What To Know This Week: SVB Fallout, Inflation and Retail Sales

Two significant economic data points before of the Federal Reserve's next policy meeting will welcome investors in the coming week, as the investing public — and beyond — keeps a watch on the latest developments in the aftermath of Silicon Valley Bank's failure last week.

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The February Consumer Price Index (CPI) on Tuesday and the February retail sales report due Wednesday morning will almost certainly raise investor expectations for the Fed's next policy move.

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According to Trading Economics data, consensus estimates are for CPI to grow 6% over last year on a headline basis and 5.5% on a "core" basis in February. An inflation of 6% would be the weakest annual increase in consumer prices since September 2021.

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The unexpected collapse of Silicon Valley Bank on Friday, however, has replaced the market emphasis on the Fed's next measures as the top focus in recent days, with worries about what the second-largest bank failure in U.S. history may signal for the broader financial system.

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The tone for the next week will be established by how futures open Sunday evening and what follow-through if any, there is into Monday's trading session. And it will reveal if investors agree with many first reactions to Silicon Valley Bank's bankruptcy, namely, that this is a one-time failure rather than the start of something greater.

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According to Finance's Jennifer Schonberger, TD Cowen analyst Jaret Seiberg wrote Friday that the firm does "not regard this as the beginning of a bigger danger to the safety and soundness of the banking system."

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"Silicon Valley, like Silvergate (SI), had a unique business strategy that was less reliant on retail deposits than a standard bank," Seiberg remarked. "This increased the bank's exposure to interest rate risk as its funding became more expensive, but its assets did not reprice higher."

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JPMorgan analyst Kabir Caprihan echoed much of this sentiment in a note to clients published Friday: "At the outset, we don't believe [Silicon Valley Bank's collapse] to be systemic, but it does reflect some of the structural issues that we highlighted in our outlook and what drove our Underweight on regional banks."

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The scale and specific challenges that brought down Silicon Valley Bank are exceptional, with its exposure to the cash-burning tech industry being among the most heavily penalized by investors throughout the Fed's rate-hiking campaign. Yet, the overall picture of increased deposits in 2021, withdrawals in recent months, and losses in securities portfolios are expected to provide a problem for certain regional banks in the near term.

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According to a Trade Algo report late Saturday, the FDIC — which took control of the bank on Friday morning — was seeking to make whole a part of uninsured savings held with the bank, with reimbursements ranging from 30% to 50% of deposits being considered.

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Fed and FDIC officials have also considered establishing a fund to support deposits from other institutions that may suffer a crisis similar to the one that brought down Silicon Valley Bank in the coming weeks. Across the Atlantic, UK finance minister Jeremy Hunt stated that the British government is working to guarantee that any UK firms having cash flow issues as a result of SVB's insolvency "can satisfy their cashflow requirements to pay their employees."

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Over the weekend, hedge funds have been reaching out to startups with cash stuck at Silicon Valley Bank, offering to buy their deposits at a discount, as some companies face a cash crunch with a payroll approaching and a potentially long road ahead to being made whole on money deposited with the failed bank.

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This comes as authorities look for a buyer for Silicon Valley Bank as well as the wealth management, investment, and securities divisions of the bank's former parent firm, SVB Financial (SIVB). Workers of the failing Silicon Valley Bank will be let go after 45 days, according to Trade Algo on Saturday.

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According to the FDIC's most recent report as of Saturday evening, "all depositors will have full access to their insured savings no later than Monday morning, March 13, 2023, and the FDIC will issue an advance payout to uninsured depositors during the next week."

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The FDIC noted, "Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured monies, and future dividend payments may be given to uninsured depositors when the FDIC sells the assets of Silicon Valley Bank."

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"The circumstances of the Silicon Valley Bank failure are distinctive enough that it is unlikely to cause broad financial contagion," writes Paul Ashworth, chief North America economist at Capital Economics. "But, it is a timely warning that when the Fed is only focused on squeezing inflation by raising interest rates - it frequently ends up wrecking things."

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