Things are getting weird in the markets

Illustration: Eniola Odetunde/Axios

A rush to safety in the bond market. A modest rally in tech stocks. And still-simmering worries about banks. Things were getting a bit weird on Monday.

Driving the news: The major stock indexes were somewhat resilient, despite massive jitters about the health of many large regional banks after the collapse of Silicon Valley Bank and Signature Bank over the last few days.

  • The S&P 500 slipped 0.2% β€” after staying in positive territory most of the day. The tech-heavy Nasdaq composite rose 0.5%.

Yes, but: Regional bank shares plunged, despite steps the government took on Sunday evening to bolster the financial system.

  • The most notable drop was First Republic Bank, a California lender which, like SVB, has a large number of deposits that are above the FDIC's $250,000 limit. It collapsed by more than 60%.

What they're saying: "The market remains highly uncertain and uncomfortable with the funding profile of many U.S. banks," said Terry McEvoy, an analyst covering regional banks for brokerage firm Stephens, based in Little Rock, Ark.

πŸ’­ Our thought bubble: At first glance, it can be hard to square the idea of a simmering banking crisis with a stock market hanging in there. But there's a certain logic to it.

  • Markets seem to be making a bet that the flare-up of a banking crisis likely marks the beginning of the end of the Fed's recent run of rate hikes.
  • That picture is backed up by prices from the Fed funds futures market, where investors have cut the odds of a half-percentage point rate hike at the Fed's next meeting from 80% to approximately zero over the last couple of days.
  • Monday's outperformance of tech stocks β€” which benefit hugely from lower interest rates β€” further underscores the fact that expectations of lower rates, or at least fewer Fed hikes, are giving the markets a lift.

What we're watching: Fresh inflation data will be out Tuesday morning, with the release of the Consumer Price Index for February.

  • The broadly watched inflation gauge could further complicate the situation for Fed chair Jerome Powell, as he tries to balance the still-unfinished fight against inflation against the risk that more rate hikes push the banking system closer to the edge.

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