Thought of the day

The S&P 500 gained 1.7% on Tuesday, amid optimism that recent initiatives by the Federal Reserve and other regulators would be sufficient to avert a banking crisis. Financials were among the top performers. The KRE index of regional banks rose 2.1% after days of heavy selling caused by the failure of Silicon Valley Bank and Signature Bank.

Investors appeared encouraged by the lack of any further banking collapses, raising hopes that the threat to the US financial system may be receding. The VIX, a gauge of expected volatility, fell from around 27 to 24, down from a peak of over 30 on Monday, which was consistent with daily moves in the S&P 500 index of close to 2%.

The market moves reflect initial confidence in federal efforts to prevent the need for banks to sell bonds at a loss to meet depositor outflows. Measures announced over the weekend include a new Bank Term Funding Program (BTFP) from the Fed, offering banks the possibility to take loans of up to one year against Treasuries and other collateral. The collateral would be valued at face value rather than market prices.

The yield on the 2-year US Treasury rose 27 basis points to 4.25%, as investors calculated that financial strains were less likely to prevent the Fed from raising rates at the policy meeting next week.

US economic data released on Tuesday underlined that the inflation threat has not gone away. Month-over-month, core CPI inflation, excluding food and energy, rose at the fastest pace in five months, accelerating to 0.5% in February from 0.4% in January. Year-over-year, headline inflation moderated to 6% from 6.4%—and down from a June peak of 9.1%—but the core measure only eased to 5.5% from 5.6%. The data suggest that the Fed will hike rates further unless restrained by worries over financial stability.