Dow ends over 300 points higher, snap 5-day losing streak as bank stocks rebound and inflation cools

What drove markets

The three major stock indexes rallied in Tuesday 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. U.S stocks held on to gains scored in the final hour of trade and finished sharply higher with the Dow industrials snapping five-day losing streak.

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, -60.41% and Signature Bank SBNY, -22.87% 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, +2.09% advanced 2.1% and the Invesco KBW Regional Banking ETF KBWR, +2.00% jumped 2%. KRE remained down more than 28% in March, while KBWR was off 19.1%.

“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.

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’s 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.

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

• First Republic Bank FRC, +26.98% shares ended 27% higher on Tuesday after a roughly 75% plunge in the previous session. First Republic said Monday it’s strengthened and diversified its liquidity.
• United Airlines Holdings Inc. UAL, -5.37% shares were down 5.4% after the airline carrier cautioned investors it is expecting a quarterly loss between 60 cents a share and $1 a share due to softer demand early this year and higher fuel prices. FactSet consensus was anticipating an adjusted profit of 64 cents a share in the first quarter.
• Meta Platforms Inc. META, +7.25% shares rallied 7.3% after the Facebook parent said it plans to cut 10,000 jobs in a focus on “efficiency.” The job cuts follow more than 11,00 job cuts late last year. “With less hiring, I’ve made the difficult decision to further reduce the size of our recruiting team,” Chief Executive Mark Zuckerberg said Tuesday, adding that the company will close around 5,000 unfilled positions.
• Shareholders of AMC Entertainment Holdings Inc. AMC, -15.02% approved the company’s proposal to convert AMC Preferred Equity  APE, -5.20% units into shares of common stock. AMC common shares were down 15%, while APE units rose 9.8%.
• Boeing Co. BA, +1.92% completed two deals with Saudi Arabia to manufacture up to 121 Boeing 787 Dreamliner aircraft equipped with General Electric GE, +2.47%  GEnex engines, the White House said Tuesday in a statement. Shares of Dow component Boeing rose 1.9%; GE shares were up 2.5%.