A major incident involving a US military drone is being widely reported as happening over the Black Sea on Tuesday, with NATO sources telling AFP there’s been an “incident” and that an investigation is ongoing. Western military sources identified that a US-made Reaper drone may have crashed for as yet unknown reasons:

“Something happened but we don’t have confirmation that the drone has been shot down. An investigation is underway,” one of two Western sources who confirmed “an incident” told AFP.

“The sources, who requested anonymity due to the sensitivity of the information, did not say which country was operating the drone, which is used extensively by the United States as well as many of its NATO allies,” the AFP report continues.

As more details trickled out in the minutes following initial reports, a war correspondent for Politico is citing US European Command officials who say the US drone has been downed over the Black Sea.

“A Russian Su-27 fighter collided with a US MQ-9 drone over the Black Sea this morning, causing the drone to crash, US European Command says,” Politico Paul McLeary writes.

NEW: A Russian Su-27 fighter collided with a US MQ-9 drone over the Black Sea this morning, causing the drone to crash, US European Command says.

— Paul McLeary (@paulmcleary) March 14, 2023

Naturally, the next question is what happened to the Russian jet… did it too crash? If so, the incident poses great danger for possible imminent US-Russia escalation, given this is the kind of rare direct military encounter and incident that many have long feared could unleash a deadly spiral of escalation.

The White House was briefed over the incident, according to NSC spokesman John Kirby:

BIDEN BRIEFED ON RUSSIA JET INCIDENT THIS MORNING: KIRBY

However, some pundits and reporters are already positing a narrative of events which contradicts the Pentagon’s. Is Pentagon leadership hoping to avoid WW3 by downplaying it as a mere accident (in the scenario this was actually a shootdown incident)? The Kremlin version of events will be interesting to hear as the aftermath unfolds.

The two Russian Su-27 returned to their baser in #Crimea after destroying a $32 million, for the latest versions of MQ-9, #US drone.

— Elijah J. Magnier 🇪🇺 (@ejmalrai) March 14, 2023

developing…

Authored by Caleb Fuller via The Mises Institute,

“Economics,” wrote Henry Hazlitt, “is haunted by more fallacies than any other study known to man.”

True. No epoch is immune to the scourge of economic illiteracy.

Yet, we find ourselves in a moment of especially unprecedented economic ignorance. We’ve come a long way since the days of Hazlitt’s editorializing in the New York Times. In the 1930s, believe it or not, the Times held the line on economic orthodoxy in the face of emergent quackery.

Fast forward and here are but a few favorite examples of economic illiteracy, ripped from the headlines of our most prominent rags:

• Corporate greed causes inflation

• Price controls are an effective way of “controlling” said inflation

• The minimum wage is a free lunch to low-skilled workers

• Racial discrimination is costless to the discriminator

• China is “beating” us at trade

• Profits are a wealth “transfer” from consumers to producers

• Prices are arbitrary and “set” by sellers

• Rent control expands housing availability for the poorest

• Trade or immigrants “steal” domestic jobs

• Women earn less than men for performing the same work

• Capitalism degrades the environment

• Material standards of living are falling in industrialized societies

• Monopolists can charge whatever they want

• Our economy is positively bristling with said monopolists

• Socialism generates higher living standards and more equitable economic outcomes than capitalism

Where to begin? Each of these statements is demonstrably false—economists propounding them are in a small minority—yet each also boasts many fervent exponents, not to mention shrill Twitterati advocates and an apparent majority of the public.

Take the first vapid claim. It possesses all the analytical horsepower of an engineer proclaiming that a plane fell from the sky due to gravity. For those of us taking our cue from Moses or Solzhenitsyn, we believe greed is a constant running through the center of every human heart. And a basic causal principle holds that explaining variation (changing prices) by appealing to a constant (greed) is a scientific non-starter. The economic point of view directs our attention toward the constraints or opportunities which must have changed to allow for rising prices.

My favorite on this list is the claim about rent control—a recently resurgent policy. You’ll search high and low before finding an economist who believes rent control exhibits a tight link between intentions and outcomes. (For evidence of my claim, see this rent control poll of dozens of the world’s top economists).

And for good reason. Rent control generates a shortage—more people want housing units than there are units available. Housing isn’t special in this regard; we’d see the same outcome if oranges were compelled to sell for a penny a piece. This shortage throws open a Pandora’s Box of social pathologies that certainly no price control advocate intends. I’ll mention just two.

On the supply side, landlords seek to exploit the housing queue to their benefit. Like a careful grocery shopper sorting through the orange bin, the shortage enables landlords to become extra choosy. Unlike a careful grocery shopper, the selection criteria may expand to include arbitrary tenant characteristics like race, sex, or religious creed. Rent control doesn’t make anyone a racist (like greed, racism cuts through the human heart). But rent control does lower the costs of the prejudiced expressing their bigotry.

On the demand side, potential renters often devise clever schemes for nabbing an apartment before it’s occupied. Under rent control, apartments go like hot cakes. In New York City, applicants are known to search the obituaries. In post-WWII Paris, young women stalked the oldest, sickest residents they could find on the presumption that when one failed to appear at his favorite café a room had opened courtesy of the Grim Reaper.

In the long run, rent control devastates the housing stock as landlords are taken to the cleaners. Some owners set fire to their own buildings. Better to collect the one-time insurance payout than to be bled dry by the rent control ordinance. Others simply flee. The predictable result is that the low-income housing stock crumbles. Economist Assar Lindbeck speculated that rent control can be as effective a means of razing a city to the ground as is aerial bombing.

Meanwhile, the relative rate of return to investing in luxury apartments or condominiums, both exempt from rent control, begins looking more attractive. Entrepreneurs respond by redirecting their investments. The supply of high-end housing expands; rent control (can) provide a subsidy to billionaire Manhattanites.

I hesitate to mention it because I don’t want to give a politician the wrong idea, but economics does prescribe a straightforward recipe for boosting the housing supply. It’s simple: Place price ceilings on every other good—oranges, TVs, t-shirts, baby formula, doctors’ salaries—anything and everything but housing. Henceforth, entrepreneurs will invest in nothing but housing, dramatically increasing its availability. Of course, another option for policymakers is to slice through the forest of regulations which have shackled America’s housing supply.

With more colorful examples like these, my 2021 book, No Free Lunch: Six Economic Lies You’ve Been Taught and Probably Believe, pushes back against our culture’s increasingly dominant paradigm which sees society as so much Play-Doh for policymakers to mold.

The great economist Armen Alchian once observed, “Fortunately, societies have progressed despite almost universal ignorance of economic principles.” True.

I wonder, however, if ours hasn’t succumbed to a Gladwellian “tipping point.” After all, economic knowledge needn’t be explicitly articulated for the citizenry to possess a tacit, intuitive “horse-sense” about how the world works. To my mind, that’s been lost in recent years.

Alchian also rightly observed that “economic law cannot be suppressed by legislated law.” With the majority of U.S. citizenry evidently believing that economic reality can be repealed with the stroke of a pen, and substituted by legislative fiat, we may be on the brink of putting Alchian’s first claim to the test. Just how much economic ignorance is compatible with human flourishing?

The Justice Department and the Securities and Exchange Commission are (separately) investigating the collapse of Silicon Valley Bank, focused on the possibility of misconduct by officers, including whether stock sales by executives violated trading rules, according to a person familiar with the matter.

SVB Financial Chief Executive was optimistic days before his bank collapsed, saying at a conference last week that it was ‘a great time to start a company.’

As we detailed previously, as lines (real and virtual) full of anxious depositors grew last week outside of Silicon Valley Bank branches around the world, and reassurances of “liquidity” were gushed from the C-Suite, three individuals within the firm were perhaps less troubled than those seeking their hard-earned cash back from the soon-to-be-failed bank.

On Feb 27th, Gregory Becker, the CEO of Silicon Valley Bank, sold $3.6 million worth (11%) of his shares…

Daniel Beck, the CFO, sold 32% (around $600,000) of his holdings…

And finally, CMO Michelle Draper sold 28% of her holdings over the last month…

Notice that none of them had sold anything sizable for a year or so before this most recent (pre-collapse) sale.

Additionally, Silicon Valley Bank on Friday paid out annual bonuses to eligible U.S. employees, just hours before the bank was seized by the U.S. government, Axios has learned from multiple sources.

Of particular note, as The Wall Street Journal reports, the executives’ sales were done under so-called 10b5-1 plans filed 30 days earlier.

These plans allow insiders to schedule share sales in advance to allay suspicion of trading on nonpublic information. The SEC recently tightened rules for the plans, which include a 90-day waiting period before sales can be executed. The new rules went into effect on Feb. 27, the same day the executives sold.

On Sunday evening, SEC Chair Gary Gensler said the agency is “particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct” that might harm investors or markets, without naming any specific companies.

WSJ concludes by highlighting the fact that no one at the bank has been accused of wrongdoing and the investigation could end without charges being brought.

Authored by Dave DeCamp via AntiWar.com,

A senior Ukrainian government official told The Washington Post that Kyiv doesn’t have the resources to pull off a big counteroffensive in the coming months as Ukraine is lacking skilled troops, munitions, and other equipment.

“If you have more resources, you more actively attack,” said the official, who spoke to the Post on the condition of anonymity. “If you have fewer resources, you defend more. We’re going to defend. That’s why if you ask me personally, I don’t believe in a big counteroffensive for us. I’d like to believe in it, but I’m looking at the resources and asking, ‘With what?’ Maybe we’ll have some localized breakthroughs.”

The official said Ukraine doesn’t have “the people or weapons” to pull off a counteroffensive. “And you know the ratio: When you’re on the offensive, you lose twice or three times as many people. We can’t afford to lose that many people,” the official said.

The Post also spoke with a Ukrainian battalion commander who went by the name of Kupol and detailed the grim situation on the frontlines. Kupol said his battalion previously withdrew from the town of Soledar, which is near the eastern city of Bakhmut, and came under Russian control in January.

Kupol said of his battalion of 500 troops, 100 were killed, and about 400 were wounded, leading to a complete turnover. He’s now being sent soldiers with no combat experience and very little training. “I get 100 new soldiers,” Kupol said. “They don’t give me any time to prepare them. They say, ‘Take them into the battle.’ They just drop everything and run. That’s it.”

“Do you understand why? Because the soldier doesn’t shoot. I ask him why, and he says, ‘I’m afraid of the sound of the shot,’” he added. The Post report said that Ukraine has sent in an influx of draftees to replace more experienced soldiers who have been killed or wounded. It said that as more Ukrainian men who didn’t volunteer fear they will get called to battle, Ukraine’s security services shut down Telegram accounts that were helping Ukrainians avoid locations where authorities were handing out draft slips.

Kupol said Ukrainian forces are also fighting with very little ammunition. “You’re on the front line,” he said. “They’re coming toward you, and there’s nothing to shoot with.” The Kyiv Independent also recently spoke with Ukrainian soldiers who said they were fighting without much ammunition, training, and support.

Both sides appear to be waiting out the other in Bakhmut as casualties soar…

Ukraine’s former army chief says ‘Bakhmut has played its role’ in depleting Russian resources’ claiming that Wagner Group has lost 40,000 of its 50,000 fighters https://t.co/iDZYqFdv6O

— christinalamb (@christinalamb) March 12, 2023

Ukraine is taking heavy losses in its battle defending Bakhmut, but it’s keeping a tight lid on its casualty numbers. A German official said including dead and wounded, Ukraine has suffered 120,000 troops, but the number could be much higher.

Despite the dire conditions for the Ukrainian troops, Kyiv is still sending untrained soldiers into what has become known as the “meat grinder” in Bakhmut. Yevgeny Prigozhin, the head of Russia’s Wagner Group, said Sunday that Ukraine was “supplying endless reserves” and that fighting was getting fiercer as Russian forces are trying to push through to the western part of the city.

Instead of spending taxpayer dollars to nationalize Silicon Valley Bank, a private buyer favored by the Treasury and the Federal Reserve had emerged, only to be nixed by FDIC Chairman Martin Gruenberg, according to the Wall Street Journal, citing a source with knowledge of the situation.

Instead the regulators offered solutions that bail out even uninsured bank depositors and other banks at unknown costs that Mr. Biden isn’t acknowledging. –WSJ

Kevin Hassett, former Chairman of the Council of Economic Advisers under Trump, told Fox Business that “there were buyers who were willing to step in & buy [SVB, but] the radicals at the @FDICgov basically weren’t going to allow that to happen … the Biden Admin had a whitelist of companies that were allowed to buy the failed bank & companies that weren’t.”

“If this is true,” said Grabien founder Tom Elliott, “then this is another Biden scandal.“

If this is true, and the WSJ is also reporting it, then this is another Biden scandal. Rather than letting the free market resolve a somewhat ordinary bank collapse, they used the opportunity to nationalize SVB, using tax money to ensure their campaign donors were made whole. https://t.co/TKtvR0eUQQ

— Tom Elliott (@tomselliott) March 14, 2023

While most banks have hedged their interest-rate risk and diversified their deposits, SVB and Signature bank did not – yet, President Biden is of course blaming former President Donald Trump for modifying certain rules from the 2010 Dodd-Frank act in the 2018 bipartisan banking law, which raised the threshold to classify financial institutions as ‘systemically important’ (Sifi) from $50 billion in assets to $250 billion.

Yet, as the Journal notes, Barney Frank, co-author of Dodd-Frank, thinks that’s BS, as the entire point of the 2018 legislation was to reduce costly compliance on mid-size banks so they could be more competitive with the giants – the latter of which benefit from a lower cost of funding due to their implicit government backstop. In short, the Dodd-Frank legislation was driving more deposits to large banks, while mid-size banks forced to comply with the same regulations were at a disadvantage.

The 2018 law did not excuse mid-sized banks from performing quarterly liquidity stress tests to ensure they could withstand “adverse market conditions,” and “combined market and idiosyncratic stresses,” such as interest-rate shocks. Mid-sized banks must also maintain a liquidity buffer of “highly liquid assets” such as Treasurys and MBS.

Something deeper afoot?

Biden’s blame game aside, crypto VC Nic Carter has some very interesting thoughts on what went down in regards to the shuttering of Signature Bank, calling it a “Colossal scandal.”

Dear God. Barney Frank openly admits that Signature was arbitrarily shuttered despite no insolvency because regulators wanted to kill off the last major pro-crypto bank. Colossal scandalhttps://t.co/Sa25w6Au7b pic.twitter.com/gLuiybHepS

— nic carter 🌠 (@nic__carter) March 13, 2023

Continued;

Heard this independently from other sources as well. I suspected as much last night but confirmed today. Signature was executed last night not due to any runs but as a political scalp, intended to be veiled by the fog of war.

Apparently even FDIC was surprised when it was dropped into their hands. The claimed justification was Signatures Signet product, which was perceived to be “systemic”

My conclusion is that politicians like Liz Warren together with regulatory bodies fragilized crypto banks and encouraged runs against them, then used withdrawals as a pretext to close them down

What was meant to be a surgical operation became a massive banking crisis.

Lastly, if you don’t think Barney Frank has a reliable read of the situation – the ‘Frank’ in Dodd Frank, former chair of the House Financial Services Committee, I can’t help you

— nic carter 🌠 (@nic__carter) March 13, 2023

Over the weekend, amid populist howls of outrage that a bailout of SVB would promote moral hazard (in the end depositors did get bailed out, but other unsecured creditors oddly enough would get nothing, while the common stock would also be a doughnut), we said that while technically true, the events that toppled SVB and now SBNY as well, are really a subsidy for the big banks.

Many view what’s happening as a question of moral hazard and a bailout of small banks. It’s really a subsidy of big banks: JPM was solidly green in Friday’s rout https://t.co/GAlJJ2iSLI

— zerohedge (@zerohedge) March 12, 2023

Today, one day after many small banks nearly failed amid a surge in deposit outflows, we read that “after the back-to-back collapse of three smaller banks, their biggest US counterparts are seeing a rush of depositors fearful the crisis will spread.”

According to Bloomberg, JPMorgan – or as we now call it JPMega – the largest US bank and about to become much, much bigger, alone received billions of dollars in recent days, and Bank of America, Citigroup and Wells Fargo & Co. are also seeing higher-than-usual volume.

“The top six banks in the US are and have been too big to fail, the financial crisis over 10 years ago demonstrated that,” Michael Imerman, an assistant professor at the University of California Irvine’s business school, told Bloomberg. “So it’s safer to go with a name with higher degree of certainty.”

Other banks are seeing increased deposit inflows as well. Citizens Financial Group Inc. announced Monday that it “has seen higher than normal interest from prospective new customers over the past few days,” and that it would temporarily extend branch hours to accommodate.

Confirming BBG reporting, the FT writes that “Large US banks are inundated with new depositors as smaller lenders face turmoil“, which of course means that small bank deposits are getting drained.

so… small financial institutions are losing deposits quickly https://t.co/suZVs39Rkm

— zerohedge (@zerohedge) March 14, 2023

According to the FT report, “large US banks are being inundated with requests from customers trying to transfer funds from smaller lenders, as the failure of Silicon Valley Bank results in what executives say is the biggest movement of deposits in more than a decade.”

“JPMorgan Chase, Citigroup and other large financial institutions are trying to accommodate customers wanting to move deposits quickly, taking extra steps to speed up the normal sign-up or “onboarding” process, according to several people familiar with the matter.”

As we speculated over the weekend, the bailout plan revealed by the Fed, TSY and FDIC was insufficient to stabilize depositor confidence, and even though it staved off the failure of a third bank following the implosion of SVB and Signature Bank, depositors were still attempting to move balances into larger banks such as JPMorgan, Citi and Bank of America, as well as money market funds. That is especially the case when balances exceed the $250,000 threshold that is guaranteed by federal insurance.

Deposit transfers from SVB and other regional lenders to large banks picked up steam last week and continued on Monday, the people said. “The calls have been coming in today like airplanes stacked on a snowy day at O’Hare airport,” said one senior banker, referring to Chicago’s busy aviation hub.

JPMorgan, which we explicitly said will be the biggest beneficiary of small bank bank run, has shortened the waiting time for opening an account and is expediting the speed at which new corporate customers can access funds to ensure they can pay staff at the end of this week, the FT reports adding that several banks have reassigned employees to jobs connected to account openings.

Citi’s private bank, which caters to wealthy individuals, is trying to open accounts within a day of application compared with the typical timeline of one to two weeks, some of the people said. The lender has also started to open accounts and initiate money transfer procedures while the new client is still undergoing compliance checks.

Executives say they are walking a fine line because they do not want to be accused of exploiting the situation. JPMorgan has told bankers they should not make active attempts to poach clients from smaller rivals, according to people briefed on the discussions.

“Goliath is winning,” Wells Fargo banking analyst Mike Mayo said in a research note on Monday as he singled out JPMorgan as a beneficiary “in these less certain times”.

None of that should be a surprise, and the real story behind the SIVB collapse emerged late last week when we reported that JPMorgan was seeking to convince some SVB customers to move their funds, in the process making the devastating and terminal SIVB bank run worse. Here is what we said:

Let us get this straight: the largest US commercial bank was actively soliciting the clients of one of its biggest competitors, and the 16th largest US bank, knowing full well deposit flight would almost certainly lead to the collapse of a bank which courtesy of fractional reserve banking, had only modest cash to satisfy deposit demands: certainly not enough to meet $42 billion in deposit outflows.

Of course, Jamie, who has suddenly emerged as a key figure in the Jeff Epstein scandal alongside Jes Staley, knows this, and would be delighted with an outcome that kills two birds with one stone: take his name off the front pages and also make JPMorgan even bigger. Actually three birds: remember it was JPM that started that “Not QE” Fed liquidity injection in Sept 2019 when the bank “suddenly” found itself reserve constrained. We doubt that JPM would mind greatly if Powell ended his rate hikes and eased/launched QE as a result of a bank crisis, a bank crisis that Jamie helped precipitate. 

And while we wait to see if Dimon’s participation in the Epstein scandal will now fade from media coverage, and whether Powell will launch QE, we know one thing for sure: JPM was a clear and immediate benefactor of SIVB’s collapse because in a day when everything crashed, JPM stock was one of the handful that were up.

And so, just like the Lehman collapse made the remaining bailed out banks stronger, so the failure of a handful of regional banks not only allowed mega banks such as JPM and BofA – which have tens of billions in net unrealized losses on their HTM books to take advantage of the Fed’s new bailout facility, the BTFP, but to also beef up their depositor bases while assuring that their profits rise too .

Almost as if it was all planned from the start…

Authored by Paul Joseph Watson via Summit News,

Canadian Foreign Minister Mélanie Joly admitted that the long term goal of western involvement in Ukraine is not merely to see Moscow defeated, but to enact “regime change” in Russia.

Joly made the comments while her government announced new sanctions against the import of Russian aluminum and steel.

“We’re able to see how much we’re isolating the Russian regime right now — because we need to do so economically, politically and diplomatically — and what are the impacts also on society, and how much we’re seeing potential regime change in Russia,” Joly stated.

“The goal is definitely to do that, is to weaken Russia’s ability to launch very difficult attacks against Ukraine. We want also to make sure that Putin and his enablers are held to account,” she added.

Russian ambassador to Canada Oleg Stepanov reacted to Joly’s remarks by stating that they may have been a “Freudian slip of the tongue.”

“What she or other decision-makers in Ottawa don’t want to recognize is that the current Russian policy is supported by the ultimate majority of the nation,” Stepanov said.

A similar awkward ‘slip of the tongue’ occurred back in January when Germany’s foreign minister Annalena Baerbock acknowledged, “We are fighting a war against Russia, and not against each other.”

Joly’s comments will only serve to bolster Vladimir Putin’s assertions that NATO support for Ukraine is about isolating Russia and eventually overthrowing its government.

Ukrainian president Volodymyr Zelensky recently warned that if Ukraine loses then Americans “will have to send their sons and daughters” to war with Russia over the Baltic states “and they will have to fight” and “they will be dying.”

Former UK Defense Minister Sir Gerald Howarth also said last month that NATO may need to send ground forces to Ukraine.

The US military-industrial complex is making massive gains as a result of the war in Ukraine and other global conflicts, with weapons manufacturers enjoying soaring profits.

Data released by the State Department shows that US weapons sales to other countries rose from $103.4 billion in 2021 to $153.7 billion in 2022.

*  *  *

Brand new merch now available! Get it at https://www.pjwshop.com/

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And so the week’s main event, the February CPI, has come and gone and while it wasn’t “shockingly hot” – which would have sent stocks tumbling today – it was in line with elevated expectations, with core CPI coming in slightly above consensus. While most of the inflation was driven by shelter, accounting for over 70 percent of the headline increase, Powell’s preferred “Supercore” metric (which excludes shelter and rent) rose to 0.5% from 0.36%, the highest since September.

Besides shelter, there were also gains in recreation and airfares, while the eggs and meat index dropped as did energy services; used cars surprisingly dropped, despite the Manheim index suggesting sharp increases, which means used car prices are likely lagging now and will push up the index in future months.

There is more in our full review of the CPI print, but what matters now is what the market’s assessment of the data is. Well, one look at today’s STIR market shows that odds of a 25bps hike rose modestly after tumbling in recent days, and are currently at 80%, after dripping below 50% earlier in the session.

And, as noted below, the prevailing consensus among Wall Street reactions is that while the data was not very hot, it remains hot enough to push the Fed to hike 25bps in the March 22 FOMC meeting, which means calls by Goldman and Barclays for a pause, and Nomura’s 25bps rate cut call, will be wrong. Unless, of course, the banking crisis is just starting and we will see more failures. To that point, while regional US banks are surging, the same can not be said for Swiss bank giant, Credit Suisse, whose CDS just hit fresh all time wides above 550bps, as the market continues to raise odds that the 2nd largest Swiss bank will be bankrupt in under 5 years.

And while we wait to see what Credit Suisse does, here is a snapshot of Wall Street analyst and strategist reactions to today’s CPI print.

Ian Lyngen, rates strategist at BMO

“Overall, this is an inflation update that, taken as a sole input, would suggest that a 25 bp hike next week is a foregone conclusion. Alas, the regional banking stress leaves next week’s decision as a wildcard until there is greater clarity on the success of limiting the contagion to the rest of the banking sector from SVB/Signature.”

Ira Jersey  BBG Intel Chief US Interest Rate strategist

“The data are just strong enough that the Federal Reserve is clear to hike 25 basis points next week. The challenge for the Fed will be communicating that it’s prepared to help financial-sector liquidity, but still needs to fight inflation. For the Treasury market, we think the long end will remain in the old November to February range of 3.32% to 3.9% until the Fed meeting, while the front end may unwind some of Monday’s rally after these data.”

Anna Wong, Bloomberg Economics’ chief US economist:

“On a 1-month, 3-month, or 6-month annualized basis — metrics that Fed officials use to gauge inflation momentum — February’s headline CPI was running at 4.5%, 4.2%, 4.3%, respectively, with the two longer measures up from the previous month. On the other hand, core was up across the board: at 5.6%, 5.2%, 5.1%, respectively. The robust core CPI print is bad news for the Fed’s preferred PCE gauge. The 12-month change in core PCE inflation may accelerate to 4.8% from 4.7% for February, both far above the 2% target. That’s the opposite direction of where the Fed wants to it to be moving.”

Dennis DeBusschere, founder of 22V Research:

“Net-net, this is on the hot side, but not game-changing. The Fed is very focused on labor data and that was slightly dovish, which is why futures are not changing rate-hike odds much post the data. Expect yields to keep moving up as financial stability concerns go away. That is the key to moving rate hike odds up (or not) over time. The CPI was not a game-changer.”

Andrew Hunter, economist at Capital Economics:

“At face value, the ongoing strength of inflation presents a dilemma for the Fed as it focuses on maintaining financial stability. But even if the current crisis ends up being resolved relatively quickly, we suspect the resulting tightening in credit conditions will still do lasting damage to the economy.”

Danni Hewson, head of financial analysis at AJ Bell:

“If this was a Disney production, inflation would have cooled considerably in the month of February, paving the Fed’s path with sparkling yellow bricks and giving them much needed breathing space to ponder how it’s intervention is impacting the financial sector. But this isn’t a fairy tale and the Fed has an increasingly pot-hole strewn path to navigate.”

Victoria Scholar, head of markets at Interactive Investor

“The fallout from SVB could in fact have an alleviating effect on inflationary pressures if credit supply tightens and the risk of a US recession increases.”

Peter Boockvar, author of the Boock Report:

“We have again a further acceleration in service prices that is offsetting the continued moderation in goods prices. That said, we know rental growth is being way overstated but should still growth 3-4% sustainably after the current supply increase gets absorbed as the demand is still very solid. Goods prices on the other hand have likely bottomed on the downside of the spike. The combination is still going to lead to slower but sustainable inflation and why the Fed is going to hike rates by 25 bps next week but likely pause thereafter. The call for a rate cut next week by a particular bank makes no sense to me as the Fed would look so weak in doing so and would make all the vocal hawks look silly.”

Neil Dutta, strategist at Renaissance Macro:

“Today’s CPI inflation data make it clear that the effort to quell inflation is far from complete. Had it not been for SVB, the Fed would likely have moved 50bp in March; instead, I see them going 25.”

Nancy Davis, founder of Quadratic Capital Management

“Jerome Powell has frequently used the term disinflation so far this year and Tuesday’s report is anything but disinflationary. The Fed has to face the fact that its rate hikes have not only failed to control inflation, but they have started to cause instability in the banking system. We are in a situation where inflation is still high and the economy is at risk for further weakening, particularly amid the recent bank failures. The Federal Reserve is running out of good choices.”

Source: Bloomberg

After January’s disappointing ‘stall’ in the linear demise of inflation, consensus expectations were for a re-acceleration of the YoY decline in headline CPI (from 6.4% to 6.0%), and the actual print came in right on expectations (+0.4% MoM, +6.0% YoY). That is the lowest YoY CPI since Sept 2021…

Source: Bloomberg

Services dominated the headline CPI YoY shift with Shelter continuing to be a main driver…

On a MoM basis, Services and Shelter also dominated, with Used Car prices lower (which lags the real shift as Manheim prices have risen for two straight months)…

The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70 percent of the increase, with the  indexes for food, recreation, and household furnishings and operations also contributing. The food index increased 0.4 percent over the month with the food at home index rising 0.3 percent. The energy index decreased 0.6 percent over the month as the natural gas and fuel oil indexes both declined.

Core CPI was expected to slow only marginally in February from 5.6% YoY to 5.5% YoY and it did – dropping to its lowest YoY print since Dec 2021…

Source: Bloomberg

The index for all items less food and energy rose 0.5 percent in February, after rising 0.4 percent in January.

• The shelter index continued to increase, rising 0.8 percent over the month. The index for rent rose 0.8 percent in February, while the index for owners’ equivalent rent increased 0.7 percent over the month. The index for lodging away from home increased 2.3 percent in February. The shelter index was the dominant factor in the monthly increase in the index for all items less food and energy.

• Among the other indexes that rose in February was the index for recreation, which increased 0.9 percent, and the index for household furnishings and operations which increased 0.8 percent.

• The airline fares index rose 6.4 percent, ending a string of four consecutive declines. The index for motor vehicle insurance, the index for apparel, the index for personal care, and the index for new vehicles also increased in February. In contrast, the index for used cars and  trucks fell 2.8 percent in February,  continuing a recent downward trend.

• The medical care index fell 0.5 percent in February, after falling 0.4 percent in January.

• The index for physicians’ services continued to decline, falling 0.5 percent after declining 0.1 percent in January. The hospital services index and the prescription drugs index were unchanged in February.

The costs of putting a roof over your head remains a critical factor for The Fed to deal with:

• Feb Rent Inflation 8.76% YoY, up from 8.56% In Jan; highest on record

• Feb Shelter Inflation 8.10% YoY, up from 7.88% in Jan; highest on record

There is some good news… egg prices appear to have peaked…

Increases in Transportation costs outweighed a drop in Medical Care costs…

Crucially, the core inflation measure Powell watches – core services excluding rents – went in the wrong direction. Up 0.5% versus 0.36% in January. The year-on-year rate came down slightly, to 6.15% from 6.22%.

Source: Bloomberg

Finally, this is the 23rd straight month where Americans cost of living has outpaced their wage growth with real average hourly earnings down 1.3% YoY…

Source: Bloomberg

Obviously the world is a different place after the SVB collapse and bailout, but The Fed still has a job to do.

Before the print, the market had priced in 17bps of hikes for March’s meeting next week

The first attempt to auction off SVB (or parts of the failed bank) was unsuccessful, but is shrouded with political questions, as The Wall Street Journal reports:

The Federal Deposit Insurance Corp. says it couldn’t find a private buyer for SVB, though a source tells us Treasury and the Federal Reserve favored one.

FDIC Chairman Martin Gruenberg nixed it owing to hostility to bank mergers.

But for venture capital firms – and the feds – if at first you don’t succeed, try, try again is the mantra, as The FT reports that several VC firms working on a long-shot plan to preserve parts of Silicon Valley Bank so it can keep serving clients in the technology sector, according to people briefed on the effort.

Since late last week a group of more than a dozen VC firms have been in talks about how to enable SVB to continue lending to, investing in and advising companies and executives in the sector.

Specifically, Bloomberg reports that Apollo Global Management and Blackstone have expressed interest in snapping up a book of loans held by SVB.

The bank had $73.6 billion of loans as of Dec. 31, 2022.

Before pressing ahead with any bid, the group is asking regulators for more information on the state of the bank, according to one of the people.

“It’s still premature but I’m hopeful it could come together in the next few days,” said one of the people involved in the discussions.

The loan portfolio is seen as an attractive buy and was not a contributing factor in the bank run that caused Silicon Valley Bank’s demise, the people said.

“It has a long-established track record in the sector which supports its expertise, conservative underwriting, and better than peer asset quality performance,” ratings agency Moody’s Investors Service said last week as it downgraded the debt of the SVB Financial Group, the bank’s parent company.

The size of the loan book Apollo and Blackstone are interested in couldn’t immediately be determined. Blackstone is also looking at other assets it may purchase from the bank, one of the people said. 

“The deal might be wholesale or piecemeal, but it is clear there needs to be financial capital providers that step into the breach… as there are scenarios here where large banks won’t get [to agreements with regulators over the potential liability of buying SVB],” according to a senior executive at a leading venture capital firm directly involved in the discussions.

Other firms involved in discussions, according to The FT’s sources, include General Catalyst, KKR, Andreessen Horowitz, Khosla Ventures, and CSFB.