5.4% to drag on the Stoxx 600 Financial Services index; private equity investors Partners Group and EQT also sink, while Credit Suisse shares plunged as much as 6.1% to hit a new record low.  Credit Suisse analyst Jon Peace says the drop for European banks, driven by worries about unrealized losses in bank bond portfolios, offers a buying opportunity (of course he would say that). Here are some of the most notable European movers:

• Daimler Truck drops as much as 4.8% in Frankfurt after its fourth- quarter earnings miss and a broader selloff in cyclical shares overshadowed its 2023 outlook
• Schroders shares fall as much as 4.3% after being cut to neutral from outperform at Credit Suisse as the broker sees the UK fund manager contending with headwinds
• Bachem Holding falls as much as 8.5% after an offering of 1.25m shares priced at CHF86.50 apiece, representing a 5.9% discount to Thursday’s close
• Kion falls as much as 6.7% after being cut to equal-weight from overweight at Morgan Stanley with the broker seeing an uncertain picture for price-volume dynamics at the forklift maker in 2023
• Casino shares fall as much as 5.8% after the French grocer reported trading profit for the full year that missed the average analyst estimate
• Mobilezone shares decline as much as 9.3% after it announced disappointing weaker gross and Ebit margins
• OTP Bank shares decline as much as 1.9% after Hungary’s largest lender said 2022 profit fell after it booked a slew of charges linked to the war in Ukraine
• Vodafone shares rise as much as 1.7% after Bloomberg reported that the UK telecom operator is at the final stages of talks to merge its British operations with Three UK
• Breedon rises as much as 5% after Abicad Holding said it is acquiring about 5.3m ordinary shares at price of 75p apiece, representing a premium to the last close
• U-blox shares climb as much as 11% after the Swiss position-systems provider reported strong profitability and free cash flow for 2022
• Leonardo gains as much as 2.9% after the Italian defense group projected profit for 2023 that was slightly ahead of estimates

Earlier in the session, stocks in Asia tumbled, following US financial shares lower, after warnings from Silicon Valley bank led to concern about the broader sector, and the yen slides as the BOJ leaves policy unchanged. The Nikkei slumps 1.6% and Topix is 1.7% lower. China’s Shanghai Composite Index falls 1.2% and the CSI 300 slips 1.1%. Hong Kong shares also decline with the benchmark down 2.5% and Hang Seng Tech Index down 3.6%.

Japanese stocks had their biggest drop in more than five months as shares of the nation’s major lenders tumbled after the Bank of Japan’s decision to leave policy unchanged set off a plunge in bond yields.  The Topix fell 1.9% to 2,031.58 as of the 3 p.m. close in Tokyo, having its steepest drop since Sept. 26. Mitsubishi UFJ Financial contributed the most to the decline, falling 6.1%. Out of 2,160 stocks in the index, 159 rose and 1,953 fell, while 48 were unchanged. The Nikkei 225 fell 1.7% to 28,143.97.  The Topix’s gauge for banks slid the most in three years, with Sumitomo Mitsui Financial and Mizuho Financial each falling at least 4.9%. Banks also dropped after their US peers slumped on concerns that signs of trouble at a Silicon Valley-based lender may point to broader risks for the sector. “Perhaps some investors were hoping for a review of yield curve control after the BOJ’s monetary policy meeting,” said Tomoaki Kawasaki, a senior analyst at Iwaicosmo Securities Co. “There was probably some talk about Silicon Valley in the morning, and the stock market was falling a little.”

Australia’s stocks slumped the most in six months: the S&P/ASX 200 index fell 2.3% to close at 7,144.70, posting its biggest decline since mid-September after concerns over a Silicon Valley-based lender sapped investor appetite. Banks were among the biggest drags on the Australian gauge, following their Wall Street peers lower as troubles at SVB Financial Group spurred concerns about the wider lending sector. Read: Asian Bank Stocks Drop to Two-Month Low on SVB Worries In New Zealand, the S&P/NZX 50 index fell 0.8% to 11,727.04.

India’s banking stocks posted their biggest slump in more than a month to lead declines as the nation’s benchmark gauges joined a global selloff triggered by worries over the health of the US banking system.  The S&P BSE Sensex fell 1.1% to 59,135.13 in Mumbai, while the NSE Nifty 50 Index declined 1%. Friday’s selloff saw both benchmarks end the week atleast a percent lower. For the year, the measures have lost 2.8% and 3.8%, respectively. HDFC Bank contributed the most to the Sensex’s decline, with a 2.6% fall on Friday. Of the 30 shares in the Sensex index, 21 dropped and nine advanced. Fifteen of 20 sector gauges compiled by BSE Ltd. closed lower, led by the banking index which fell 1.9%, its biggest drop since Jan. 27.  Banking and financial stocks, with nearly 40% weight in the benchmarks, have been among the prominent decliners recently with higher interest rates expected to impact margins as well as hurt demand for fresh loans.

The Bloomberg Dollar Spot Index inched lower for a second day and the greenback traded mixed against its Group-of-10 peers. Treasuries extended a rally across the curve as money markets eased Fed tightening bets. Euro-area and UK bonds also rallied in early trade, with short-dated debt outperforming amid demand for haven assets and amid paring of central bank hikes. The euro rose to trade around $1.06. The cost of converting euro payments into dollars using cross-currency basis swaps rises at the European open as demand for the greenback surges

• The pound rose, buoyed by stronger-than-forecast data on UK economic growth in January, which added to evidence of resilience in the face of a cost-of-living squeeze and widespread industrial unrest. Gilts followed moves in European bonds and Treasuries
• Norway’s krone slumped after data showed the headline inflation rate declined to 6.3% in February, versus the median projection of 6.8% in a Bloomberg poll of analysts that was the same as the central bank’s estimate. Underlying inflation, the measure followed by Norges Bank, also declined from an all-time high to 5.9%, matching the central bank’s view, while analysts had expected a smaller slowdown
• The yen reversed gains and government bonds advanced after the BOJ kept its policy settings for its negative interest rate and yield curve control program unchanged at Governor Haruhiko Kuroda’s last meeting
• Australian sovereign bonds extended opening gains after the BOJ left its key policy rates unchanged. Aussie dollar dips were bought into by exporters and leveraged funds squaring up before US jobs data later today

Global bonds broadly rally: Treasuries are richer across the curve, extending Thursday’s sharp rally, while off session highs reached during European morning as stock futures pare losses. Yields are richer by 3bp-6bp across the curve led by intermediates, steepening 5s30s spread by 3bp on the day and adding to Thursday’s aggressive bull-steepening move; 10-year yields around 3.85%, richer by 5bp vs Thursday’s after touching 3.797%, lowest since Feb. 16. Flight-to-quality backdrop remains a theme, supporting Treasuries, amid mounting worries about contagion in US banking system from SVB Financial’s slump. Treasury yields underperform gilts and bunds across the curve as they catch up to Thursday’s action. Peripheral spreads widen to Germany. Bloomberg dollar spot index is flat.

In commodities, WTI Crude continues its decline trading ~$75. Spot gold rises roughly $3 to trade near $1,834/oz.

Looking to the day ahead now, the main highlight will be the aforementioned US jobs report for February. Other releases include the UK’s GDP for January. And from central banks, we’ll hear from the ECB’s Panetta.

Market Snapshot

• S&P 500 futures down 0.2% to 3,910.75
• MXAP down 1.9% to 156.95
• MXAPJ down 1.8% to 502.93
• Nikkei down 1.7% to 28,143.97
• Topix down 1.9% to 2,031.58
• Hang Seng Index down 3.0% to 19,319.92
• Shanghai Composite down 1.4% to 3,230.08
• Sensex down 1.1% to 59,130.19
• Australia S&P/ASX 200 down 2.3% to 7,144.69
• Kospi down 1.0% to 2,394.59
• STOXX Europe 600 down 1.3% to 453.84
• German 10Y yield little changed at 2.53%
• Euro up 0.2% to $1.0597
• Brent Futures down 0.3% to $81.35/bbl
• Gold spot up 0.3% to $1,836.92
• U.S. Dollar Index down 0.14% to 105.16

Top Overnight News from Bloomberg

• President Joe Biden and European Commission leader Ursula von der Leyen will likely make their meeting at the White House on Friday convivial, despite trade tensions and the pressure of the war in Ukraine
• UK GDP grew 0.3% in January, recovering part of a 0.5% decline in December when strikes halted activity, Office for National Statistics figures show. Economists forecast growth of 0.1% in January
• Janus Henderson’s emerging-market hard currency debt fund has a “cautious overweight” on Argentina as the bonds are cheap and there’s expectation of a change in government at the October election, Thomas Haugaard says
• The ECB will step up its fight against stubborn inflation by raising interest rates four more times and unwinding its €5 trillion ($5.3 trillion) bond portfolio at a quicker pace, according to a Bloomberg survey of economists
• Japan’s broken bond market gave Governor Haruhiko Kuroda one last salute at his final policy meeting, when one of the 10-year tenors saw its yield turn negative
• For the first time in years, the euro is poised to offer better returns than its Nordic counterparts. Should money-market wagers materialize, the ECB deposit rate will climb above the Norges Bank key rate for the first time ever and will surpass the Riksbank’s benchmark after five years lagging
• Japan’s parliament gave a green light for veteran economics professor Kazuo Ueda to take the helm of the BOJ next month in the first change of governor in a decade

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks declined amid headwinds from the banking sell-off in the US owing to contagion fears related to Silicon Valley Bank in which shares of the group dropped more than 60% during Wall St trade and resulted in the four biggest US banks shedding a total of more than USD 50bln in market cap, while SVB suffered another 20% drop after-hours as funds advised companies to pull out of the lender. ASX 200 was pressured by losses in its largest-weighted financial industry on spillover selling from stateside peers and with the index also hit by weakness in the commodity-related sectors. Nikkei 225 declined with risk sentiment dampened following mixed household spending data and with banking shares further hit after the BoJ maintained its ultra-loose policy settings. Hang Seng and Shanghai Comp. conformed to the downbeat mood with Hong Kong underperforming amid a tech rout as JD.com shares suffer a double-digit drop despite beating on the bottom line, while property stocks are also in focus as shares in developer Kaisa initially dropped around 40% post-earnings and on return from a 12-month trading halt.

Top Asian News

• China’s parliament elected Chinese President Xi for a third term as President and as Central Military Commission Chairperson, while the NPC also elected Zhao Leji as NPC Standing Committee Chairperson and Han Zheng as China’s Vice President.
• US is working to close a loophole in the export ban related to China’s Inspur (000977 CH), while it was also reported that Senator Rubio introduced legislation seeking to block tax credits for batteries produced by the planned Ford (F) plant using Chinese technology.
• BoJ kept policy settings unchanged, as expected, with rates held at -0.10% and QQE with yield curve control maintained to target 10yr JGB yields at around 0%, while it kept the band around the yield target at +/-50bps with the decision on YCC made by unanimous vote. BoJ also maintained its forward guidance on interest rates and said Japan’s economy is picking up with the economy expected to recover as the impact of the pandemic and supply constraints fade, while it stated that core consumer inflation is moving around 4% and inflation expectations are heightening.
• BoJ’s Kuroda: premature to debate the specifics on the exit from monetary easing, policy rate and balance sheet the main things to consider when the debate begins; exit must be conducted only when 2% inflation is sustainably and stably achieved.
• Japan’s upper house approved the appointment of Kazuo Ueda as the next BoJ Governor, while it approved the appointment of Shinichi Uchida and Ryozo Himino as Deputy Governors, as expected.

European bourses are lower across the board, Euro Stoxx 50 -1.5%, as contagion fears from SVB dents risk sentiment and weighs heavily on banks, SX7P -4.0%. As such, the Banking sector is underperforming with the exception of Utilities; aside from the above, pertinent movers on the upside are limited to Leonardo and Vodafone. Stateside, futures remain under pressure with the ES around 3900 while the NQ is the relative outperformer, and little changed overall, with yields lower amid haven action and as participants prepare for NFP.

Top European News

• US President Biden and European Commission President von der Leyen have agreed to launch talks on critical mineral and subsidies, according to a senior US official; expects to discuss strengthening cooperation on Russian sanctions.
• UK PM Sunak is to unveil up to GBP 5bln additional cash for defence, according to The Times.
• Reuters poll showed all 60 economists surveyed unanimously forecast the ECB to hike the Deposit Rate by 50bps to 3.00% at its meeting next week, while expectations are for the Deposit Rate to peak at 3.75% in Q3 vs prev. forecast of a peak at 3.25% in Q2.
• 5.6 magnitude earthquake occurs in northern Colombia, via EMSC.

FX

• The USD has failed to benefit from the broader risk tone, with the DXY underpressure though yet to test the 105.00 mark to the downside within 105.07-36 parameters.
• JPY is the standout laggard, with USD/JPY testing 137.00 from a 135.82 base as hawkish positioning unwound following Kuroda’s last BoJ, where policy parameters were maintained.
• At the other end of the spectrum is GBP, with firmer-than-expected headline GDP data and technicals via EUR/GBP assisting to lift Cable above 1.20; specifically, EUR/GBP moved below the 21- & 50-DMA’s of 0.8849 and 0.8838 in relatively quick succession.
• Elsewhere, the CHF benefits on haven-flows while peers ex-JPY are generally firmer against the USD pre-NFP; CAD, ahead of its own jobs report, is litle changed in narrow 1.3823-3861 parameters.

Fixed Income

• Core and periphery EGBs are benefiting from the glum risk tone; though, the benchmarks have eased from initial extremes as newsflow slows pre-NFP.
• Specifically, Bunds are now below 133.00 within 132.37-133.82 ranges; Gilts back towards 101.16 vs 102.00+ best and USTs at 112.00 despite being 13 ticks above the mark earlier.
• Amidst this, yields are lower across the curve with action in US yields most pronounced in the belly.

Commodities

• Crude and base metals are dented by the deterioration in risk sentiment, with spot gold gleaning some modest upside from this.
• Currently, WTI and Brent are just off initial lows within ranges of circa. USD 1/bbl while base metals are, broadly speaking, softer across the board with LME nickel particularly afflicted.
• For gold specifically, the yellow metal briefly surmounted its 21-DMA and yesterday’s best at USD 1834/oz and USD 1835/oz respectively, but remains only modestly firmer overall.
• Saudi Aramco is to supply full contract volumes of oil to at least four north Asian refiners in April.
• Chevron’s (CVX) 240k BPD Richmond California plant reports malfunctioning flaring equipment.

Geopolitics

• North Korean leader Kim oversaw the fire assault drill on Thursday and the drill proved the capability to counter an actual war, while shells were aimed at simulated targets of enemy airport. Furthermore, North Korean leader Kim said the army should be ready to fight at any time citing ‘frantic war preparation moves’ by the enemy, according to KCNA.
• US is to hold an informal meeting of UN Security Council members next week regarding human rights abuses in North Korea, according to Reuters.
• Russian Deputy Foreign Minister Ryabkov says that Russia and the US remain in contact over the New START Treaty but progress is not expected from these contacts.

US Event Calendar

• 08:30: Feb. Change in Nonfarm Payrolls, est. 225,000, prior 517,000
  • Change in Private Payrolls, est. 215,000, prior 443,000
  • Change in Manufact. Payrolls, est. 10,000, prior 19,000
  • Unemployment Rate, est. 3.4%, prior 3.4%
  • Underemployment Rate, prior 6.6%
  • Labor Force Participation Rate, est. 62.4%, prior 62.4%
  • Average Weekly Hours All Emplo, est. 34.6, prior 34.7
  • Average Hourly Earnings YoY, est. 4.7%, prior 4.4%
  • Average Hourly Earnings MoM, est. 0.3%, prior 0.3%
• 14:00: Feb. Monthly Budget Statement, est. -$263b, prior -$216.6b

DB’s Jim Reid concludes the overnight wrap

What do you get when you see one of the biggest hiking cycles on record, alongside one of the most inverted yield curves in history, at the same time as seeing one of the biggest tech bubbles bursting in history, coupled with runaway growth in private markets. The answer is that you get nights like yesterday where SVB (Silicon Valley Bank) Financial Group, closed -60.41% lower on the day, wiping out $9.6bn of market value. Although this story was brewing in the background for much of the day, it wasn’t until Europe went home that it exploded on the global macro stage as the S&P 500 went from around flat at that point to close -1.85%, with the KBW US bank index (-7.7%) seeing its worst day since June 2020. Rates saw a huge rally, especially at the front end as we’ll see below.

For background, SVB focuses on servicing emerging to middle-market growth technology companies that are usually backed by venture-capital firms. They announced that they had large losses on security sales and would be undergoing a stock offering to shore up its balance sheet. Silicon Valley Bank’s CEO pointed to the expectation of higher rates and persistent client outflows as to why the lender incurred a one-time $1.8bn loss on a security portfolio sale. Considering the client outflows are also likely driven by higher interest rates, it is not a stretch to say that this episode is emblematic of the higher-for-longer rate regime we appear to be at the start of, as well as inverted curves, and a tech venture capital industry that’s been seeing much tougher times of late. The perfect storm of all the things we’ve been worrying about in this cycle.

Sentiment across markets soured following the spreading of the SVB news. The KBW Bank index saw all of its 24 index member lower on the day with some high-profile names like JPM (-5.41%), BofA (-6.20%) and Citi (-4.10%) also much lower. The index has been down every day this week, with the 4-day performance (-12.31%) also the worst 4-day performance for US banks since June 2020.

We’ll have to see how this story develops but something always breaks hard during or after a Fed hiking cycle. Is this another mini wobble on this front or the start of something bigger? Tough to tell but I would be stunned if there weren’t many more casualties of this boom-and-bust cycle. Don’t forget, we haven’t been in recession yet. Imagine superimposing that on the leveraged world we live in.

It’s fair to say a new payrolls Friday comes at a fraught moment with today’s probably up there with the most closely anticipated in recent times. This is before we see US CPI next Tuesday and what both imply for the March FOMC the following week. With such an outsized beat last month (+517k vs. 189k expected) it’s fair to say no-one has any real idea of what random number will be churned out today. Having said that, both 25bps and 50bps are in play for the FOMC and today and Tuesday will probably be swing factors with Fed Chair Powell stressing that “no decision has been made on this” earlier this week. SVB has to be thrown into the mix too.

As we look forward to the jobs report, the recent momentum behind a 50bp hike actually stalled slightly yesterday even before the SVB story spread. This was driven by the latest round of weekly jobless claims data coming in beneath expectations. In terms of the specifics of the release, initial jobless claims came in at 211k over the week ending March 4 (vs. 195k expected). That’s their highest level so far in 2023, and marks an unusually large surprise on the upside as well, having come in above every economist’s estimate on Bloomberg. In absolute terms, the surprise of +16k above consensus is also the biggest weekly surprise on the upside in 9 months, so this isn’t the sort of report we see often. There was some weather distortions, with California (+10k) seeing a spike following massive snow storms and making up nearly a third of the increase in NSA claims (+35k). We will see how this evolves over the next couple of prints. And at the same time, there was a negative story from the continuing claims release as well, which came in at 1.718m over the week ending February 25 (vs. 1.660m expected).

With the labour market appearing softer than otherwise expected, investors moved to dial back the amount of rate hikes priced for the months ahead. Looking on an intraday basis, expectations of the terminal rate had been at 5.67% immediately prior to the claims report, but fell to 5.61% shortly after, before ending the day -15.9bps lower at 5.515% for the July meeting after the SVB story. At the highs of the day, there was a 74% chance of a 50bp rate hike later this March, before the risk-off sentiment took the probability of a 50bp hike back down to 56% by the close.

The broader sell-off across risk markets meant that the 2yr yield saw its biggest daily decline since January 6, thanks to a -20.0bps move to 4.87%. Longer-dated Treasuries also advanced, with the 10yr yield down -8.8bps to 3.90% and it even meant that the 2s10s curve steepened for the first time in a week as well, closing +11.4bps at -97.3bps. Both 2 and 10yr yields are down around another -8.5bps overnight.

Back to the S&P 500, every industry group was lower and only 26 index constituents were higher. Sector performance has tilted toward defensive non-cyclicals recently with utilities (-0.84%) and consumer staples (-0.95%) selling off less yesterday than cyclical peers such as materials (-2.54%) and autos (-4.76%). Over in Europe, the STOXX 600 (-0.22%) posted a small decline as well, though trading had closed before the deeper US sell-off.

The focus on the US labour market will of course be the main one today with the February jobs report. In terms of what to expect, our US economists think that nonfarm payrolls will have grown by +300k in February, in part thanks to mild weather during the survey week. That would be some way above the +225k consensus view, and would keep the unemployment rate at a 53-year low of 3.4%, with a risk it could round down to 3.3% if participation contracts slightly. This report will be very important when it comes to the Fed’s meeting on March 22, as what we’ve heard so far suggests that both 25 and 50bp hikes are still in play. Indeed, Chair Powell went out of his way while in Washington DC on Wednesday to say “I stress that no decision has been made on this”.

On the topic of Washington, President Biden unveiled the administration’s initial 2023 budget proposal yesterday afternoon. The $6.9tr budget proposal is viewed as an opening bid to House GOP members, who are expected to negotiate it down in the upcoming debt ceiling negotiations. The proposal increases funding on an array of government programs, including making Medicare more solvent, lowering prescription drug prices, and trimming the deficit by $3 trillion over the next decade. The deficit cutting is mostly coming in the form of higher taxes on capital gains (25% on those making over $1mn), a new tax bracket of 39.6% on every dollar made over $400k, a minimum 25% on billionaires, and hiking the corporate tax rate from 21% to 28%. Republicans have already called the proposal a non-starter, with Speaker McCarthy saying that he does “not believe raising taxes is the answer.” There was no House budget plan yet, as Speaker McCarthy said that Republicans wanted to analyse the White House’s budget first. The opening salvo does nothing to lower expectations of a protracted debt ceiling fight.

Returning to the theme of central banks, overnight the Bank of Japan (BOJ) left its key interest rate unchanged at -0.1%, while maintaining its YCC policy. In his last meeting as the BOJ’s Governor, Haruhiko Kuroda made no surprise move and lent support to the central bank’s long-standing ultra-dovish monetary policy. Following the decision, the Japanese yen lost ground, weakening as much as -0.6% against the dollar before cutting losses to trade at 136.53 per dollar as we go to press. Meanwhile, the Japan’s upper house in parliament has formally approved the appointment of Kazuo Ueda to be the next central bank chief in April. Additionally, the parliament also approved Shinichi Uchida and Ryozo Himino as the next BOJ Deputy Governors.

Following a weak handover from Wall Street overnight, Asian stocks are also trading lower. Across the region, the Hang Seng (-2.46%) is sharply lower, wiping out all the YTD gains with the CSI (-1.12%), the Shanghai Composite (-1.15%), the Nikkei (-1.59%) and the KOSPI (-1.05%) also tumbling this morning amid contagion worries related to SVB. Outside of Asia, US stock futures are indicating further losses with contracts tied to the S&P 500 (-0.78%) and NASDAQ 100 (-0.54%) quite weak for an overnight session. Bitcoin dropped below the key $20,000 mark in Asia trading hours for the first time since mid-January, reversing its strong 2023 uptrend.

Back in Europe yesterday, it was a fairly quiet day on the whole, with the focus now turning to next Thursday’s ECB meeting. Ahead of that, sovereign bonds rallied for the most part with very modest reductions for yields on 10yr bunds (-0.3bps) and OATs (-0.1pbs), alongside larger reductions at the front end. We will be set for a big rally this morning though given the late news last night. The only ECB official we did hear from yesterday was France’s Villeroy, who said “We will bring inflation toward 2% by the end of 2024 or beginning of 2025 – that’s a commitment, not just a forecast.” Investors have almost fully priced in a 50bps increase at the next meeting (97%), but there’s a bit more doubt over what they’ll do in May still, with 50bps considered the most likely as per our own House View, but with only a 74.7% chance of such a move.

To the day ahead now, and the main highlight will be the aforementioned US jobs report for February. Other releases include the UK’s GDP for January. And from central banks, we’ll hear from the ECB’s Panetta.