- Investors expect a smaller hike from the Fed.
- US consumer prices decreased in February, generally in line with market forecasts.
- Investors eagerly await the European Central Bank’s decision to raise interest rates on Thursday.
US equities recovered on Tuesday as expectations for the size of the Fed’s next hike were lowered by inflation data that was largely on target. Risk sentiment also improved due to reducing concerns about contagion in the banking sector.
After several days of risk-off instability brought on by the aftermath of the collapse of Silicon Valley Bank and Signature Bank, all three major US stock indexes closed strongly higher. The S&P 500, the Dow, and the tech-heavy Nasdaq all ended up by more than 1%.
Concerns about a bank contagion were allayed on Tuesday as US President Joe Biden and other international policymakers committed to containing the situation.
According to the Labor Department’s CPI report, consumer prices decreased in February, generally in line with market forecasts. Headline and core measures recorded welcome yearly decreases.
However, prices still have a long way to go before inflation reaches the central bank’s target of 2% annually.
The likelihood of the Fed adopting a modest 25 basis-point increase to its benchmark interest rate on March 22 has grown. This is due to indications of economic softening and the regional financial crisis.
On Tuesday, European shares experienced their biggest one-day gain in over three months. This rise was thanks to the region’s banking industry’s resilience in the face of Silicon Valley Bank’s (SVB) failure.
Olaf Scholz, the German Chancellor, also thinks that regulators have learned from the 2008 global financial crisis and that Germans shouldn’t be overly concerned about the SVB fallout.
Meanwhile, investors eagerly expect the European Central Bank’s decision to raise interest rates on Thursday, predicted to be by 50 basis points.
However, in light of the SVB collapse, Deutsche Bank believes there is a greater possibility that the ECB will increase its key rate by 25 basis points.
On Tuesday, the FTSE 100 in the UK reversed course and experienced its greatest day in more than two months.
Data indicated that salary growth in Britain slowed in the three months to January. With the fall of SVB, investors gave the Bank of England a 40% chance of suspending its recent rate increases at its March meeting next week. Markets will now focus on Wednesday’s spring budget for the UK.
