By Lewis Krauskopf
NEW YORK, March 10 (Reuters) - A critical inflation
report next week will test a U.S. stock market already consumed
by worries over Federal Reserve hawkishness and potential
fallout from the largest bank failure since the financial
crisis.
Friday’s mixed U.S. jobs report eased some worries about big
rate hikes, days after Fed Chair Jerome Powell warned that
policymakers may raise rates higher than expected if upcoming
data showed the economy remains hot after nearly a year of
tightening.
A hotter-than-expected consumer price report on Tuesday,
however, could reignite fears of jumbo-sized Fed rate hikes like
those that rocked markets last year. That would be unwelcome to
a market on tenterhooks following this week’s failure of SVB
Financial Group , which does business as Silicon Valley
Bank.
“There is uncertainty revolving around the inflation report
and there is a lot of confusion caused by SVB’s failure and
worry that it might be a bigger problem,” said Robert Pavlik,
senior portfolio manager at Dakota Wealth. “The market is
dealing with confusion and uncertainty in a very short time
frame.”
The S&P 500 sank on Friday, bringing the weekly loss to
4.5%. After a big rebound in January, the benchmark index is now
clinging to a 0.6% gain for 2023.
Investors are growing nervous that the Fed's campaign to
fight inflation by ending the era of cheap money has exposed
cracks in the economy that could widen if it ratchets up its
rate hikes.
Traders were on guard for signs of contagion in the
financial sector and beyond in the wake of troubles for SVB and
crypto-focused Silvergate , which this week disclosed
plans to wind down operations and voluntarily liquidate.
"The concerns emanating from the financial sector are
rippling across the market in general,” said Michael James,
managing director of equity trading at Wedbush Securities. “When
you combine the debacle of Silvergate with the collapse of
Silicon Valley Bank ... that's creating a ripple effect of
concern for the overall market stability."
On Friday, markets appeared to be dialing down their
expectations for Fed hawkishness, pricing in a 40% chance that
the central bank will raise rates by 50 basis points at their
March 21-22 meeting, according to CME's Fedwatch tool. Those
odds stood at around 70% as recently as Thursday, but abated on
Friday after investors saw the employment data and gained more
clarity on the extent of SVB’s troubles.
Late on Friday, yields on two-year U.S. Treasuries, which
closely follow Fed policy expectations, were on track for their
biggest two-day basis-point drop since September 2008.
“The Fed now has very clear evidence that they are having an
impact on the financial system and the economy — rate hikes are
starting to bite – and while that’s not enough to give them
pause, it is something they will take into consideration,” wrote
Mark Haefele, Chief Investment Officer at UBS Global Wealth
Management in a Friday report.
Rate expectations could again change dramatically if the CPI
report for February comes in above the year-over-year increase
of 6% expected by analysts polled by Reuters. The consumer price
report is followed the next day by more inflation data, on
producer prices.
While moderation of annual inflation from a peak of 9% last
year to current levels was the "easy move", going from 6% to 3%
will be more difficult, said John Lynch, chief investment
officer for Comerica Wealth Management.
FOCUS ON INFLATION
Markets have been more volatile on average on CPI days over
the past year, with the S&P 500 moving an average of 1.8% in
either direction on those days against an average 1.2% daily
move overall in that time frame.
Midday on Friday, S&P 500 Index options implied that the CPI
print would move the index 1.8% in either direction in the hour
following the data release, according to Optiver data.
Volatility surged on Friday, with the Cboe Volatility Index,
known as Wall Street’s fear gauge, hitting its highest level
since late October amid a broad equities selloff.
Besides signs of falling inflation, reassurance for
investors could come if it became clearer that SVB’s issues were
unlikely to spread.
“If banks are saying that their finances are in good shape
and they are not seeing the same issues to that extent, then
that would go to stabilizing the market a bit,” said James
Ragan, director of wealth management research at D.A. Davidson.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Will FOMC go back to jumbo-sized rate hikes? ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Lewis Krauskopf; additional reporting by Saqib
Iqbal Ahmed, Sinéad Carew, Stephen Culp; Editing by Ira
Iosebashvili and David Gregorio)
Messaging: lewis.krauskopf.thomsonreuters.com@reuters.net,
Twitter: @LKrauskopf))
For the daily stock market report, please click ))
