U.S. Stocks Open Higher After Powell Says Fed Is Ready to Be More Aggressive

In the U.S. Treasury market, a selloff in government bonds intensified, sending the yield on the 10-year U.S. Treasury note climbing to 2.364%, from 2.315% Monday. The yield on the benchmark note is now hovering around its highest yield since May 2019, before the Covid-19 pandemic upended financial markets. Yields rise when bond prices decline. 

Stocks, bonds, commodities and currencies have been whipsawed by volatility for the past month as investors have tried to assess the economic fallout from Russia’s war in Ukraine. Many investors now fear that the war could keep inflation sustained and stunt economic growth in the U.S. and Europe.

This week, however, investors were thrown a new curveball when Mr. Powell spoke Monday and struck a tougher tone than the one he used when the Fed lifted interest rates from near zero last week. He stressed the uncertainty facing the central bank and said officials are ready to move their policy in a more disruptive direction, saying the Fed would shift into a more restrictive stance if needed.

The comments prompted some analysts and investors to reassess interest-rate expectations. Economists at Goldman Sachs Group said in a note after Mr. Powell’s remarks that they now expect half-percentage-point increases at both of the Fed’s May and June meetings. That compares with expectations of quarter-percentage-point increases at both of the meetings previously.

“The message that came out of the [Fed] meeting last week is that they are going to be tightening [monetary policy] but the U.S. economy is resilient enough to withstand that,” said Huw Roberts, head of analytics at Quant Insight, a data analytics firm. “The equity market chose to emphasize the economic resilience portion.”

Monday’s comments rattled some of those expectations, he said, and heightened fears that the Fed could be tightening more quickly just as the economy is slowing. “The big variable now is the economic growth side of things,” Mr. Roberts continued. 

Many investors are keeping a close watch on the so-called yield curve, which measures the spread between short- and long-term rates and is often seen as a strong indicator of sentiment about the prospects for economic growth. Recently, the gap between yields on shorter-term and longer-term U.S. Treasury bonds has been shrinking, stirring anxieties that the bond market is close to signaling a potential recession. 

The two-year Treasury yield—which is especially sensitive to changes in monetary policy—climbed to 2.179% Tuesday, from 2.132% Monday. 

To get a better a read on the U.S. economic landscape, investors on Tuesday morning will parse data from the Federal Reserve Bank of Richmond on manufacturing activity. The economic data, due at 10 a.m. ET, is expected to register an increase from the prior month. 

In morning trading in New York, shares of banks rose, tracking similar moves in Europe. In the U.S.,

Morgan Stanley

and

Citigroup

each added more than 0.8%. In Europe,

Société Générale

advanced 0.9% and

Deutsche Bank

jumped 3.6%. 

In other sectors,

Nike

advanced 4.8% after it reported revenue that beat analyst expectations. Shares of

Okta

fell 4.5% after a hacking group posted screenshots purporting to show that it had gained access to Okta.com’s administrator and other systems. The company said Tuesday that a preliminary investigation found no evidence of any malicious activity, adding that the screenshots were most likely related to a January security incident.

In the energy markets, futures for Brent crude, the international benchmark, rose 0.7% to $116.43 a barrel. Last week, Brent prices fell below $100 before reversing and climbing higher. Support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, raising the possibility of more volatility ahead. 

In cryptocurrency markets, bitcoin rose about 4.2% from its 5 p.m. ET level Monday to trade around $42,896. The price of the cryptocurrency has swung sharply within the past month but has largely traded above $40,000 since the middle of last week.

In Europe, the pan-continental Stoxx Europe 600 increased 0.5%, putting it on pace to rise for a fifth consecutive session. 

In Asia, major indexes also largely ended higher. Hong Kong’s Hang Seng gained about 3.2%, while Japan’s Nikkei 225 rose 1.5%. China’s Shanghai Composite advanced 0.2%.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com