Stocks Recover on Pared FED Rate Hike Bets

U.S. equities are trading sharply higher on Tuesday after an extremely volatile trading session on Monday. The better-than-feared inflation figures for February, as well as expectations that the Federal Reserve won’t hike by 50 basis points next week, are behind this rally.

Investors are also hoping that the risk of contagion following the collapse of Silicon Valley Bank (SIVB:US) had been contained after the FED decided to step in to shield depositors and their uninsured deposits.

SPDR S&P Bank ETF (KBE:US) was trading higher as well after plummeting nearly 20% since last week. This way, the bank-focused ETF hit its lowest level since November 2020. Senator Tom Carper reported last month he sold some shares in KBE.

“Considering how much they’ve gotten destroyed, they’re due for a bounce back,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “The challenge for banks, in my opinion, is more of what the profit outlook is rather than viability.”

Arguably the strongest driver of the ongoing bounce in equities is expectations that the FED will hike by 25 basis points on March 22. The in-line February CPI report means that the FED will likely opt for a smaller increase given the financial stability risks.

According to Reuters’ data, the FED is seen hiking its benchmark rate to a 4.75-5% range with a 15% chance of not hiking at all.

"Inflation has peaked but remains stubbornly firm and isn't declining as quickly as the Fed would like," analysts at Jefferies wrote in a note. "The recent string of regional bank failures likely closed the door on a 50 (basis point) rate hike, but today's data suggests that the Fed is going to remain on-track for a 25 (basis point) hike on March 22."

As a result, the S&P 500 is trading above 3900 once again while Nasdaq 100 rose above 12000 on improving risk sentiment.

SPDR S&P 500 ETF Trust (SPY:US), an ETF that tracks the S&P 500 stock market index, rose to $393. It was around these levels that Congressman Ro Khanna spent $500,000 - $1 million in December to invest in SPY. He previously invested a similar amount of money to buy SPY while the ETF was trading around the $365 handle.