Inflation and Tariff Fears Grip The Market
Stocks sold off sharply on Friday, pressured by growing uncertainty on U.S. trade policy as well as a more grim outlook on inflation.
The Dow Jones Industrial Average closed down 715.80 points, or 1.69%, at 41,583.90. The S&P 500 shed 1.97% to 5,580.94, ending the week down for the fifth time in the last six weeks. The Nasdaq Composite plunged 2.7% to settle at 17,322.99.
Shares of several technology giants dropped, putting pressure on the broader market. Google-parent Alphabet lost 4.9%, while Meta and Amazon each shed 4.3%.
This week, the S&P 500 lost 1.53%, while the 30-stock Dow shed 0.96%. The Nasdaq declined by 2.59%. With this latest losing week, Nasdaq is now on pace for a more than 8% monthly decline, which would be its worst monthly performance since December 2022.
Stocks took a leg lower on Friday after the University of Michigan’s final read on consumer sentiment for March reflected the highest long-term inflation expectations since 1993.
Friday’s core personal consumption expenditures price index also came out hotter-than-expected, rising 2.8% in February and reflecting a 0.4% increase for the month, stoking concerns about persistent inflation. Economists surveyed by Dow Jones had been looking for respective numbers of 2.7% and 0.3%. Consumer spending accelerated 0.4% for the month, below the 0.5% forecast, according to fresh data from the Bureau of Economic Analysis.
“The market is getting squeezed by both sides. There is uncertainty around next week’s reciprocal tariffs hitting the major exporting sectors like tech alongside concerns about a weakening consumer facing higher prices hitting areas like discretionary,” said Scott Helfstein, head of investment strategy at Global X.
Helfstein added, however, that the news on inflation and consumer spending “was not that bad” and could simply represent a hiccup in near-term sentiment as investors struggle to understand the Trump administration’s new policies.
“Despite today’s sell-off and broader market volatility of the past few weeks, there have not been big inflows into money markets. It seems like a lot of investors are trying to ride this out,” he said.
The latest inflation report comes amid a flurry of tariff announcements from the White House, which have roiled the market in recent weeks. Investors are looking ahead to April 2, when President Donald Trump is expected to announce further tariff plans, for further clarity.
On Friday, Canadian Prime Minister Mark Carney told Trump that the Canadian government will implement retaliatory tariffs following Wednesday’s announcements. Bloomberg earlier reported that the European Union is identifying concessions it could make to Trump’s administration to reduce the reciprocal tariffs from the U.S.
Trump earlier this week announced a 25% tariff on “all cars that are not made in the United States,” a decision that hurt auto stocks and raised concerns of an economic slowdown.
Jennifer Shonberger of Yahoo Finance also reports the Fed’s inflation dilemma just got more challenging as Trump's new tariffs loom:
The Federal Reserve’s preferred inflation gauge showed prices in February rose more than expected, re-intensifying the central bank’s inflation battle at a time when it expects new tariffs from the Trump administration to push prices higher.
The new reading makes it more likely that officials hold rates at current levels for longer as policymakers look for signs of how President Trump's policies will affect the US economy in the months ahead.
"It looks like a 'wait-and-see' Fed still has more waiting to do," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
"Today’s higher-than-expected inflation reading wasn’t exceptionally hot, but it isn’t going to speed up the Fed’s timeline for cutting interest rates, especially given the uncertainty surrounding tariffs."
Fed Chair Jerome Powell has said that his "base case" is that any extra inflation from Trump's slate of tariffs will be "transitory." But some of his colleagues worry the effects could be more persistent, adding to the uncertainties ahead for the central bank.
The Fed's goal is to get inflation down to its 2% target, but the key measure released Friday remains well above that marker. The "core" Personal Consumption Expenditures (PCE) Index, which excludes volatile food and energy prices, rose 2.8% year-over-year.
That reading was higher than economists' estimate of 2.7%, jumping from 2.6% in January. The month-over-month reading was also hotter, clocking in at 0.4%. That was higher than the 0.3% expected and up from that same level in the previous month.
Inflation now stands at the level the Fed predicted it would be at year's end — and that's before some of Trump's most aggressive tariff plans kick in. The president plans to announce a sweeping set of "reciprocal" country-by-country duties next week.
Fed officials raised their 2025 inflation forecast at a meeting last week, to 2.8% from 2.5% previously, due in large part to uncertainty surrounding the new tariffs. They also lowered their economic growth forecasts for the year.
But February’s inflation report now shows that even the Fed’s revised inflation forecast may prove to be too conservative.
'Transitory' — or not?
Traders are still pricing in an interest rate cut in June with the potential for another cut in the fall. And the two-cut prediction from Wall Street still matches what Fed officials estimated at their meeting last week where they held rates unchanged.
Some Fed watchers, however, argue that these rate cut predictions could be challenged, too.
The new PCE reading "reinforces our view that the Fed is unlikely to cut interest rates this year," said Stephen Brown, deputy chief North America economist for Capital Economics.
The critical question ahead for Fed policymakers is how much of any additional inflation they expect to see is a one-off effect that will prove to be temporary.
While Powell has argued in favor of a potential "transitory" effect, some of his colleagues have offered more caution.
Boston Fed president Susan Collins said Thursday while speaking in Boston that she believes it’s “inevitable that tariffs are going to increase inflation in the near term” and she expects the uptick in inflation could be short-lived.
But she added, “there are risks around that and depending on how that unfolds, it could be more persistent.”
Collins stressed that if there are additional rounds of tariffs, they are more broad-based, or if there are different levels of retaliation, then inflation could be more persistent than just a relatively fast adjustment to a higher level of prices.
In that context she said she would be looking more closely at inflation expectations because anchoring expectations is important for the Fed’s credibility to bring inflation back down.
St. Louis Fed president Alberto Musalem also said this week that he could be "wary of assuming that the impact of tariff increases on inflation will be entirely temporary, or that a full 'look-through' strategy will necessarily be appropriate."
He noted that tariffs could create a one-time increase in price-levels, but that so-called "indirect effects" where domestic producers raise prices as importers raise prices could cause inflation to be more long lasting.
Musalem offered the example of beer from Canada. If it is subject to a 25% tariff, US consumers could shift from Canadian beer to American-made Budweiser, and then Budweiser could increase its prices as people look for locally produced goods.
"Distinguishing, especially in real-time, between direct, indirect, and second-round effects entails considerable uncertainty," he added.
It's been a tough week for markets as tariffs and inflation fears loom large.
On inflation, tariffs or no tariffs, it remains the big wildcard for the second half of the year.
Obviously, I agree with those who think tariffs will not lead to "transitoty inflation," that's pure nonsense especially if a full-blown tariff war breaks out.
But I remain unconvinced that Trump really wants a tariff war and this week we got a sense of why when he threatened higher tariffs on Canada and the EU if they combine forces to slap tariffs on the US.
That just tells me that Trump is very worried about that possibility and he's just using tariffs to negotiate.
However, he made a huge mistake slapping a 25% tariff on all foreign cars, not realizing how intertwined the supply chains are between Canada and the US, not to mention many Japanese, German and Korean automakers have invested billions in US plants and make cars there.
It's a complete and utter mess and now that "Liberation Day" is right around the corner, many are bracing for chaos, including US ports.
Again, I don't think Trump really wants a full-blown tariff war with other nations risking to plunge the US and world into a recession but I could be wrong.
A global recession will mean growth fears will dominate inflation fears, yields will plunge.
If however we manage to get past this tariff tantrum, growth moderates but inflation persists, then that will wreak havoc as rates will remain elevated, the Fed will not cut and stagflation will develop.
Stagflation could develop with tariffs too but I see more of a growth risk there, meaning unemployment will soar and inflation will be capped.
Either way, the way stocks are trading, it's clear big investors are worried about persistent inflation and a recession.
Growth stocks are bearing the brunt of the selloff in Q1:
And if you look at the best and worst large cap stocks year-to-date, you see a clearer picture of what is going on, especially looking at the worst performing large cap stocks so far this year:
Look at the charts below of Nvidia, Microsoft, Google and Meta for this month:
Nvidia shares are retesting their low from earlier this month, Microsoft shares are making a new 52-week low, Google and Meta shares are sliding lower.
I can tell you it's pretty much the same for Amazon and Apple and we all know what's going on in Tesla shares this year.
The way mega cap and hyper growth stocks are selling off this past quarter, it's a huge re-rating based on expectations of higher rates.
Is this another golden buying opportunity or the start of a long and painful bear market where big tech shares lead the market lower?
I can't answer that just yet, I need one more quarter to figure out if inflation expectations are picking up.
Below, Tom Lee, Fundstrat, joins 'Closing Bell Overtime' to talk the state of the markets and the impact of tariffs.
Also, Bob Elliott, Unlimited CEO, and Richard Bernstein, Richard Bernstein Advisors CEO, join 'Closing Bell Overtime' to talk the days market selloff.
Lastly, 'Fast Money' traders react to the day's market selloff.
Next week is a big week, tariffs, ISM and jobs data all coming up.
Comments
Post a Comment