U.S. stocks hold gains as bank tensions ease and Fed decision looms

By Jamie Chisholm Follow and Andrew Keshner

U.S. stocks were holding onto gains midsession Tuesday after a sharply higher opening, while anxiety about the banking sector recedes and traders wonder how high the Federal Reserve will raise interest rates on Wednesday — if at all.

How stocks are trading

• The S&P 500 SPX, +0.59% climbed 22 points, or 0.5% to 3,973
• The Dow Jones Industrial Average DJIA, +0.43% is up 146 points, or 0.4% to 32,390
• The Nasdaq Composite COMP, +0.69% gained 63 points, or 0.5% to 11,739

On Monday, the Dow Jones Industrial Average DJIA, +0.43% rose 383 points, or 1.2%, to 32245, the S&P 500 SPX, +0.59% increased 35 points, or 0.89%, to 3952, and the Nasdaq Composite COMP, +0.69% gained 45 points, or 0.39%, to 11676.

What’s driving markets

Calmer conditions in the financial sector were buoying sentiment on Tuesday. Investors have welcomed the market’s ability to absorb the rescue takeover of Credit Suisse CS, +4.02% by UBS UBS, +11.44%, whose shares rose over 3% in Europe early Tuesday. By late morning Tuesday, UBS shares were up more than 10%.

The shotgun-wedding of a failing systemically important bank and its peer initially rattled stocks at the start of the week.

But the S&P 500 index finished Monday up 0.9% as many recently battered banking shares rallied in the U.S. and Europe. A statement from the ECB early Monday effectively promised that it would take a different approach from the Swiss National Bank with respect to higher risk bonds in banks’ capital structure than the Swiss National Bank did in forcing the merger of Credit Suisse with UBS UBS, +11.44% on Sunday.

Reports that the U.S. Treasury is considering boosting the guarantees on bank deposits was also helping the mood.

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Treasury Secretary Janet Yellen told banking industry members Tuesday that “the situation is stabilizing.” Specifically, she said “aggregate deposit outflows have stabilized,” speaking at the American Bankers Association meeting.

Easing tensions in the financial sector makes it more likely the Federal Reserve will raise its policy interest rate again on Wednesday, said analysts. The fast-moving banking crisis was suddenly setting up a clash for the Fed between banking sector stability and price stability while inflation sticks around.

Read: The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

“[T]he more positive shift in sentiment saw investors put growing weight on the probability of the Fed hiking rates tomorrow,” said Jim Reid, strategist at Deutsche Bank.

“Our own U.S. economists published their preview of tomorrow’s Fed meeting, and they agree with the view that the Fed will opt for 25bps [basis points]. Our economists expect the Fed to follow the ECB’s lead and raise rates in line with expectations, do away with forward guidance, but signal a continued tightening bias,” Reid added.

Many Fed watchers in the market say a 25 basis point increase is the likely outcome. There’s an 80.5% chance of a 25-basis-point increase to the federal funds rate at the March meeting, according to CME Group’s FedWatch Tool.

But there’s still many who think the Fed will stand pat for now. That includes Peter Cardillo, chief market economist at Spartan Capital Securities.

Stocks are higher Tuesday on the brightening mood surrounding regional banks and Yellen’s remarks that regulators are ready to do what’s needed to shore up the financial system, he said.

“Does that cure the present banking turmoil? I don’t think so,” Cardillo said.

That’s why he thinks the Fed will pause on Wednesday. That buys the central bank more time to monitor what’s next, he said. “I think the Fed can pause and revisit what inflation looks like in two months,” he said.

After this week’s meeting, the central bank’s next Federal Open Market Committee meeting is scheduled for May 2-3.

And:The bank panic of 2023 could be just what the stock market needs to make money for investors again

Others think markets may not be out the woods, amid higher interest rates and tighter lending conditions.

Roughly one-third of 212 fund managers polled by Bank of America said a “systemic credit event” is the biggest threat, while 25% said persistent inflation is the market’s most pressing problem.

In U.S. economic data, existing home sales in February made their biggest leap since July 2020, according to Tuesday morning data. Last month, sales climbed 14.5% to 4.58 million, beating expectations of 4.2 million in sales. Housing stocks are trading higher after the data release.

Companies in focus

• First Republic Bank FRC, +39.33%   shares were up more than 35% on Tuesday morning. The regional bank’s stock is up after reports that JP Morgan Chase & Co. is reportedly helping the bank determine strategic next steps like a sale or capital raise.
• Amazon.com Inc. AMZN, +1.54% shares are up more than 1.5%. The online retail giant is cutting another 9,000 jobs, according to a company announcement. That follows more than 18,000 recent Amazon layoffs, and another round of layoffs for the tech sector. “This was a difficult decision, but one that we think is best for the company lon