NEW YORK: A critical inflation report next week will test a US stock market already consumed by worries over Federal Reserve hawkishness and potential fallout from the largest bank failure since the financial crisis.

Friday’s mixed US jobs report eased some worries about big rate hikes, days after Fed Chair Jerome Powell warned that policymakers may raise rates higher than expected if upcoming data showed the economy remains hot after nearly a year of tightening.

A hotter-than-expected consumer price report on Tuesday, however, could reignite fears of jumbo-sized Fed rate hikes like those that rocked markets last year. That would be unwelcome to a market on tenterhooks following this week’s failure of SVB Financial Group, which does business as Silicon Valley Bank.

“There is uncertainty revolving around the inflation report and there is a lot of confusion caused by SVB’s failure and worry that it might be a bigger problem,” said Robert Pavlik, senior portfolio manager at Dakota Wealth. “The market is dealing with confusion and uncertainty in a very short time frame.” The S&P 500 sank on Friday, bringing the weekly loss to 4.5%. After a big rebound in January, the benchmark index is now clinging to a 0.6% gain for 2023. Investors are growing nervous that the Fed’s campaign to fight inflation by ending the era of cheap money has exposed cracks in the economy that could widen if it ratchets up its rate hikes.

Traders were on guard for signs of contagion in the financial sector and beyond in the wake of troubles for SVB and crypto-focused Silvergate, which this week disclosed plans to wind down operations and voluntarily liquidate.

“The concerns emanating from the financial sector are rippling across the market in general,” said Michael James, managing director of equity trading at Wedbush Securities. “When you combine the debacle of Silvergate with the collapse of Silicon Valley Bank ... that’s creating a ripple effect of concern for the overall market stability.” On Friday, markets appeared to be dialing down their expectations for Fed hawkishness, pricing in a 40% chance that the central bank will raise rates by 50 basis points at their March 21-22 meeting, according to CME’s Fedwatch tool. Those odds stood at around 70% as recently as Thursday, but abated on Friday after investors saw the employment data and gained more clarity on the extent of SVB’s troubles.

Late on Friday, yields on two-year US Treasuries, which closely follow Fed policy expectations, were on track for their biggest two-day basis-point drop since September 2008.

“The Fed now has very clear evidence that they are having an impact on the financial system and the economy — rate hikes are starting to bite – and while that’s not enough to give them pause, it is something they will take into consideration,” wrote Mark Haefele, Chief Investment Officer at UBS Global Wealth Management in a Friday report.

Rate expectations could again change dramatically if the CPI report for February comes in above the year-over-year increase of 6% expected by analysts polled by Reuters. The consumer price report is followed the next day by more inflation data, on producer prices.

While moderation of annual inflation from a peak of 9% last year to current levels was the “easy move”, going from 6% to 3% will be more difficult, said John Lynch, chief investment officer for Comerica Wealth Management.

Markets have been more volatile on average on CPI days over the past year, with the S&P 500 moving an average of 1.8% in either direction on those days against an average 1.2% daily move overall in that time frame.

Midday on Friday, S&P 500 Index options implied that the CPI print would move the index 1.8% in either direction in the hour following the data release, according to Optiver data.

Volatility surged on Friday, with the Cboe Volatility Index, known as Wall Street’s fear gauge, hitting its highest level since late October amid a broad equities selloff.