The Silicon Valley Bank (SVB) collapsed on Friday, March 10, making it the second-largest bank failure in U.S. history. SVB invested their funds in long-term bonds when interest rates were near zero. Bonds have an inverse relationship with interest rates, so the value of SVB’s investments fell as the Federal Reserve began rapidly increasing its Fed Funds rate to combat inflation beginning in March 2022.
On Wednesday, March 8, SVB announced it had suffered a $1.8 billion (about $6 per person in the U.S.) after-tax loss and needed to raise capital to address depositor concerns. SVB’s stock began to precipitously lose value and as the stock fell, more depositors withdrew money from the bank. A bank run ensued, and the bank failed. There have since been other banks with similar exposure that have failed (Signature Bank) or are at risk of failure. The reach and magnitude of the financial crisis has grown to include international banks. Credit Suisse Group AG experienced financial distress and its largest one-day equity selloff resulting in Switzerland’s central bank intervening to provide liquidity reassurances.
Banking and monetary policy experts mostly point their fingers at SVB’s mismanagement of funds and lack of oversight, as well as the quick rate of interest rate hikes across central banks as root causes of the onset of this banking crisis. The U.S. government quickly assured all depositors that they could access their money at failed institutions. The full extent of financial industry risk remains uncertain and speculative. The rest of this article focuses upon offering near and long-term perspectives for potential impacts.
Impacts to Freight Markets
Bank failures signal the growing risk of a recession, and the most direct, near-term impact of these bank failures is likely to be seen in the response of consumers. Consumer sentiment is likely to be negatively impacted by these failures and contribute to slowing freight demand as consumers change spending behavior in preparation for a potential recession.
Freight demand has fallen across most industries over the past 6 months, bringing demand closely in line with 2019 levels. Though imbalanced, the leisure, retail, construction, and manufacturing industries are often the most impacted through a recession as consumers and businesses curtail nonessential spending. Consumer staples, however, tend to be less impacted by economic turbulence as consumers generally regard these goods as essential spending, although they may substitute away from brand-names in favor of cheaper private label products.
A longer-term impact of regional bank failures could be seen in changes to the previously communicated monetary policy stance of the Federal Reserve. Another round of interest rate hikes was expected during the upcoming Federal Open Market Committee meeting next week, but further interest rate increases would put more pressure on exposed banks who hold a significant amount of bonds on their balance sheets. There is a chance the Fed may pause rate hikes until the scope and severity of the ongoing shock to the banking system is better understood.
Impacts to Transportation Energy Markets
The recent news from the financial sector has had a ripple effect on the energy market, with both crude oil and diesel prices experiencing downward price pressure in the days since the failure of SVB. Truckload wholesale diesel prices have fallen about $0.20 per gallon, from about $3.65 to $3.45 following about a week of volatility from the banking shock.
The prevailing economic headwinds are likely to contribute to continued downward pressure on the energy market. While the financial sector has contributed to a decline in prices, the global crude oil and refined product market is unlikely to see an enduring return to the price levels of 2015-2020. The supply side of the market remains constrained with OPEC+ expected to continue to cut production, Russian production decreasing due to sanctions, and the U.S. expected to purchase crude oil for its Strategic Petroleum Reserve at a price between $67 and $72 per barrel.
The Breakthrough Advisor team will continue to provide clients with relevant updates related to these market events. We plan to release our updated market forecasts to the Breakthrough client base on their normal cadence.