Traders now largely expect a 25-basis-points rate hike on Wednesday at the conclusion of the Federal Reserve’s two-day meeting – a dramatic turnaround from a steep 50 basis point rate hike expected before the banking crisis, triggered by the collapses of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) earlier this month.
However, the state-backed takeover of Credit Suisse by UBS, as well as steps taken by central banks to boost liquidity, eased fears of a contagion to the broader banking sector, helping Wall Street’s main indexes gain ground in the previous session.
Shares of beaten down regional lenders climbed in premarket trade, with First Republic Bank (NYSE:FRC) rising 23.6% after hitting a record low on Monday.
Its peers PacWest Bancorp and Western Alliance (NYSE:WAL) Bancorp rose 6.7% and 4.6% respectively.
“The Fed faces a relatively difficult decision at the FOMC meeting this week. It has to worry about a rate hike adding to the stress in the financial system while at the same time inflation is still well above target,” said Mark Haefele Chief Investment Officer, UBS Global Wealth Management in a note.
“In our view, the Fed is likely to hike rates, putting more emphasis on the fight against inflation than risks in the financial system.”
U.S. Treasury yields rose for the second straight day as fears of a banking crisis took a breather, with the yield on the two-year note which best reflects interest rate expectations last at 4.04%.
Data on existing home sales for the month of February is due later in the day, which will be gauged for clues on the strength of the economy.
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