Investors and traders (two distinct classes of market participants, only one of which makes money reliably over long horizons) are compelled to grapple with a US inflation update this week.
CPI’s due Wednesday, and the BLS figures tend to be less friendly than the BEA’s PCE price growth series, which the Fed officially targets. The last CPI update (covering January) was regrettable, to put it politely. The new figures, covering February, may be better at the margins, but the release will almost surely underscore fears that underlying inflation in the US has reset meaningfully higher.
Consensus is looking for 0.3% from the MoM core readout, a deceleration from January’s brisk pace, but nevertheless a mile above what the Fed needs if they’re truly interested in returning this metric to target.
As the simple figure reminds you, MoM prints conducive to 2% annual price growth on the BLS’s core measure are few and far between.
Jerome Powell’s reassurances aside, there’s some evidence that longer run, or at least medium-term, consumer inflation expectations are again at risk of becoming unanchored although, to be fair to Powell, that doesn’t have anything to do with the Fed this time. Rather, it’s about tariffs.
Near-term (i.e., 12-month) inflation expectations are definitely reflecting trade war worries, something Powell gently acknowledged late last week. A new vintage of the NY Fed’s consumer poll, which includes surveyed household inflation expectations at three different time horizons, is due Monday.
Friday’s preliminary read on University of Michigan sentiment for March will be critical. Recall that five- to 10-year inflation expectations in the final Michigan release for February rose to the highest since 1995, a clarion call for the Fed regarding the impact of tariffs on consumer psychology.
If that series rises any further, an already awkward discussion at the March FOMC meeting will be even more uncomfortable.
Obviously, the Fed’s on hold at the March 18/19 gathering, but traders will expect the dot plot to reflect market pricing for 2025 rate cuts which, after a run of soft data, now suggests high odds of three reductions. Some policymakers will be reluctant to mark their dots to market in an environment where core inflation’s sticky, inflation expectations are rising and trade policy’s a wild card on predictable days and a rabid squirrel every other time.
“I want to see what happens with this February inflation data,” Chris Waller mused recently, adding that he also “want[s] to see a little bit more with what happens with tariff policies.” Well, Chris, you’re going to see “a little bit more” about tariffs all right, but I gotta tell you, my friend, if it’s clarity you seek, you’re not going to find it in US trade policy right now.
The PPI release, on Thursday, will help economists refine their PCE forecasts, and JOLTS data due Tuesday will give the Fed a bit more to work with on the labor market front. NFIB, also due Tuesday, could be fun. Small business owners, who you can be sure went overwhelmingly for Trump in November, were certain that “Trump 2.0” would be a glorious time. I’m curious as to how they’re feeling now.
It goes without saying that tariff headlines will command a very large share of financial media coverage in the days ahead, and with US stocks coming off their worst week in years, market participants will continue to fret about the potential for trade uncertainty to feed stock losses, which in turn reverses the vaunted “wealth effect” to the possible detriment of consumer spending.
“Much has been said regarding the ‘Trump put’ and the potential for the President’s apparent sensitivity to the stock market to temper a more dramatic trade war,” BMO’s Ian Lyngen and Vail Hartman remarked. “There is some evidence that this dynamic remains in place [but] the equity market is vulnerable to the swift shifts in Trump’s policies and there is nothing to point toward stability in the near-term.”
It is well to keep in mind tariffs are a consumption tax on imports. Consumption taxes don’t increase consumption, except initially when consumers and businesses attempt to front run the tax. It will be interesting to see if the channel gets stuffed and consumption falls off rapidly in the next 3-6 months. It is amusing to watch Bessent and Lutnick and wall street contort themselves trying to make this like some grand plan. It isn’t and we will all pay the price.
A couple things about Trump are clear. He can’t function without “enemies” he can pretend he has conquered to show his “pure genius” and become the top boss. He might not have started out to make enemies of us all, but that’s the way it’s working out. His cult followers will be the last to take a bullet for him, even though it won’t take long for everyone to get on the list. He’s running out of steam. His two latest idiocies were cutting down one our most important resources and playing with DST. It’s also clear he has only the vaguest notion about his congressional constituents, especially those he treats as “suckers.” After the election last year, I wrote a number on a piece of paper and locked it in my desk. It said Musk wouldn’t last past spring. I’ll be wrong, but not by much. Almost the entire cabinet has made at least one really stupid mistake so far. Who knew the first to break ranks would be Rubio.
cult followers, dead accurate !
There is no Trump put, because he cannot do the thing he’d have to do to make good on the put. He cannot forswear tariffs, he cannot stop deporting labor, he cannot stop slashing at the so-called deep state, he cannot stop talking from the poor to give to the rich. He might be able to read mollifying words off a teleprompter, but his credibility is evaporating.
Never underestimate stupid. And never doubt the faith of a doomsday cult.
“Traders Brace” ….Hang on boys. So much confusion. You’d think it was planned !