Inflation data and bank bounce factoring into stock-market surge early Tuesday


U.S. stocks opened sharply higher Tuesday after February inflation data matched estimates and suggested pressure on prices continued to cool. The numbers could ease Wall Street worries over steeper upcoming interest rate hikes from the Federal Reserve at a time when the banking sector is regaining its footing following the collapse of two regional banks.

How stocks are trading
  • The S&P 500 SPX, +1.89% rose 58 points, or 1.5%, to 3914
  • The Dow Jones Industrial Average DJIA, +1.37% added 303 points, or 0.9%, to 32122
  • The Nasdaq Composite COMP, +2.17% climbed 212 points, or 1.9%, to 11401

On Monday, the Dow Jones Industrial Average DJIA, +1.37% fell 91 points, or 0.28%, to 31819, the S&P 500 SPX, +1.89% declined 6 points, or 0.15%, to 3856, and the Nasdaq Composite COMP, +2.17% gained 50 points, or 0.45%, to 11189.

What’s driving markets

Tuesday is juxtaposing inflation and price stability with financial stability in the minds of investors.

February’s consumer price index came in largely at expectations. The cost of living rose 0.4% month to month and 6% year over year. The 6% print is down from 6.4% a month earlier.

Stripping out food and energy prices, the core CPI number was up 0.4% from January and 5.5% year over year, ticking down from the 5.6% print in January. The 6% headline number is the lowest since September 2021.

The inflation data comes while the dust is settling in the banking sector. The failure of Silicon Valley Bank SIVB, and Signature Bank SBNY, -22.87% days ago has rattled the global financial sector. It was the turn of Japanese banks to flounder on Tuesday, with the TOPIX Banks index off more than 7%.

Stocks of America’s regional banks, which have been under pressure, showed a bounce in early trading Tuesday. First Republic Bank FRC, +57.90% was leading the charge, up more than 47% in the early trading session. The regional bank ETF KRE, +7.46% is up 8%.

The broader market, though volatile of late — the CBOE VIX index VIX, -13.50% touched 30 on Monday — has not completely cracked. The Vix was down more than 9% early Tuesday, dropping more than 2 points to 23.94.

The S&P 500 SPX, +1.89% remains within — though now towards the bottom — of the 3,800 to 4,200 range it has inhabited for four months or so, supported by hopes the banking angst will be ameliorated by a consequently less hawkish Federal Reserve.

Read also: Banking-industry jitters could mean more pain for stocks as the Fed’s battle with inflation is dragged out

Federal funds futures are now forecasting an 88% chance of a quarter-point basis point hike in the Fed’s meeting next week. Ahead of the Silicon Valley Bank fallout, the emerging debate was a 25 basis point or 50 basis point increase to the federal funds rate.

“February inflation data probably doesn’t ease or complicate the Fed’s price stability versus financial stability dilemma. While not a great reading, with headline consumer prices rising broadly in line with expectations, the Fed can take a 50bps hike firmly off the table,” said Seema Shah, chief global strategist at Principal Asset Management.

“Services inflation is still hot,” said Andrew Patterson, senior international economist at Vanguard. “The Fed still has work to do, and their actions and communications are going to come under increasing scrutiny given the events of the past few days.  They need to be careful in balancing the risks of price and financial stability.”

Mark Newton, head of technical strategy at Fundstrat, noted that there was welcome strength in big technology and healthcare stocks on Monday as financials struggled, but that with U.S. retail sales data also due Wednesday, investors should brace for volatility.

“While it might be premature to think healthcare strength can completely offset financials weakness, it’s certainly helpful to see that technology, discretionary, industrials were all stronger relative to S&P 5000,” Newton wrote in a note published late Monday.

“SPX daily chart shows prices having pulled back to just above last December lows. There has been a definite break of the 200-day moving average along with a break of its uptrend. Thus, a rebound is imperative this week, and ideally on Tuesday/Wednesday.”

“The ability of recovering SPX 3928 would be a great sign, which signifies the initial upside resistance. Downside support lies near last December 2022 lows, which lies from 3764-3800. Only if December 2022 lows are violated would the 4-6 week forecast turn more negative,” Newton concluded.

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