Stocks Fall as Contagion Fears in Regional Banking Sector Return Ahead of Fed’s Rate Decision

　　

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On Tuesday, stock markets experienced a sharp decline due to concerns among traders about contagion in the regional banking sector ahead of the Federal Reserve’s rate decision. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all fell for a second consecutive session. Bank shares also declined, with the SPDR S&P Regional Banking ETF dropping more than 6%. Traders were questioning the stability of smaller regional financial institutions, including PacWest and Western Alliance, which declined by 27% and 15%, respectively.

The Federal Reserve’s two-day policy meeting, which began on Tuesday, is expected to result in the announcement of another quarter-point rate hike on Wednesday. Traders are pricing in a roughly 85% chance of a rate hike. Investors will be looking for clues about whether the Fed will keep rates steady after this meeting or further tighten monetary policy to fight inflation. Additionally, the U.S. Treasury warned on Monday that the country may hit the debt ceiling sooner than expected, which weighed on market sentiment.

On Tuesday, all sectors in the stock market experienced a decline of 1.16%. Among the sectors, energy was hit the hardest with a decline of 4.28%, followed by financials at 2.30%. Real estate and communication services also experienced significant drops of 1.74% and 1.78%, respectively. The remaining sectors also showed negative results, with consumer staples down 0.32%, health care down 0.49%, and information technology down 0.93%. Consumer discretionary was the only sector to show a slight increase of 0.16%.

Major Pair Movement

The US dollar index declined on Tuesday as below-forecast JOLTS and plummeting regional bank stocks caused Treasury yields to fall, resulting in renewed recession fears. The dollar lost ground against the yen, euro, and Swiss franc, while high beta currencies suffered. USD/JPY fell 0.67% as the S&P regional banking index dropped around 7% to its lowest level since May 2020. EUR/USD recovered from its risk-off lows and gained roughly 0.29% despite disappointing eurozone bank lending data, the first fall in core inflation since January 2022, and an unexpectedly large 2.4% drop in German retail sales.

The focus is now on Wednesday’s ISM non-manufacturing and ADP releases, followed by the Fed’s announcement, which is expected to include a 25bp hike. The Fed will also have the Q1 loan officer survey and ongoing banking concerns to ponder beyond inflation and labor data.

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Economic Data

Currency	Data	Time (GMT + 8)	Forecast
NZD	Employment Change	06:45	0.8% (Actual)
NZD	Unemployment Rate	06:45	3.4% (Actual)
NZD	RBNZ Gov Orr Speaks	09:00
USD	ADP Non-Farm Employment Change	20:15	148K
USD	ISM Services PMI	22:00	51.8
USD	FOMC Statement	02:00 (4th May)
USD	Federal Funds Rate	02:00 (4th May)	5.25%
USD	FOMC Press Conference	02:30 (4th May)