'Fed put' still alive - Invesco

U.S. equity indexes rally, but off highs: Nasdaq up ~1%

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All S&P 500 sectors green: Comm svcs up most

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Dollar edges down; gold dips; crude down >3%; bitcoin up 5%

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U.S. 10-Year Treasury yield jumps to ~3.62%

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'FED PUT' STILL ALIVE - INVESCO (1400 EST/1800 GMT)

After a "rapid and comprehensive" response from U.S. federal regulators following the failure of Silicon Valley and Signature banks, a bank liquidity crisis has likely been averted, Invesco Chief Global Market Strategist Kristina Hooper wrote in a research note this week.

But on top of that, the events of the past week "reinforce the view that the 'Fed put' is alive and well," she says.

"It seems unlikely that the Fed can raise rates much more, although this new facility (related to the banks) could give the Fed a greater ability to continue raising rates than it had on Friday," she wrote.

While risks remain that banks, insurers and other holders of long-term fixed-income assets could face similar issues, so far "financial breakdowns have been isolated and seem likely not to become systemic."

With any significant liquidity shortages in key areas globally, the Fed could still re-introduce dollar swap lines, she wrote.

BANKS MAY BE FAILING BUT FED TO KEEP RAISING (1352 EDT/1752 GMT)

Investors were scared enough by a rash of bank collapses, including the biggest bank failure since the financial crisis, that they switched bets to a much less hawkish Federal Reserve than they had bet on just a few days ago.

The reasoning is that the government will have no choice but to ease up a little on rate hikes since it was forced to step in to restore faith in financials after its rate hiking helped cause the bank failures. But while expectations for a 50-basis-point rate hike next week have faded to nothing, a majority of investors are still expecting a 25-basis-point hike. Traders are putting the probability at around ~70% compared with ~30% for no hike, according to CME Group's FedWatch Tool.

Lauren Goodwin, economist and strategist at New York Life Investments, says she believes "recent bank failures will not deter the Federal Open Market Committee (FOMC) from moving forward with a 25-basis point hike in next week’s meeting."

Her argument is that the Fed can bring stability to banks while also staying "focused on its price stability goal."

Some strategists argue that fear will cause banks to tighten lending enough to help the Fed reach its goals.

But Goodwin argues that more liquidity "could, if anything, propel the economy’s inflationary impulse further."

And she quoted Fed Chair Powell's assertion that "the economy doesn’t work well for anyone when inflation is high."

With today's combo of slowing growth, a lagged impact of tightening lending and monetary conditions, as well as uncertainty around "potentially more restrictive bank lending standards," Goodwin sees a recession as "a matter of when, not if."

(Sinéad Carew)

JPMORGAN SAYS GO LONG CREDIT – “THERE IS EXCESS FEAR” (1258 EDT/1458 GMT)

JPMorgan recommends taking long positions in credit by selling protection on credit default swap (CDS) indices, saying that “there is excess fear in the market, which is likely to subside over the coming trading sessions.”

Last week CDS spreads reached their widest levels since December after being largely range-bound since a rally in January. They have since rallied sharply but "remain wide relative to the trading range for the year,” JPMorgan analysts including Saul Doctor said in a report sent on Tuesday.

While the market is moving fast and “notes like these can feel a bit like following the trend,” the bank’s Fear&Greed index indicates that the market is too fearful, even at current levels. European indexes have also “somewhat surprisingly” borne the brunt of the weakness.

JPMorgan says “there is value in being long through CDS indices” and recommends selling protection in the iTraxx Crossover. In the U.S., the bank also notes that the high yield index CDX.HY looks attractive versus BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF, while implied volatility is also elevated in credit, “so selling credit optionality to buy it elsewhere also appears attractive.”

A FED PAUSE: BENEFICIAL TO BANKS, BUT A BAD SIGN FOR THE ECONOMY (1222 EDT/1622 GMT)

While the panic over banking shares showed some signs of abating on Tuesday, Mike O'Rourke, chief market strategist at JonesTrading, wrote after Monday's sell-off that SVB Financial and Signature Bank appeared to be "the sacrifices that will pause/end the Fed's tightening cycle."

Although it was not apparent Monday, O'Rourke said that there was a theoretical positive from the regulators seizure of Signature Bank.

"One would hope they moved upon any institutions viewed to be at risk. They don't want to repeatedly come back to the market with additional seizures. There comes a point where they need to defend institutions believed to be solvent and make sure they survive the panic."

O'Rourke believes that the kind of uncontrolled failure witnessed with the fall of Lehman Brothers is the kind of event regulators never wish to allow again as there were too many damaging and unintended consequences.

As O'Rourke sees it, it is debatable whether the banking sector is better or worse off than it was a week ago. But it is clearly better off than it was Friday due to the combination of the bond market rally, the likely Fed pause and the Fed's liquidity backstop. However, he says that still does not mean things are great.

O'Rourke expects banks to be more cautious with their lending and more conservative with their investments. Additionally, he believes they should opportunistically raise capital.

On the downside, he thinks the developments over the course of the past week make it more likely that a recession will emerge.

O'Rourke's bottom line is that "the FOMC pausing its tightening is not a positive. It is in hopes of avoiding a greater evil. While the Fed pause is beneficial to the banks it is (a) sign of a deteriorating outlook for the economy."

(Terence Gabriel)

GOLDILOCKS LIKES HER PORRIDGE ON THE COOL SIDE: CPI, NFIB (1135 EDT/1535 GMT)

Eagerly awaited inflation data arrived on Tuesday like the weather - damp, to be sure, but not quite as damp as forecast.

As predicted, the consumer price index (CPI) notched a 0.4% monthly gain in February, and 6% year-on-year, nailing the consensus and furthering the gradual cool-down narrative.

Stripping out volatile food and energy prices, so-called core CPI gathered some unexpected heat, rising 0.5% compared with January's 0.4% gain. On an annual basis, core price growth cooled a smidge, shedding 10 basis points to 5.5%.

A deeper dive into the Labor Department's consumer price index (CPI) report, which tracks the prices U.S. urban consumers pay for a basket of goods and services, reveals a 0.6% drop in energy items and a 1.4% decline in heating fuel and utilities.

Both of those were offset by a 0.4% rise in food, a 0.5% advance in services, a 0.8% increase in shelter, and a jumbo-sized 6.4% monthly jump in airfares.

Airfares continue to be the outlier, up a nosebleed-inducing 26.5% year-on-year.

In light of the ongoing regional banking kerfuffle, the report shifted expectations around whether the Federal Reserve will hike or pause at the conclusion of next week's two-day monetary policy meeting.

"The Federal Reserve is going to have to pick its poison," says Jamie Cox, managing director for Harris Financial Group.

"(The Fed will either) tolerate some inflation for a bit to see if its current series of rate hikes takes hold and pause or keep hiking and deal with the financial instability caused by their own policy decisions."

Here is a graphic showing core CPI with other major indicators, and how far most of them have yet to descent before approaching Powell & Co's average annual 2% inflation target:

The report also marks the 15th consecutive month in which core CPI ran hotter than average wage growth, meaning "real" wages have been falling now for well over a year.

As a result, the spending power of American consumers - who shoulder about 70% of the U.S. economy - is steadily declining.

For now, consumers are dipping into savings and running up credit card balances to meet demand. It's a worrisome state of affairs and can't go on forever.

Tuesday's statuette for best performance by an indicator in a supporting role went to the National Federation of Independent Business (NFIB), which showed the mood of small business owners continued to inch away from doom and gloom last month.

The NFIB's Optimism index rose to 90.9 from 90.3 last month, with an improved sales outlook and a healthy 60% of respondents reporting capital outlays.

Those things helped offset the historically high 47% of participants who have job openings that were hard to fill, reflecting ongoing challenges of a tight labor market.

Inflation and labor quality remained the top two most important problems small business owners face, according to the survey.

"Small business owners remain doubtful that business conditions will get better in the coming months," write Bill Dunkelberg, chief economist at NFIB. "They continue to struggle with historic inflation and labor shortages that are holding back growth."

It should be noted that the NFIB is a politically active membership organization that skews conservative, according to the Center for Responsive Politics/opensecrets.org.

For its part, Wall Street rallying in a bounce back from its recent sell-off ignited by contagion fears arising from the regional banking crisis.

Financials and smallcaps, up >3%, were having a better day than most, with the S&P 500 banking index, up 3%, erasing some losses from Monday, which saw its biggest one-day percentage plunge since June 2020.

BANKS: COULD THE WATER BE SAFE (ISH) AGAIN? (1032 EDT/1432 GMT)

After taking a severe beating on Monday and last week, shares in U.S. banks are regaining some lost ground on Tuesday on hopes that moves by the government to restore confidence in banks would succeed in averting a bigger financial crisis.

The collapse of three U.S. banks between Wednesday and Sunday sent bank investors fleeing on Monday with memories of the 2008/2009 great financial crisis returning with a vengeance.

On Sunday, the U.S. government offered a new loan program for banks and said it would make sure customers of the failed banks would have access to their deposits as it looked to stem a broader fallout from the sudden collapse of startup-focused lender Silicon Valley Bank, owned by SVB Financial and Signature Bank which was taken over by authorities on Sunday. Crypto lender Silvergate said Wednesday that it would have to wind down its operations.

After Monday brought the S&P 500 Banks index its biggest one-day sell-off since 2020 with an almost 7% drop, the index is up ~3% on Tuesday. Of course this only erased a small portion of the deep losses the sector incurred in the previous six-day losing streak, but under the hood are some big moves in the regional bank stocks that had been hit hardest.

First Republic shares are up ~48% on Tuesday after losing ~75% of their value in the previous six sessions. The bank last traded close to $49, down from $123.22 on March 3, before the sell-off began. Keycorp is up ~14% on Tuesday, while Zion Bancorp is up ~15%.

Investors had also reacted to the banking crisis with bets that it would lead the Federal Reserve to slow or stall its rate hiking cycle aimed at taming inflation.

In a way, Angelo Kourkafas, investment strategist at Edward Jones, said the crisis may help the broader market as it is "doing some of the Fed's work for the Fed."

"Financial conditions have tightened. Banks are likely to be more conservative and tighten lending conditions and that could cool economic activity and inflation," said Kourkafas. "That's why the Fed might be more comfortable pausing earlier than it would have without the bank rout we've had."

Here is a snapshot of S&P 500 banks from 1032 EDT:

(Sinéad Carew)

U.S. STOCK FUTURES GREEN ON ROUGHLY IN-LINE CPI (0900 EDT/1300 GMT)

U.S. equity index futures are in positive territory in the wake of the release of the latest data on U.S. inflation.

The February CPI on a month-over-month and year-over-year basis came in flat with estimates. The month-over-month core reading was slightly above the estimate, while the year-over-year reading was in-line with the estimate:

According to the CME's FedWatch Tool, the probability of a 25 basis point rate hike at the March 21-22 FOMC meeting is now 92% from 78% just before the numbers were released. There is now around a 8% chance that the FOMC will leave rates unchanged from around 22% prior to the data coming out.

CME e-mini S&P 500 futures are gaining around 1.1%. The futures were up around 0.9% just before the numbers came out.

All S&P 500 sector SPDR ETFs are higher in premarket trade. Financials are showing the biggest gain, up about 4%.

A check of premarket action in banking ETFs shows the SPDR S&P Bank ETF gaining more than 7%, while the SPDR S&P Regional Banking ETF is up 10%.

Regarding the inflation data, Angelo Kourkafas, investment strategist at Edward Jones, said, "Today's report suggests that the Fed has more work to do. It's not dissimilar to January's report. We continue to see inflation slow down but not at the pace we were hoping to see."

Here is a premarket snapshot just shortly after 0900 EDT:

(Terence Gabriel, Sinéad Carew)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)