Wall St set to open higher as inflation data bolsters bets of small rate hike

Wall Street looked set to open higher on Tuesday after consumer prices in the world’s largest economy rose in line with expectations, bolstering bets of a smaller interest rate hike by the Federal Reserve at its next meeting.

Data showed that U.S. Consumer Price Index (CPI) rose 0.4% in February versus 0.5% a month ago, while on a yearly basis, it rose 6.0% last month compared with 6.4% the previous month.

Traders held on to bets of a 25-basis-point rate hike at the Fed’s March meeting, with odds of a pause in hikes slipping a bit to 15%.

Stocks have been hammered in the past few days following the collapse of SVB Financial and peer Signature Bank and fears of contagion in the banking sector.

Investors are hoping that the threat of a financial crisis will force the U.S Federal Reserve to ease up on monetary tightening.

“In light of the weekend’s events, I don’t think it could have been a more perfect number. It’s showing that inflation is trending the way that the Fed has kind of expected and wanted,” said Kim Forrest, chief investment officer, Bokeh Capital Partners, Pittsburgh.

“The Fed’s not going to be super aggressive and hurt banks more by raising interest rates.”

The yield on two-year Treasury notes, which best reflect interest rate expectations, tumbled below the 4% mark on Monday and is currently at 4.26%.

Regional bank stocks rebounded in premarket trading. First Republic Bank jumped 59%, a day after the mid-cap lender’s executive chair, Jim Herbert, told CNBC the bank has been able to meet withdrawal demands with additional funding from JPMorgan Chase & Co.

At 9:02 a.m. ET, Dow e-minis were up 301 points, or 0.95%, S&P 500 e-minis were up 43.25 points, or 1.12%, and Nasdaq 100 e-minis were up 124 points, or 1.04%.

Big U.S. banks, including JPMorgan Chase & Co, Citigroup and Wells Fargo, gained between 1.2% and 3.4% after losing ground in the previous session.

Shares of ride-hailing companies Uber Technologies Inc and Lyft Inc rose 6.4% and 6%, respectively, after a California state court revived a ballot measure allowing app-based services to treat drivers as independent contractors rather than employees.

While many investors looked through their bank holdings for signs of risk, Schleif said much of the weakness in regional bank stocks stemmed from a “proverbial shoot first ask questions later situation.”

The KBW regional banking index ended the session down 2.4% while the S&P 500 financials index lost 1.8%.

Schleif and other investors said they hoped regulations added to the U.S. banking system since the 2008 financial crisis would prevent a similar catastrophe.

But still “people are very nervous because they don’t want a repeat,” she said.

The Dow Jones Industrial Average fell 345.22 points, or 1.07%, to 31,909.64, the S&P 500 lost 56.73 points, or 1.45%, to 3,861.59 and the Nasdaq Composite dropped 199.47 points, or 1.76%, to 11,138.89.

All 11 S&P 500 industry sectors lost ground. Real estate, down 3.3%, led declines while consumer staples the top performer, fell just 0.5%.

For the week, the S&P lost 4.6% in its biggest weekly percentage decline since September but was clinging to a tiny year-to-date gain of 0.6%. The Dow fell 4.4% for the week and was down more than 3% year-to-date while the Nasdaq declined 4.7% this week but was up more than 6% for 2023.

The Cboe Volatility Index, an options-based indicator that reflects demand for protection against stock market declines, closed at a 3-month high, up 2.19 points at 24.9 after touching a roughly five-month high during the session.

Investors had expected to end the week with most of their focus on economic data rather than banks.

Before the market opened, the closely monitored non-farm payrolls report showed the U.S. economy added more jobs than expected in February while average hourly earnings rose at a slower 0.2% last month after versus 0.3% in January while unemployment rose to 3.6%.

The data had eased some concerns that the Fed could raise rates by 50 basis points at its March meeting after hawkish remarks from Fed Chair Powell this week.

But investors were more focused on uncertainties around the bank system, said John Praveen, managing director & Co-CIO at Paleo Leon in Princeton, New Jersey.

“Whatever positive vibes came out of the labor market report were upstaged by negative vibes from the SVB situation,” Praveen said.

The S&P 500’s bank subsector closed down 0.5% with a boost from JPMorgan Chase, which closed up 2.5% and Wells Fargo , which closed up 0.6% while the rest of the index lost ground.

The biggest decliners were Silvergate cryto-bank peer Signature Bank, which tumbled 22.9% and regional bank First Republic, which finished down 14.8%.

In individual stocks, Gap Inc lost 6.3% after the apparel retailer posted a bigger-than-expected fourth-quarter loss and forecast full-year sales below Wall Street estimates.