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The S&P 500 continued to flirt with correction territory as investors used an early morning rally to sell.
At the same time, concerns over the ongoing trade war remained a key overhang on the market, though investors got a brief reprieve following the release of the latest U.S. consumer price inflation data.
The core Consumer Price Index (CPI) rose 0.2% month-over-month in February, according to the Bureau of Labor Statistics—slightly below the 0.3% economists had expected. The softer-than-expected number was a welcome relief, especially after January’s surprise 0.4% jump in the core CPI.
On a year-over-year basis, the core CPI increased by 3.1%, also below the 3.2% forecast and down from January’s 3.3% reading.
The market initially reacted positively, with the SPDR S&P 500 ETF Trust (SPY) jumping 1.1% at the open as investors saw the data as a sign that the Federal Reserve may have more room to cut interest rates. However, by midmorning, the ETF had pared its gains.
Rate-Cut Hopes vs. Trade War Uncertainty
In recent weeks, expectations for the Federal Reserve to cut rates have gained traction, with investors hoping the central bank might step in to support the economy amid headwinds from the Trump administration’s multifront trade war.
But some analysts urged caution. February’s inflation data is backward-looking, and Trump’s tariffs could put upward pressure on consumer prices in the coming months, potentially making the Fed hesitant to ease policy.
Ultimately, whether and how much the Fed cuts rates will depend on the ongoing tug-of-war between inflation concerns and economic growth.
Bond Market Signals Mixed Outlook
Beyond the volatility in equities, this push-and-pull dynamic was also evident in the bond market. Despite the tame inflation report, yields on the 10-year Treasury rose 3 basis points to 4.3%, while the iShares 7-10 Year Treasury Bond ETF (IEF) fell fractionally.
One possible explanation is that lower inflation increases the likelihood of Fed rate cuts, reducing the risk of an economic slowdown or recession—steepening the yield curve. Alternatively, bond investors may be looking past February’s data and pricing in the potential for higher inflation in the coming months.
Parsing the bond market’s sentiment remains tricky. Yields have declined from 4.57% at the start of the year but remain well within their multi-year range.
Unlike the mixed signals in bonds, the stock market’s reaction has been much easier to read—investors remain anxious about the impact of Trump’s trade policies on corporate earnings and economic growth.
The next few weeks will be pivotal. Whether the Fed steps in to cushion the economy will largely depend on how tariffs impact not just growth but inflation as well.