U.S. stock futures rise as traders eye inflation data and bank situation

What’s driving markets

Trader focus was shifting on Tuesday back to inflation with the consumer price index for February due to be published at 8:30 a.m. Eastern.

The failure of Silicon Valley Bank
SIVB,
-60.41%
and Signature Bank
SBNY,
-22.87%
has badly rattled the global financial sector. It was the turn of Japanese banks to flounder on Tuesday, with the TOPIX Banks index off more than 7%.

But the broader market, though volatile of late — the CBOE VIX index
VIX,
+0.90%
touched 30 on Monday — has not completely cracked.

The S&P 500
SPX,
-0.15%
remains within — though now towards the bottom — of the 3,800 to 4,200 range it has inhabited for four months or so, supported by hopes the banking angst will be ameliorated by a consequently less hawkish Federal Reserve.

But for the Fed to halt its rate hikes — now priced at a 44.6% probability, according to futures markets — it may need the cover of declining inflationary pressures.

Consequently the looming CPI report is arguably the most consequential to date. If it comes in lower than the expected annual headline rate of 6%, down from January’s 6.4%, then investors can embrace a Fed loosening the monetary screws to support markets.

However, if inflation proves stickier than feared, then it’s likely the market will balk at greater uncertainty as it asks whether the Fed will stick with its inflation battle despite financial sector ructions, or will it retreat on concerns its tightening policy already has caused too much damage.

“There is now a massive lack of consensus in the market regarding what the Fed should do, and what the Fed will do,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Some think that if today’s inflation data is not sufficiently soft, the Fed should continue hiking by 50bp. Some others think that the Fed should simply hike by another 25bp this month and signal a pause starting from the next meeting – which would be the smoothest solution of all for the market,” she added.

Mark Newton, head of technical strategy at Fundstrat, noted that there was welcome strength in big tech and healthcare stocks on Monday as financials struggled, but that with U.S. retail sales data also due Wednesday, investors should brace for volatility.

“While it might be premature to think healthcare strength can completely offset financials weakness, it’s certainly helpful to see that technology, discretionary, industrials were all stronger relative to S&P 5000,” Newton wrote in a note published late Monday.

“SPX daily chart shows price having pulled back to just above last December lows. There has been a definite break of the 200-day moving average along with a break of its uptrend. Thus, a rebound is imperative this week, and ideally on Tuesday/Wednesday.”

“The ability of recovering SPX 3928 would be a great sign, which signifies the initial upside resistance. Downside support lies near last December 2022 lows, which lies from 3764-3800. Only if December 2022 lows are violated would the 4-6 week forecast turn more negative,” Newton concluded.