By Isabel Wang and Andrew Keshner
U.S. stocks ended sharply higher in volatile trade on Tuesday, after steep losses in the wake of the failure of Silicon Valley Bank, as investors digested February inflation data that matched estimates and suggested pressure on prices may be easing.
How shares were traded
Shares ended a choppy session mostly lower on Monday as banking shares plunged. The Dow extended a losing streak to five sessions, falling about 91 points, or 0.3%, while the S&P 500 lost 0.2% and the Nasdaq Composite hung on for a 0.5% gain.
What drove the markets
The three major stock indexes rose in morning trade on Tuesday but gave up some gains in the afternoon after a statement from the US European Command said a Russian fighter jet downed a US Air Force drone over international waters in the Black Sea. US stocks rallied in the final hour of trading, ending sharply higher with the Dow snapping a five-day losing streak.
Tuesday saw inflation data and concerns about financial stability side by side in the minds of investors. For now, the mix of data and market conditions could clear the way for a smaller rate hike from the Federal Reserve next week than traders recently expected.
February’s consumer price index came in largely in line with expectations. The cost of living was 6% year-on-year, down from 6.4% a month earlier. Stripping out food and energy prices, the core CPI number was up 5.5% year-on-year, ticking down from the 5.6% print in January. The headline figure of 6% is the lowest since September 2021.
The inflation data came as the dust settled in the banking sector. The failure of Silicon Valley Bank (SIVB) and Signature Bank (SBNY) days ago rocked the global financial sector.
Shares in US regional banks, which have been under pressure, showed an uptick on Tuesday. The SPDR S&P Regional Banking ETF ( KRE ) rose 2.1% and the Invesco KBW Regional Banking ETF ( KBWR ) jumped 2%. KRE remained down more than 28% in March, while KBWR was down 19.1%.
“Today’s rally is driven by relief that systemic problems appear to be easing,” said Matt Peron, director of research at Janus Henderson Investors. “On top of that, the CPI numbers were in line, maybe a little bit better as the number of shelters we know are outdated and the real-time numbers are more benign.”
There is still some way to go on inflation, but the market is “probably going to find some short-term support” on the cooling inflation number, he said. “That said, we remain cautious over the medium term as earnings expectations and valuations remain a bit too high,” Peron added.
“February inflation data is unlikely to ease or complicate the Fed’s price stability versus financial stability dilemma. While not a good read, with overall consumer prices rising broadly in line with expectations, the Fed could take a 50bps hike firmly off the table.” said Seema Shah, global chief strategist at Principal Asset Management.
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The S&P 500 is staying within — but now toward the bottom — of the 3,800 to 4,200 range it has inhabited for four months or so, buoyed by hopes that banking anxiety will be eased by a consequently less hawkish Federal Reserve.
But what does that mean for the high-stakes guessing game of where interest rates will go?
There may be some hope that the February data – combined with interest rate pressure on the banks – could convince the Fed to stop raising interest rates all together. Other market observers are split on the idea, saying a 25 basis point increase could be the more likely outcome
There is a more than 71% chance of a one-quarter basis point increase in the federal funds rate, according to CME Group’s FedWatch tool. But before Silicon Valley Bank’s fallout, the emerging debate was a 25-basis-point or 50-basis-point increase to the federal-funds rate.
“It was clearly priced in by the Fed leaning toward 50 basis points without the SVP and other banks having their problems. That said, I think what the market said to the Fed is that you have some very important new information; we expect you to adjust your game plan,” JJ Kinahan, CEO of IG North America, said in a phone interview with MarketWatch.
However, Kinahan said the Fed could make a 25 basis point increase this month to give the banking industry “pause” as markets expect the central bank to start tapering, but it is possible that policymakers will have to go back to a 50 basis point increase if inflation numbers still coming hot next month.
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He also believes the collapse of SVB could lead to some “contagion” risks in the markets as “it takes some time to work its way through the system.”
“Usually when you have a story like this, something else happens in the next few weeks or something resurfaces. It seems like the Fed and the Treasury Department did a very nice job of engaging, temporarily putting a lid on fear , but the story still has to play out,” Kinahan said.
Companies in focus
— Jamie Chisholm contributed to this article.
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