After the anticipated slowdown in consumer inflation for February, U.S. stock futures on Tuesday extended their gains. Especially in light of Silicon Valley Bank’s demise, market participants will be examining the data for any indications of the Federal Reserve’s upcoming interest rate hike (SVB).
S&P 500 futures (SPX) had increased by 1.26% while Nasdaq 100 futures (NDX:IND) had increased by 1.16%. Dow futures (INDU) increased by 1.03%.
The consumer price index (CPI) increased 0.4% M/M in February, which was less than the +0.5% M/M increase in January. In line with expectations and less than the +6.4% Y/Y increase in January, the CPI increased by 6% year over year in February. Core CPI for February was higher than expected, at +0.5% M/M as opposed to +0.4%.
When the Fed released stronger-than-anticipated economic statistics on inflation and the labor market over the past month, market investors had grown accustomed to expecting the Fed to keep raising interest rates. Nevertheless, since Friday, when US regulators took control of SVB and Signature Bank (SBNY) in response to liquidity concerns at the lenders, such expectations have been promptly reevaluated.
The CPI data demonstrates that inflation isn’t declining as quickly as anticipated. The hiking cycle is expected to continue having bumps, especially because the market has already begun to reflect the conclusion of the climbing cycle following the failure of Silicon Valley Bank. It is now up to the Fed to explain how it can keep raising rates without further endangering financial stability.
The odds of a Fed rate hike expectations were not much altered after the release of the CPI data. According to the CME FedWatch tool, traders are currently factoring in a 79% probability of a 25 basis point raise at the Fed’s monetary policy meeting next week. Prior to the CPI announcement, the likelihood of no raise at all decreased somewhat from 26.9% to 21%.
On Monday, Treasury rates experienced sharp drops as investors flocked to safe assets like bonds and gold and avoided banking equities. Tuesday saw a stabilization and small increase in yields. The US10Y yield on the 10-year Treasury note increased by 3 basis points to 3.55%, and the US2Y yield increased by 21 basis points to 4.24%. In the previous session, the latter had had its worst daily loss since 1982.
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