Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

Equity performance was negative this week, impacted primarily by rate swap volatility being estimated by money market traders. On Tuesday and Wednesday Fed Chair Jerome Powell gave his updates during the Semiannual Monetary Policy Report to the Congress and the Semiannual Monetary Policy Report to the Congress, respectively. Powell indicated in both meetings that the Fed is solely committed to getting inflation to 2% and achieving full employment. Key market risk came when Powell alluded that the Fed was not against reversing the pace of hikes back up to 50 bps. Since the last FOMC policy rate decision, jobs and inflation data have been mostly robust, an indication of a more aggressive Fed likely to come. On Friday, however, jobs data came in mixed and rate swaps began to display a higher probability of continued sequential rate hikes of 25 bps into July, whereas just two days earlier the probability favored closer to a 50 bps hike in the March FOMC meeting. Friday’s economic data included a higher-than-expected Change in non-Farm Payrolls, which is indicative of a continued demand-driven labor market. As an offset though, the Change in Manufacturing Payrolls came in at (4,000) jobs added versus an expectation for +10,000, while the Unemployment Index showed a 20 bps increase to 3.6%, against expectations of 3.4% for February. Markets have primarily traded on interest rate risk for over a year now, as the Fed has led an all out assault on inflation. Investors will be keeping a close eye on next week’s CPI and PPI index readouts in order to solidify expectations for the magnitude of the next rate hike.

On the macro level, China concerns have been at the forefront of many investor interests, with U.S. lawmakers taking a bipartisan stance on regulating China-based social media app, TikTok. Social media apps with competitive exposure to TikTok surged on Monday, but declined in subsequent trading days this week as terminal rate speculation put pressure on growth. China continues to be a key trade partner with the U.S., but increased geopolitical tensions, specifically in tech, are becoming ever more problematic for domestic equities traders. This is slightly offset by a rebound in economic activity in China.

On Thursday, US stocks had their worst day in two weeks after bank shares sank on news that Silvergate Capital Corp. is winding down its bank operations and liquidating. The bank’s collapse comes in light of regulatory scrutiny and criminal investigations by the DOJ on linkages to FTX and Alameda Research. In an increasing rate environment, Silvergate’s flagship crypto operations seemed to be unable to withstand the borrowing costs of the dollar. Indexes tracking the banking sector overall sank, highlighting the interlinkages of the lending system and the added volatility that crypto currencies are having on the financial system as a whole. In all, we seem to be in a shake-out period of sorts as companies with clean balance sheets and sustainable crypto lending operations (e.i. adequate reserves) are likely to weather the storm.

Additionally, Silicon Valley Bank jolted investors on Wednesday after announcing that it would need to raise $2.25 billion in stock, roughly 7% of its total market capitalization at the time, in order to cover cratering deposits.

As of Friday’s Close:

S&P 500 3,861.59 -4.55%
Dow Jones 31,909.64 -4.44%
Nasdaq 11,138.89 -4.71%

Thank you Blue Room Analyst IAN CARTER

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Weekend Update #117