Stocks rise on Wall Street, led by defeated banks

Stocks rose on Wall Street on Tuesday as some of the most breathtaking moves followed Monday’s manic turnaround.

The Standard & Poor’s 500 rose 1.5% in early trading after a report showed that inflation is still high but declining. Shares of smaller and medium-sized banks partially recovered from their previous declines, which were caused by concerns that customers could withdraw all their money. Government bond yields rose to their historic declines.

The Dow Jones Industrial Average was up 308 points, or 1%, to 32,127 at 9:45 a.m. ET, while the Nasdaq Composite was up 1.9%.

A week ago, Wall Street expected Tuesday’s inflation report to be the key data of the week, if not the month. The concern at the time was that inflation would remain stubbornly high, which could force the US Federal Reserve to pick up the pace again with its rate hikes.

Such increases can reduce inflation by slowing the economy, but they increase the risk of a later recession. They also negatively affect the prices of stocks, bonds and a variety of other assets.

Tuesday’s report showed consumer inflation was 6% in February compared to a year earlier. That was in line with economists’ expectations and was a slowdown on January’s inflation rate of 6.4%, but it’s still uncomfortably warm.

In normal times, this may even require an extension of rate hikes. The problem for the Fed is that it also has to deal with a banking system and an economy that may already be collapsing after all of its rate hikes over the past year, which have been at their fastest pace in decades. These include the second and third largest bank failures in US history as of Friday.

“The Fed is stuck between a rock and a hard place,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

“Inflation is meeting expectations, but remains uncomfortably warm. Financial stress is intense. Caution will dictate a pause, but couple this with a stern warning that they may have to rise further if inflation trends don’t improve.

He said the Fed has other tools at its disposal besides rate hikes. Among them: The Fed can adjust the pace at which it shrinks its massive inventory of bond investments, a move that effectively tightens the screws of the financial system.

A looser Fed can give the banking system and the economy more breathing room, but it can also give inflation more oxygen.

Stocks in the financial sector rallied on Tuesday to reverse some of their sharp previous declines. Financial Republic Bank rose 43.4% after falling 67.5% in the previous three days. Zion’s Bancorp was up 14.4%, KeyCorp was up 16% and Charles Schwab was up 9.6%.

The US government late Sunday announced a plan to boost confidence in the banking system after the collapses of Silicon Valley Bank on Friday and Signature Bank on Sunday. Banks are struggling as higher interest rates erode the value of their investments, while they grapple with concerns that rare customers will try to withdraw their money en masse to fuel a stampede.

Some of the wildest action took place in the bond market, where yields on the two-year Treasury fell about half a percent on Monday. This is a historic move for the bond market. Yields fell as investors turned to safe havens and scaled back expectations of future Fed rate hikes.

The two-year interest rate recovered from 4.02% to 4.36% at the end of Monday, another big step.

The 10-year yield rose from 3.55% to 3.66%. It helps set interest rates on mortgages and other large loans.

European markets also recovered after a broad downturn in Asia.

Bank stocks stabilized after statements by Paschal Donohoe, the group of finance ministers of the 20-nation euro zone, said late Monday that Europe had “no direct exposure” to the Silicon Valley bank.

AP staffers Yuri Kageyama, David McHugh, and Matt Ott contributed to this report.