By STAN CHOE (AP Business Writer)
NEW YORK (AP) — Stocks are rallying on Wall Street Tuesday, as some of the most breathtaking moves from a manic Monday reverse course.
The S&P 500 was 1.5% higher in early trading after a report showed inflation is still high but heading lower. Stocks of smaller and mid-sized banks recovered some of their prior plunges caused by worries that customers could yank out all their cash. Treasury yields soared to trim their historic drops.
The Dow Jones Industrial Average was up 308 points, or 1%, at 32,127, as of 9:45 a.m. Eastern time, while the Nasdaq composite was 1.9% higher.
A week ago, Wall Street was expecting Tuesday’s report on inflation to be the most important data of the week, if not month. The worry at the time was that inflation is staying stubbornly high, which could force the Federal Reserve to pick up the pace again on its hikes to interest rates.
Such hikes can drive down inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and all kinds of other investments.
Tuesday’s report showed that inflation at the consumer level was 6% in February, versus a year before. That matched economists’ expectations and was a slowdown from January’s 6.4% inflation rate, but it’s still uncomfortably hot.
In normal times, that could indeed call for an increase in the size of rate hikes. The trouble for the Fed is that it’s also facing a banking system and economy that may already be cracking due to all of its rate increases from the last year, which came at the fastest pace in decades. That includes the second- and third-largest bank failures in U.S. history since Friday.
“The Fed is stuck between a rock and a hard place,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“Inflation met expectations, but is still uncomfortably hot. Financial stresses are intense. Prudence would dictate they pause, but couple it with a stern warning that if inflation trends don’t improve that they might need to hike more.”
He said the Fed also has other tools to use besides rate increases. Among them: The Fed could adjust the speed at which it’s shrinking its massive trove of bond investments, an action that effectively tightens the screws on the financial system.
An easier Fed could give the banking system and economy more breathing room, but it could also give inflation more oxygen.
Stocks across the financial industry were rising Tuesday to recover some of their steep earlier drops. Financial Republic Bank soared 43.4% after plunging 67.5% over the prior three days. Zions Bancorp. rose 14.4, KeyCorp gained 16% and Charles Schwab jumped 9.6%
The U.S. government announced a plan late Sunday to shore up confidence in the banking system following the failures of Silicon Valley Bank on Friday and Signature Bank on Sunday. Banks are struggling as higher interest rates knock down the value of their investments, while contending with worries that skittish customers could try to withdraw their money en masse to cause a run.
Some of the wildest action has been in the bond market, where the yield on the two-year Treasury plunged Monday by roughly half of a percent. That’s a historic-sized move for the bond market. Yields plummeted as investors piled into investments seen as safe and ratcheted back their expectations for future rate increases by the Fed.
The two-year yield climbed back to 4.36% from 4.02% late Monday, another huge move.
The 10-year yield jumped to 3.66% from 3.55%. It helps set rates for mortgages and other important loans.
European markets also rebounded after a broad retreat in Asia.
Bank shares stabilized following statements late Monday by the head of the group of finance ministers for the 20-country eurozone, Paschal Donohoe, that Europe had “no direct exposure” to Silicon Valley Bank.
AP Business Writers Yuri Kageyama, David McHugh and Matt Ott contributed.
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