Regional bank stocks, some of which lost nearly half their value on Monday, rebounded in early trading on Tuesday, helping Wall Street to recover and offering a pause in the market panic over the health of the financial system.
The S&P 500 rose 1.5 percent in morning trading, recouping some of its losses from the rapid collapse of Silicon Valley Bank and Signature Bank, and pointing to a semblance of stability returning to financial markets. Investors appeared to take to heart assurances that depositors will be protected by federal authorities, helping to calm nerves in the banking sector.
First Republic Bank, one of the banks most in the crosshairs of investors in recent days, was up nearly 50 percent, having fallen by a similar amount on Monday. Western Alliance Bancorp rose roughly 40 percent, following a fall of nearly 50 percent. The KBW Bank index, which tracks the performance of 24 banks, rose over 4 percent, its best day in roughly four months.
The rally brushed off inflation data that showed prices continue to rise at a stubbornly high pace. Consumer Price Index data released before trading began showed inflation cooling slightly for the year through February, but accelerating from the previous month.
Typically that would garner a strong response from the Federal Reserve, resulting in even higher interest rates that typically weigh on the stock market. But expectations for further rate increases have been moderated by the banking crisis, leaving the Fed in a difficult spot. The central bank has said that it will keep raising interest rates until it has inflation under control but it is those same interest rate increases that were at the root of the pain among banks over the past week.
“People are trying to gauge what the Fed is actually going to do given all the new information since the end of last week,” said Charlie Ripley, a senior investment strategist at Allianz Investment Management. “I think there is a tremendous amount of uncertainty. The Fed really has a dilemma on its hands here.”
Some investors posited that the crisis in the banking sector appeared contained, boosting sentiment, yet it might still be enough to give the Fed reason to forgo further interest rate increases, bolstering that positive sentiment.
Investors’ bets on whether or not the Fed will raise interest rates next week tilted back to expecting a quarter point increase following the hot inflation data, but that’s still markedly lower than where expectations stood a week ago.
“This is giving the Fed a reason to back off and adjust what they have done,” said Liz Ann Sonders, chief investment strategist at Charles Schwab, after the data was released. “Absent further deterioration in regional banks I think the market is grasping at the Fed being given an excuse to pause and reassess.”
In the bond market, sentiment appeared less hopeful. The two-year Treasury yield, which is sensitive to changes in interest rate expectations, rose by more than 0.3 percentage points — a large move for an asset that typically rises and falls in tiny fractions of a percentage point. The 10-year Treasury yield remained more anchored, suggesting fading hopes for economic growth over the long term.
“I think what is reflected in the bond market is an elevated risk of recession and a credit crunch but for whatever reason it hasn’t reached stock investors yet,” said Ms. Sonders.