US stock climbed as traders bet the worst of the banking sector turmoil has passed, while Treasury yields climbed after the latest inflation reading cemented bets for a Federal Reserve rate hike next week.
(Bloomberg) — US stock climbed as traders bet the worst of the banking sector turmoil has passed, while Treasury yields climbed after the latest inflation reading cemented bets for a Federal Reserve rate hike next week.
The S&P 500 advanced over 1%, with regional bank shares bouncing back from two days of frantic selling. The two-year Treasury yield climbed — following a three-day swoon that was the biggest in decades amid the tumult — after data showed inflation remained elevated in February. Swaps traders now expect the Fed to lift rates by a quarter percentage point. Odds of an increase had slipped to nearly 50-50 on Monday. The dollar was little changed versus major peers.
US consumer prices rose 0.4% in February, meeting economists’ forecast. The closely watched core CPI number — which excludes food and energy — increased 0.5%, just ahead of the median estimate of 0.4%.
The two-year note — the most sensitive to interest rates — climbed about 28 basis points to 4.27%. Plunging rates gripped Wall Street’s attention yesterday, when the yield dropped more than a half-percentage point in the biggest move since the 1980s.
Treasuries have been whipsawed in recent days — with a measure of volatility climbing to the highest since 2009 — and banking shares plunged as the collapse of Silicon Valley Bank and two other US lenders prompted wagers the Federal Reserve will pause its hiking cycle and even cut interest rates to stabilize the financial system.
Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, expects that the data will keep the Fed on track to raise rates 25 basis points next week.
“Given the bank troubles, this report isn’t bad enough to put 50 bps back on the table, but if the Fed wants to maintain credibility on inflation, then this report says they have to hike again next week and not signal they are done,” Essaye wrote.
Europe’s Stoxx 600 equity benchmark advanced after falling the most since December on Monday. A gauge of European bank stocks rebounded, led by Caixabank SA and Barclays Plc. Credit Suisse Group AG slipped after uncovering accounting weaknesses.
Goldman Sachs Group Inc. economists as well as asset managers from the world’s largest actively managed bond fund, Pacific Investment Management Co., said the Fed could take a breather on the policy rate following the collapse of SVB. Nomura Holdings Inc. economists took it one step further, saying the Fed could cut its target rate next week.
“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,” said Ian Lyngen, rates strategist at BMO Capital Markets. “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.”
The S&P 500 closed Monday down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders, while reassuring depositors that their money is safe.
The SVB meltdown has also caused a swift repricing in credit risk. Yield premiums on company debt, which had trended lower for much of this year, have climbed back to levels seen in November, according to a Bloomberg index that includes investment-grade and junk bonds.
Elsewhere in markets, oil extended declines. Gold slid after rising in the three previous sessions as traders turned to haven assets.
Key events this week:
- China retail sales, industrial production, medium-term lending, surveyed jobless rate, Wednesday
- Eurozone industrial production, Wednesday
- US business inventories, retail sales, PPI, empire manufacturing, Wednesday
- Eurozone rate decision, Thursday
- US housing starts, initial jobless claims, Thursday
- Janet Yellen appears before the Senate Finance Committee, Thursday
- US University of Michigan consumer sentiment, industrial production, Conference Board leading index, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 1.4% as of 9:33 a.m. New York time
- The Nasdaq 100 rose 1.3%
- The Dow Jones Industrial Average rose 0.9%
- The Stoxx Europe 600 rose 1.4%
- The MSCI World index rose 0.6%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro fell 0.2% to $1.0714
- The British pound was little changed at $1.2174
- The Japanese yen fell 1.2% to 134.75 per dollar
Cryptocurrencies
- Bitcoin rose 7.4% to $26,020.84
- Ether rose 4.3% to $1,744.33
Bonds
- The yield on 10-year Treasuries advanced five basis points to 3.62%
- Germany’s 10-year yield advanced 16 basis points to 2.41%
- Britain’s 10-year yield advanced 14 basis points to 3.51%
Commodities
- West Texas Intermediate crude fell 2.4% to $72.99 a barrel
- Gold futures fell 0.3% to $1,910.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Tassia Sipahutar, Sujata Rao and Michael Msika.
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