Possible Second Wave

Last week we got important jobs data, this week we get important inflation data. Both are important drivers of financial markets, but just how influential each is depends on investors’ view of its risk to the Federal Reserve’s dual mandate of maximum employment and price stability. If perceived risks are greater with inflation than the labor market, market volatility tends to be higher when price data is released versus jobs data. That’s where we find ourselves now. Evaluating underlying inflation is tough to do early in the year, however, since inflation has had a tendency to come in hot early in the year before moderating. This entrenched seasonal pattern has made it hard to separate actual inflation developments from month–to-month noise, adding a layer of complexity to this week’s data. Complicating matters even further is the potential impact of the Trump administration's tariff policies. While it could be premature for these measures to appear in official inflation metrics, several CEOs have said explicitly that they’d increase prices on goods affected by tariffs. And given that the United States sources over 40% of its imports from Mexico, Canada, and China – the targets of those tariffs – the potential for higher prices and a second wave of high inflation is real. Though economic growth estimates have turned negative over the last two weeks, persistent inflation pressures could prevent the Fed from lowering interest rates. This dynamic of lower growth and higher inflation would be classified as stagflationary (see the first half of 2022 for a reminder), and would have significant implications across asset classes. Bond markets are particularly sensitive to inflation surprises, while stocks demonstrate varying degrees of inflation resilience. For example, defensive sectors such as Consumer Staples or Utilities typically weather inflationary environments better than more discretionary-based businesses, and certain assets like gold generally see a boost as well. Still, maintaining perspective is essential. Individual inflation readings provide important insights, but it’s the broader trend that will matter most for the future of markets and interest rates.

Economic and Earnings Calendar

Monday

•   February New York Fed Survey of Consumer Expectations: This is a measure of peoples’ expectations for inflation, jobs prospects, earnings growth, and more.

•   Earnings: Oracle (ORCL)

Tuesday

•   February NFIB Small Business Optimism: This measures how small business owners feel about current and future economic conditions.

•   January Job Openings: A key measure of business demand for labor is the number of job openings, since reducing openings is easier and preferable to layoffs.

Wednesday

•   February Consumer Price Index: The CPI is one of the most popular indicators for tracking consumer price trends and is a marquee release for market watchers.

•   February Treasury Statement: This summarizes the U.S. federal government budget by tracking government revenues and expenditures.

•   Weekly Mortgage Applications: Mortgage activity gives insight on demand conditions in the housing market.

•   Earnings: Adobe (ADBE), Crown Castle International (CCI)

Thursday

•   February Producer Price Index: The PPI tracks price trends that producers face and is down significantly from its peak earlier in the cycle.

•   Weekly Jobless Claims: This high frequency labor market data gives insight into filings for unemployment benefits. Jobless claims have continued to show a labor market that remains strong despite having cooled.

•   Earnings: Dollar General (DG), Lennar (LEN), Ulta Beauty (ULTA)

Friday

•   March University of Michigan Consumer Sentiment: How consumers feel about economic conditions affect their spending habits. This survey places a particular focus on inflation and its trajectory.

•   Earnings: Jabil (JBL)

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