NEW YORK, March 7 (Reuters) - A critical inflation
report in the coming week could further rattle an increasingly
tumultuous U.S. stock market, with investors worried about an
economic growth slowdown and President Donald Trump's tariffs.
Despite a gain on Friday, the benchmark S&P 500
marked its worst week in six months. The tech-heavy Nasdaq
Composite on Thursday ended down more than 10% from its
December all-time closing high, confirming it has been in a
correction for several months.
Investors were grappling with dramatic policy change around the
world. Trump's back-and-forth implementation of fresh tariffs on
Mexico, Canada and China exacerbated broad concerns about the
economy. Markets were also shaken by Germany's surprise spending
plans, which drove a selloff in the benchmark German Bund.
As recent U.S. economic data has disappointed, one silver
lining for stocks has been markets factoring in more interest
rate cuts by the Federal Reserve this year to account for
potential growth weakening.
But Wednesday's U.S. consumer price index report could
scuttle those expectations if it confirms that inflation is
still simmering at levels that force the Fed to keep monetary
policy tighter.
"A hot CPI print will likely scare the market," said Bryant
VanCronkhite, senior portfolio manager at Allspring Global
Investments. "The market still wants the Fed to come to the
rescue... Until inflation and inflation expectations come down,
the Fed is handcuffed."
Investors are mindful of last month's hotter-than-expected
CPI data that saw inflation rise 0.5% in January, its biggest
monthly gain since August 2023.
CPI for February is expected to have climbed 0.3%, according
to a Reuters poll.
The inflation report will be among the last key pieces of data
before the Fed next meets on March 18-19. While the central bank
is expected to hold its benchmark rate steady at 4.25%-4.5% at
that meeting, Fed funds futures indicate about 70 more basis
points of easing are expected through December of this year,
according to LSEG data.
"Equities would not enjoy a hot CPI print because... it
softens that Fed easing view that has been starting to build in
the market," said John Velis, Americas macro strategist at BNY.
Investors are also increasingly concerned about "stagflation" -
slowing growth and rising inflation that is feared to be a toxic
combination for a broad range of assets.
An elevated CPI report could "bring the 'S-word' into play,"
Velis said.
Data on Friday
showed U.S. job growth picked up in February, but cracks
are emerging in the once-resilient labor market amid chaotic
trade policy and federal government spending cuts.
The market's focus will also be on Washington, as lawmakers
wrangle over a spending bill that would avert a partial shutdown
of agencies late next week.
Trade policy remains in the spotlight. Tariffs on foreign
imports are expected to hurt corporate profits and increase
consumer prices, but investors are weighing how lasting the
levies will be against their potential as negotiating tools.
Trump on Thursday said Mexico and Canada won't be required to
pay tariffs on goods that fall under a prior trade deal until
April 2.
Under the new Trump administration, the barrage of
initiatives on trade and other issues, such as federal workforce
cuts, has fed uncertainty for businesses and consumers.
Market unease is also rising. The Cboe Volatility index
jumped this week and was around its highest level since
late last year.
"Volatility is here to stay for a while because we do not
have economic and trade policy certainty," said Irene Tunkel,
chief U.S. equity strategist at BCA Research.
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