The Fed is “between a rock and a hard place," said Hans
Olsen, chief investment officer at Fiduciary Trust Co. "The rock
is they have to deal with inflation and the hard place is they
have this banking panic, like a fever that is running through
the markets right now.”
Until the recent instability in the banking sector, markets
had been fixated on inflation data as perhaps the most
significant factor behind asset price moves because of the
influence on the Fed's rate-hiking path.
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.
As of late last week, investors had largely been bracing for
a 50-basis-point increase at the Fed's March 21-22 meeting, but
that hefty hike has been priced out of expectations now. Odds of
a 25-basis-point hike are about 75%, with 25% chance of no hike
at the meeting, according to the CME Group's FedWatch tool as of
Monday afternoon.
Those shifting generations have generated huge moves in
Treasury yields. On Friday, yields on the two-year U.S. Treasury
bond saw their biggest drop since 2008.
Tuesday's data could sway expectations once again. CPI
for February is expected to rise 0.4% on a month-over-month
basis, and 6% annually, according to a Reuters poll of
economists.
A hot consumer price report was always going to be
problematic for markets, but now "you have this financial
stability dynamic interjected into the equation, which further
complicates the Fed’s job," said Walter Todd, chief investment
officer at Greenwood Capital.
Indeed, analysts at Capital Economics said a signal from the
Fed that it will pause or slow rate hikes could lead to a rise
in inflation expectations, if investors concluded that
policymakers are no longer as committed to bringing inflation
down.
"That might lead to a partial reversal of the recent rally
in bonds, worsening the problems in the banking sector," Capital
Economics said in a note.
To be sure, some investors said the market's focus was
elsewhere. Chuck Carlson, chief executive officer at Horizon
Investment Services, said developments in the banking sector
would likely "outweigh market moves based on the CPI number.”
“Unless it’s a significant outlier, I don’t think it is
going to have too much of an impact,” Carlson said of the CPI.
Peter Tuz, president of Chase Investment Counsel, gave even
odds that the Fed would either raise by 25 basis points or make
no move at the meeting later this month, saying that CPI "might
prove to be irrelevant given the current chaos in the financial
services industry.”
Still, "I hope it is not a terrible number," he added.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and
Jonathan Oatis)
By Lewis Krauskopf
NEW YORK, March 13 (Reuters) - A market rocked by a
banking crisis faces a potential one-two punch as investors
await a U.S. inflation report that could further complicate
views on the Federal Reserve’s monetary policy trajectory.
Tuesday's report on February consumer prices has been highly
awaited for weeks. It has taken on added relevance in recent
days, however, following concerns over financial stability after
the swift collapse of Silicon Valley Bank , the biggest
bank failure since the financial crisis, and Signature Bank .
While markets have started to price in a strong likelihood
that the central bank will pull back on its interest rate
increases to ease pressure on the banking sector, evidence that
inflation remains hot could once again ramp up uncertainty over
the Fed’s next move - potentially fueling more of the
eye-popping gyrations in rates markets that have whiplashed
investors over the last few days.
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