Stocks rise after data show inflation easing

Stocks ended broadly higher on Wall Street on Tuesday, as some of the most breathtaking moves from a manic Monday reversed course.

The Standard & Poor’s 500 index rose 1.7% after a report showed inflation is still high but heading lower. Stocks of smaller and midsize banks recovered some of their Monday 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 rose 1.1%, while the Nasdaq composite added 2.1%. Gains in technology stocks, banks and communications services companies powered much of the rally.

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 interest rate increases.

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 earlier. That matched economists’ expectations and was a slowdown from January’s 6.4% inflation rate, but it’s still way above the Fed’s target.

In normal times, that could call for an increase in the size of rate increases. 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. The secondand third-largest bank failures in U.S. history have both come 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.

Traders rushed Monday to place some bets that the Fed could decide to keep rates steady at its next meeting, instead of accelerating to a hike of 0.50 percentage points as they thought a week ago.

After the inflation data, bets are largely falling on it sticking with an increase of 0.25 points later this month, according to data from CME Group.

“From there, something like this should give the Fed pause about how much tightening is already in the system and has just yet to show up, especially when the labor market and the inflation data is cooling,” said Ross Mayfield, investment strategist at Baird. “Markets have been trying to gauge a Fed pivot since last June, it feels like, and gotten it wrong every time. This feels like an event that could actually push the Fed to pivot.”

Stocks across the financial industry rose Tuesday to recover some of their steep earlier drops. First Republic Bank jumped 27% after plunging 67.5% over the prior three days. KeyCorp gained 6.9%, Zions Bancorp rose 4.5% and Charles Schwab climbed 9.2%.

All told, the S&P 500 rose 63.53 points to 3,919.29, ending a three-day losing streak. The Dow added 336.26 points to close at 32,155.40, and the Nasdaq gained 239.31 points to close at 11,428.15.

Some of the wildest action has been in the bond market, where the yield on the two-year Treasury plunged Monday by roughly half a percentage point.

The two-year yield climbed back to 4.21% 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.