U.S. stocks reversed early losses on Thursday with a report from the Wall Street Journal suggesting buyers have emerged for troubled regional bank First Republic (FRC).
Markets opened lower after the European Central Bank surprised with a 0.50% interest rate hike amid continued concerns over the global banking system but inflation that remains “too high” in the view of central bankers. Near 10:50 a.m. ET, the S&P 500 (^GSPC) was up 0.6%, the Dow Jones Industrial Average (^DJI) was higher by 0.2%, while the tech-heavy Nasdaq Composite (^IXIC) led gains, rising just less than 1%.
Futures had been mixed early Thursday ahead of the ECB’s announcement. Wednesday’s turmoil in Credit Suisse and a late-night intervention from the Swiss National Bank pushed investors to expect a more modest 0.25% increase from the ECB as central banks weigh financial stability concerns against inflation that remains elevated.
“Inflation is projected to remain too high for too long,” the ECB said in its statement. “Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target.”
“The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the statement added. “The euro area banking sector is resilient, with strong capital and liquidity positions.”
Late Wednesday, Credit Suisse announced it would borrow up to 50 billion Swiss francs, or about $54 billion, from the SNB.
Shares of Credit Suisse (CS) fell as much as 30% on Wednesday after its largest investor, the Saudi National Bank, said it would not increase its stake in the trouble bank, citing regulatory challenges to taking its stake north of 10%.
Credit Suisse shares trading in New York were up about 5% in late morning trade Thursday.
The ECB’s decision also comes just days before the Federal Reserve’s next policy announcement, at which the central bank is expected to raise rates by 0.25% for the second-straight meeting.
Markets were putting roughly 75% odds on the Fed raising rates by 0.25% at its policy meeting next week on Thursday morning, down from expectations for a 50-basis-point rate hike before this past week’s banking system turmoil.
“FOMC members likely have not yet decided what to do next week, given the volatility of markets,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note on Thursday. “But yesterday’s meltdown in Credit Suisse stock, and—more importantly—the loss of liquidity in the Treasury market, coming on top of the SVB, Silvergate, and Signature failures, makes it more likely that they pass on raising rates.
“It is more important, in our view, not to take risks with the stability of the system than to reassert your determination to fight inflation,” Shepherdson added.
In U.S. economic data, the latest weekly report on initial jobless claims showed a drop in first-time filings for unemployment insurance to 192,000 down from 212,000 the prior week and suggesting continued strength in the U.S. labor market.
This report serves as one of the last pieces of notable economic data ahead of the Federal Reserve’s two-day policy meeting, which kicks off next Tuesday and will see the central bank announce its latest policy decision Wednesday afternoon.
Investors will also be paying close attention to testimony from Treasury Secretary Janet Yellen, who will speak before the Senate beginning at 10 a.m. ET. In prepared remarks released ahead of Yellen’s appearance, the Treasury Secretary said the U.S. banking system remains “sound.”
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