US Stocks Pare Gains as Financials Turn Lower: Markets Wrap

US stocks pared back a rally as investors digested a round of comments from Federal Reserve officials suggesting more monetary tightening was needed to fight inflation even in the wake of turbulence in the banking sector.

(Bloomberg) — US stocks pared back a rally as investors digested a round of comments from Federal Reserve officials suggesting more monetary tightening was needed to fight inflation even in the wake of turbulence in the banking sector. 

The S&P 500’s advance withered to 0.3% with financials again under pressure, while the tech-heavy Nasdaq 100 gained 0.6%. Treasuries were little changed and the dollar weakened.

The moves come as market watchers have struggled to predict the Fed’s path forward on interest rates after the collapse of three US banks earlier this month. Richmond Fed President Thomas Barkin said the Fed can raise rates more if inflation risks persist. Boston Fed President Susan Collins also said tightening was needed. And Minneapolis Fed President Neel Kashkari said he’s committed to getting inflation back to 2% and that it’s not yet fully clear what impact the financial-system turmoil will have.

“Given the proverbial long and variable lag in the effects of monetary policy adjustments to be fully apparent, much of the Fed’s tightening over the past year has not yet been fully absorbed by the economy,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Recession risk remains in focus given the Fed’s historical track record of struggling to tighten policy while easing the economy to a soft landing.”

President Joe Biden’s administration also called on regulators Thursday to tighten the rules for mid-sized banks in response to the recent bank failures. Stress in the financial sector has increased the chance of the Federal Reserve tipping the economy into a recession with its rate hikes. However, Collins echoed remarks by Fed Chair Jerome Powell in that pain in the banking sector could be worth 25 basis points of tightening. Tighter credit conditions could remove the need for more hikes later, she said. Analysts have also agreed, saying it could be the equivalent of a far more aggressive hike. 

“The plausible range is anything from nearly zero to 200bp or more in the event that stress were to broaden and deepen,” Krishna Guha, Evercore ISI head of central bank strategy, wrote. “We will all need to update as the data comes in and that updating could be quite rapid.”

The yield on the 10-year Treasury note was steady in a second day of muted trading as investors next look to inflation data due Friday. Investors expect US rates to sit around 4.3% by the end of the year, around 70 basis points lower than the current level. 

Elsewhere in markets, oil rebounded after its first drop in three sessions. Gold gained and Bitcoin traded around $27,800.

Key events this week:

  • China PMI, Friday
  • Eurozone CPI, unemployment, Friday
  • US consumer income, PCE deflator, University of Michigan consumer sentiment, Friday
  • ECB President Christine Lagarde speaks, Friday
  • New York Fed President John Williams speaks, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 0.3% as of 2:13 p.m. New York time
  • The Nasdaq 100 rose 0.6%
  • The Dow Jones Industrial Average rose 0.1%
  • The MSCI World index rose 1.2%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.4%
  • The euro rose 0.5% to $1.0900
  • The British pound rose 0.6% to $1.2385
  • The Japanese yen rose 0.3% to 132.42 per dollar

Cryptocurrencies

  • Bitcoin fell 2.1% to $27,789.5
  • Ether fell 1.8% to $1,770.7

Bonds

  • The yield on 10-year Treasuries declined one basis point to 3.55%
  • Germany’s 10-year yield advanced five basis points to 2.37%
  • Britain’s 10-year yield advanced five basis points to 3.52%

Commodities

  • West Texas Intermediate crude rose 2.2% to $74.54 a barrel
  • Gold futures rose 0.7% to $1,997.70 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Vildana Hajric.

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