To The Moon

Treasury yields rebounded after epic declines and US equity futures rose on Tuesday as investors await inflation data that may upend bets that the Federal Reserve is done tightening.

The yield on the two-year Treasury — the most sensitive to interest rates — climbed about 25 basis points to 4.25%, still more than 70 basis points lower than this time last week. Plunging rates captured Wall Street’s attention yesterday, when the yield dropped more than a half-percentage point in the biggest move since the 1980s. The 10-year yield rose four basis points to 3.60%, while a gauge of the dollar snapped three days of losses.

Futures on the S&P 500 and Nasdaq 100 rose about 0.4% as regional banking stocks rallied in premarket trading. First Republic Bank, whose shares tumbled by a record 62% on Monday, jumped as much as 20%. Among larger lenders, Wells Fargo & Co. and Bank of America Corp. gained more than 3%.

Treasuries have been whipsawed in recent days along with banking shares as the collapse of Silicon Valley Bank and two other US lenders prompted wagers the Federal Reserve will pause its hiking cycle and even cut interest rates to stabilize the financial system. But a hot inflation reading later today could muddy that outlook and spark a fresh wave of volatility in fixed-income markets.

“A policy mistake is hands down the biggest risk in the market,” Mary Manning, global portfolio manager for Alphinity Investment Management, said on Bloomberg Television. “Controlling inflation but also addressing the fact there is some instability in the banking system is difficult.”

Swap contracts referencing Fed policy meetings — which last week favored a half-point rate increase at next week’s gathering of officials — slashed the odds of any increase to less than one-in-two. Meanwhile, contracts for the rest of 2023 suggest that the Fed could cut rates by almost a full percentage point from the peak in May before the year is out.

Europe’s Stoxx 600 equity benchmark was little changed after falling the most since December on Monday. A gauge of European bank stocks edged lower, led by Close Brothers Group Plcafter a first-half profit miss. Credit Suisse Group AG slipped after uncovering accounting weaknesses. A gauge of Asian stocks fell 2%, wiping out gains for 2023.

Goldman Sachs Group Inc. economists as well as asset managers from the world’s largest actively managed bond fund, Pacific Investment Management Co., said the Fed could take a breather on the policy rate following the collapse of SVB. Nomura Holdings Inc. economists took it one step further, saying the Fed could cut its target rate next week.

Key Data

Traders are looking to the US consumer price index report later in the day for cues that may trigger further shifts in the outlook for monetary policy.

The bank selloff “certainly creates a headwind for aggressive Fed action, if any action,” said Gary Schlossberg, a senior economist at Wells Fargo. “But there is that very important data coming out which may not ease concerns over inflation. It means the Fed has even more of a balancing act.”

The S&P 500 closed Monday down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders, while reassuring depositors that their money is safe.

The SVB meltdown has also caused a swift repricing in credit risk. Yield premiums on company debt, which had trended lower for much of this year, have climbed back to levels seen in November, according to a Bloomberg index that includes investment-grade and junk bonds.

Elsewhere in markets, oil extended a decline ahead of the inflation data. Gold slid after rising in the three previous sessions as traders turned to haven assets.

Key events this week:

• US inflation, Tuesday
• China retail sales, industrial production, medium-term lending, surveyed jobless rate, Wednesday
• Eurozone industrial production, Wednesday
• US business inventories, retail sales, PPI, empire manufacturing, Wednesday
• Eurozone rate decision, Thursday
• US housing starts, initial jobless claims, Thursday
• Janet Yellen appears before the Senate Finance Committee, Thursday
• US University of Michigan consumer sentiment, industrial production, Conference Board leading index, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures rose 0.4% as of 5:59 a.m. New York time
• Nasdaq 100 futures rose 0.3%
• Futures on the Dow Jones Industrial Average rose 0.4%
• The Stoxx Europe 600 was little changed
• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%
• The euro fell 0.2% to $1.0712
• The British pound fell 0.2% to $1.2156
• The Japanese yen fell 0.7% to 134.18 per dollar

Cryptocurrencies

• Bitcoin rose 0.6% to $24,387.75
• Ether rose 0.2% to $1,675.24

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.62%
• Germany’s 10-year yield advanced 11 basis points to 2.37%
• Britain’s 10-year yield advanced 13 basis points to 3.50%

Commodities

• West Texas Intermediate crude fell 2.2% to $73.17 a barrel
• Gold futures fell 0.6% to $1,905.50 an ounce

Volatility

• VIX rose 1.4% to 26.89

• VIXmain rose 0.32% to 25.45