U.S. stocks gained on Wednesday after February inflation data came in cooler than expected, offering a brief respite from the recent market selloff. However, despite the initial rally, concerns over an escalating trade war and economic uncertainty continued to weigh on investor sentiment.
The S&P 500, which had recently approached a technical correction, advanced by 0.5%. The Nasdaq 100 climbed 1.1%, driven largely by major tech stocks that had been heavily hit in earlier market declines. The Dow Jones Industrial Average, however, ended the day lower, losing 0.2%.
Despite the positive reaction to the inflation data, some Wall Street analysts cautioned that the relief may be short-lived, with the risks of tariffs and trade policy uncertainty still looming large.
Inflation Data Offers Temporary Relief Amid Trade War Fears
The surprise slowdown in consumer prices brought some relief to traders, but many remain cautious, seeing the situation as the “calm before the storm.” The ongoing trade conflict, sparked by President Donald Trump’s tariffs on imports, continues to influence market behavior. The U.S. equity benchmark briefly erased a 1.3% rally before recovering.
Mark Hackett, Chief of Investment Research at Nationwide, noted, “For the last three weeks, traders have felt like buying this market is like trying to catch a falling knife.” He added that extreme oversold conditions suggest that a relief rally was likely, though uncertainty remains over the broader economic outlook.
Market Outlook: Inflation Moderates, but Trade Risks Persist
While inflation may be moderating, the outlook remains clouded by the impact of trade policies. Oscar Munoz and Gennadiy Goldberg from TD Securities said that the Federal Reserve is unlikely to adjust its policy guidance anytime soon, given the ongoing uncertainty surrounding inflation and trade tensions.
“The Fed will also need to see inflation expectations recovering before cutting rates,” said Jeff Schulze of ClearBridge Investments. He emphasized that the Federal Reserve is focused on maintaining price stability, which remains a challenge due to the volatility of inflation expectations.
Tech Stocks Lead the Rally, but the Road Ahead Remains Uncertain
Tesla Inc. extended its recent surge, rising 12% over two days, while Intel Corp. announced the appointment of industry veteran Lip-Bu Tan as its new CEO. Adobe Inc., however, offered a tepid outlook, which tempered enthusiasm in the tech sector.
The yield on 10-year U.S. Treasuries rose three basis points to 4.31%, while the dollar remained largely unchanged.
Fed’s Role in Shaping Market Expectations
Despite the recent inflation data providing some optimism for risk assets, the Federal Reserve’s role in the market remains a key focus. Traders continue to expect that the Fed will implement another quarter-point rate cut in June. The central bank’s actions will be influenced by upcoming economic data, including a government report on producer prices due Thursday.
David Russell, from TradeStation, suggested that tariffs have not yet significantly impacted consumer prices, offering a positive sign for investors. “For the first time in several weeks, we might get a break in the streak of frightening news,” he said, noting that the outlook for next week’s Fed meeting had become less worrisome.
Fed’s Next Steps: Focus on Labor Market and Economic Projections
Investors are increasingly concerned about the potential effects of the trade war on the labor market and the broader economy. According to Bret Kenwell at eToro, reassuring inflation data alone may not ease investors’ concerns. As such, attention will soon turn to the Federal Reserve’s stance on the economy and its quarterly update on economic projections.
BlackRock’s Rick Rieder pointed out that while the Fed may hold off on drastic policy changes in the short term, a more rapid rate-cutting cycle could follow, depending on upcoming economic reports.
“We’ll be focused on payroll reports and the potential impact of immigration on the labor market,” Rieder said. In the meantime, he recommended focusing on good-quality assets to maintain a balanced portfolio while mitigating risks from interest rate fluctuations.
Conclusion
As the trade war continues to escalate and economic uncertainty rises, investors will be closely watching upcoming inflation reports and the Federal Reserve’s decisions. While recent inflation data provided some relief, the outlook for the labor market and economic growth remains uncertain, suggesting that market volatility may continue in the weeks ahead.
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