Markets: News  

By Isabel Wang and Andrew Keshner

U.S. stocks trimmed were off session highs in the final hour of trade on Tuesday, but held on to gains scored after February inflation data matched estimates and suggested pressure on prices continued to cool.

How stocks are trading

Stocks ended a choppy session mostly lower Monday as bank shares plunged. The Dow extended a losing streak to five sessions, falling around 91 points, or 0.3%, while the S&P 500 lost 0.2% and the Nasdaq Composite hung on to a 0.5% gain.

What's driving markets

The three major stock indexes rallied in morning trading, but gave up some gains in the afternoon after a statement from the U.S. European Command said a Russian fighter jet forced down a U.S. Air Force drone over international waters of the Black Sea.

Tuesday saw inflation data and financial stability concerns juxtaposed in the minds of investors. For now, the mix of data and market conditions could be clearing the way for a smaller interest rate hike from the Federal Reserve next week than traders were recently expecting.

February's consumer-price index came in largely at expectations. The cost of living stood at 6% year over year, down from 6.4% a month earlier. Stripping out food and energy prices, the core CPI number was up 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 came while the dust was settling in the banking sector. The failure of Silicon Valley Bank (SIVB) and Signature Bank (SBNY) days ago rattled the global financial sector.

Stocks of America's regional banks, which have been under pressure, showed a bounce on Tuesday. The SPDR S&P Regional Banking ETF (KRE) advanced 1.6% and the Invesco KBW Regional Banking ETF (KBWR) jumped 1.4%. KRE remains down more than 28.7% in March, while KBWR is off 19.6%.

"Today's rebound is being driven by the relief in that systemic issues seem to be subsiding," said Matt Peron, director of research at Janus Henderson Investors. "On top of that, the CPI numbers were in line, perhaps slightly better as the shelter numbers we know are stale and the real time numbers are more benign."

There's still a way to go on inflation, but the market "is likely going to find some near-term support" on the cooling inflation number, he said. "That said, we remain cautious in the intermediate term as earnings expectations and valuations are still a bit too high," Peron added.

"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.

See: 6 charts show how SVB's collapse sent shock waves through global markets

The S&P 500 index 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.

But what does it all mean for the high-stakes guessing game where interest rates will go?

There might be some hope the February data -- combined with the interest rate pressures on banks -- could convince the Fed to stop rate hikes all together. Other market observers are split on the idea and say a 25 basis point increase could be the more likely result

There's a more than 71% chance of a quarter-point basis point increase to the federal-funds rate, according to CME Group's FedWatch tool However, 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.

"It was clearly priced in that the Fed was leaning toward 50 basis points without the SVP and other banks having their issues. That said, I think what the market saying to the Fed is you have some really important new information; we expect you to adjust your game plan," said JJ Kinahan, chief executive officer of IG North America, in a phone interview with MarketWatch.

However, Kinahan said the Fed could do a 25-basis-point hike this month to give the banking industry a "break" as the markets do expect the central bank to start tapering, but it is possible that the policymakers have to go back to a 50-basis-point hike if inflation numbers comes in still hot next month.

See:'I'm not seeing true danger here': Michael Burry says U.S. banking crisis to be resolved 'very quickly'

He also thinks the collapse of SVB could lead to some "contagion" risks in markets as "it takes a while to work its way through the system."

"Normally when you have a story like this, something else happens within the next few weeks, or something comes up again. It seems as though the Fed and the Treasury did a very nice job of getting involved, putting temporarily a cap on fear, but the story still has to play out," Kinahan said.

Companies in focus

-- Jamie Chisholm contributed to this article.

-Isabel Wang

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March 14, 2023 20:30 ET (00:30 GMT)

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