Investors were uneasy last week following two of the three largest bank failures in U.S. history. Regulators and financial institutions worked to promote confidence in the banking industry, first with government agencies ensuring all deposits at the failed banks. Eleven banks then rescued First Republic Bank by depositing a combined $30 billion in the struggling institution, and UBS reached a deal to acquire troubled rival Credit Suisse. Even with these measures, investors have renewed concerns about the effects of the past year’s rate hikes.
Despite a cloudy economic picture, the S&P 500 rebounded to finish the week in the green, as a sharp drop in bond yields helped buoy equity markets and sectors like technology and communication services rose. Economic prints also calmed investors' nerves, with the Consumer Price Index (CPI) and Producer Price Index (PPI) showing that inflation continued to ease in February and retail sales data indicating a cooling economy. Federal Reserve (Fed) officials will welcome this data ahead of this week's policy meeting.
Banking turmoil and recent economic data have driven expectations for the path of interest rates lower in recent weeks, with markets now implying a roughly 60% chance of a 0.25% rate increase and a 40% chance the Fed pauses hikes this week; this is a stark contrast to the 70% probability of a 0.50% hike that markets implied on March 8.
A look back
- Global stocks were slightly negative last week, but the S&P 500 was a significant outperformer, up nearly 1.5%.
- Bonds rallied as yields plummeted. Less than two weeks after surpassing 5%, 2-year rates dropped roughly 75 basis points to 3.82%. The drop in yields was more pronounced at the short-end of the curve, easing the inversion.
- Inflation data was promising, as headline CPI was in line and PPI came in below expectations and pointed to moderating price pressures.
A look ahead
- The Federal Open Market Committee (FOMC) meets this week, and all eyes will be on both the Fed’s policy rate decision and Chair Powell’s speech on Wednesday.
- Investors will monitor any new developments related to the banking industry and watch for signs of potential contagion.
- Economic Releases: New & Existing Home Sales, FOMC policy decision, Durable Goods Orders, S&P Global U.S. Manufacturing and Services.
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