Markets Rebounded Despite A Downgraded Outlook From Moody’s

Bank Stocks & Markets Are Back in the Green

U.S. stocks rebounded Tuesday as investors may have felt the turmoil from SVB and Signature Bank had been contained. The Dow Jones broke its five-day losing streak and closed up 1.06%. The S&P 500 saw a rise of 1.68%, while the Nasdaq climbed 2.14%.

While big banks were mostly insulated, smaller bank stocks saw significant drops last Friday and Monday. Though enthusiasm for purchasing bank stocks waned on Tuesday afternoon, many still experienced gains. For example, First Republic Bank (FRC), which was down 61.83% at Monday’s close, ended Tuesday with a 26.98% gain.

Mortgage Rate Reversal

One notable effect of the banking sector’s troubles was a decline of the 10-year Treasury yield to a one-month low. Mortgage rates generally follow the movement of the 10-year Treasury yield, so mortgage rates fell from 6.76% on Friday to 6.57% on Monday.

The slide switched direction on Tuesday, and mortgage rates ended close to their Friday level at 6.75%.

A New Rating for the Banking Sector

Despite several steps to contain and potentially reverse the liquidity crisis, Moody’s Investors Service still downgraded its view on the banking system as a whole.

The firm “expect[s] pressures to persist and be exacerbated by ongoing monetary policy tightening,” and that “interest rates [are] likely to remain higher for longer until inflation returns to within the Fed’s target range.”

Given this expectation that the Fed will keep raising rates, Moody’s expects a recession later this year.

Inflation Update and The Fed’s Next Meeting

Still, the markets finished up hours after Moody’s announcement.

Helping to boost investor sentiment, the new Consumer Price Index report, which measures inflation on a monthly basis, announced that inflation fell for the 8th straight month in February. Though still higher at 6% than the Fed’s goal of 2%, the steady decline appears to indicate that the Fed’s attempts to cool the economy with increased interest rates is working.

Some market watchers think that falling inflation plus the recent banking troubles portend a lower Fed rate hike than previously predicted, possibly 25 basis points instead of 50. The next Fed meeting is March 22.

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