Job creation decelerated in February but was still stronger than expected despite the Federal Reserve’s efforts to slow the economy and bring down inflation. The U.S. economy unexpectedly created 311K jobs in February of 2023, well above market forecasts of 205K, pointing to a tight labour market.

The unemployment rate edged up to 3.6% in February 2023, up from a 50-year low of 3.4% seen in January and above market expectations of 3.4%. The U.S. economy continued to create jobs faster than most expected in February, but wage growth eased, and the average worker’s working hours fell, suggesting that the labour market is starting to cool.

The nonfarm payroll report was seen as playing an influential role in whether the Federal Reserve will resume its aggressive rate hikes given recent strong economic data. After the February’s job report the prospect of a 50-basis point rate hike at the next policy meeting on the 22nd of March were reinforced.

These expectations were short lived as the backdrop dramatically changed with three U.S. banks collapsing last week. The crypto lender Silvergate announced on Wednesday that it would be winding down operations and liquidating its bank. Silicon Valley Bank (SVB), a major lender to the tech startups, collapsed on Friday after depositors withdrew more than $42 billion following the bank’s statement on Wednesday that it needed to raise $2.25 billion to revive its balance sheet. New York based Signature Bank, with a strong crypto focus too, but much larger than Silvergare was closed by the State regulators on Sunday.

Global equity markets were spooked by the speed at which SVB, which is the 16th largest lender in the U.S. collapsed by customer withdrawals. More than $100 billion in market value were erased from U.S. banks last week, prompting quick action from government officials over the weekend in order to restore confidence in the financial system.

So what triggered the collapse of SVB? When interest rates were near zero, the bank loaded up on long-dated U.S. Treasuries. But as the Federal Reserve has been raising interest rates to fight inflation, the value of those assets has fallen, leaving the bank sitting on unrealized losses. The higher rates have lowered the value of SVB’s treasuries and other securities which the bank needed to pay depositors.

When SVB announced it had sold some of its securities at a loss to repay depositors and that would need to raise fresh capital to revive its balance sheet, that triggered a panic and companies started to withdraw their money fast, creating a classic bank run, causing the insolvency of the bank within days.

SVB’s collapse stems partly from the Fed’s aggressive interest rate hikes over the past year. Despite the panic selloff in global equity markets over the failure of SVB, investors are hoping there would not be broader repercussions to the broader economy.

U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system after the failure of SVB threatened to trigger a broader financial crisis, announcing they would cover all depositors at SVB and Signature Bank.

The Federal Reserve also made it easier for banks to borrow from it in emergencies, in an attempt to prevent these collapses from having wider repercussions through both the tech and finance industries.

The last piece of crucial data before the Fed meets on the 22nd of March was the CPI released on Tuesday. U.S. headline inflation slowed again in February, but core prices continued to rise at an uncomfortable pace.

The Bureau of Labor Statistics said the CPI rose by 0.4% in February, a slowdown from 0.5% in January. The annual inflation fell to 6.0% from 6.4%, well below its peak of over 9% in June 2022. Core inflation rose by 0.5%, an acceleration from 0.4% last month. Therefore, the annual core inflation slowed much less than the headline rate, falling to 5.5% from 5.6% in February.

Despite the deceleration in inflation over the past eight months the current rate remains three times above the Federal Reserve’s targeted rate of 2%. The hot core CPI print shows the path to disinflation will be rocky and could take a long time to reach the Fed’s target.

Against the backdrop of strong U.S. economic data, still elevated inflation and banks failures last week, investors are trying to figure out the next move of the Fed. While the previous aggressive rate hikes are clearly starting to have an effect, Fed officials recently indicated rates need to go higher to contain uncomfortably high inflation.

Early last week a 50-basis point rate hike was almost fully priced in. However, last week’s shock to the finance system has raised questions whether the Federal Reserve will pause its rate hiking cycle when it meets next week.

Number of investment banks expect the Fed to leave rates unchanged as concerns about financial stability have risen. However, according to the CME FedWatch Tool there are 81.9% probability the Fed would deliver a 25-basis point increase next week.