Inflation data on deck for markets hit by worries about Fed, banks
Send a link to a friend
[March 11, 2023] By
Lewis Krauskopf
NEW YORK (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.”
![](http://archives.lincolndailynews.com/2023/Mar/11/images/ads/current/humanesociety_sda022411.png)
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.
![](http://archives.lincolndailynews.com/2023/Mar/11/images/ads/current/LPL_small%201.gif)
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.
[to top of second column] |
![](../images/031123PIX/busine89.jpg)
People are seen on Wall Street outside
the New York Stock Exchange (NYSE) in New York City, U.S., March 19,
2021. REUTERS/Brendan McDermid//File Photo
![](http://archives.lincolndailynews.com/2017/Jul/22/images/ads/current/rohlfs_lda_072017.png)
“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.
![](http://archives.lincolndailynews.com/2023/Mar/11/images/ads/current/graue_lda_ENCOREpreowned_020723.jpg)
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.
(Reporting by Lewis Krauskopf; additional reporting by Saqib Iqbal
Ahmed, Sinéad Carew, Stephen Culp; Editing by Ira Iosebashvili and
David Gregorio)
[© 2023 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content. |