The weekend may not have been too relaxing for market participants who saw the S&P 500 and Dow Jones plunge almost 2% Friday with the Nasdaq off by almost 3%. But investors may have to get used to anxiety.
The markets were reacting to core inflation data, with the Personal Consumption Expenditures index up 0.4% month-over-month and 2.8% year-over-year in February, hotter than was expected.
“[The] higher-than-expected inflation reading wasn’t exceptionally hot, but it isn’t going to speed up the Fed’s timeline for cutting interest rates, especially given the uncertainty surrounding tariffs,” Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management told CNBC.
Data on consumer spending showed a slower monthly rise than expected (0.4% vs. 0.5%) while personal income was up 0.8% (vs. 0.4% expected) suggesting consumers may be earning more but saving for potential pain ahead or focusing more cash on debt payments.
“On a positive note, strong wage growth pushed income up by 0.5% after accounting for prices, which was stronger than the projection of 0.1% and the 0.4% stride in January,” José Torres, senior economist at Interactive Brokers wrote in a commentary. “The pullback in outlays, alongside the jump in compensation, generated a personal savings rate of 4.6%, an advancement from the prior period’s 4.3%.”
Torres added that investors are “aggressively dumping stocks and greenback exposure in favor of long-dated Treasurys, gold bars, volatility call options, equity index put derivatives and forecast contracts. Furthermore, emblematic of the slowdown worries is the bull-flattening across the yield curve as fixed-income watchers dial down growth expectations.”
The stats prompt some familiar questions: will the Fed cut more aggressively? Is recession coming? Are we going to see inflation continue higher?
With the significant risk of tariff day on Wednesday fast approaching, markets will remain anxious and Dan Siluk, head of Global Short Duration & Liquidity and Portfolio Manager at Janus Henderson, told InvestmentNews that it’s likely to add additional uncertainty to a complex economic environment.
“This upward trend in surprises is underscored by the fact that this is the second-largest core PCE print in the last 24 months, highlighting persistent inflationary pressures,” he said. “Such resilience in core inflation, persistently above the Federal Reserve's target, suggests expectations for a shift in monetary policy may need to be recalibrated, potentially affecting the timing of interest rate adjustments.”
For many American households, the immediate concern is whether the prices that they are already struggling with are going to push them to boiling point. Sentiment has plunged recently with inflation the main concern highlighted in polls by the University of Michigan and the Conference Board.
The cost of living has been stretching household budgets to the limit and 37% of respondents to a Bankrate survey said they have tapped their emergency funds in the last year just to make ends meet, with core-working-age millennials most likely to have done so.
“More than half of Americans who tapped their emergency savings in the past year did so for an unplanned emergency expense, exactly what it is there for,” said Bankrate chief financial analyst Greg McBride, CFA. “But alarming percentages used those withdrawals for monthly bills and day-to-day expenses, indicating possible variability of household income or potential strain on household budgets.”
Fannie Mae says that mortgage rates are easing, although its latest forecast still puts the average rate for a 30-year fixed-rate loan at 6.3% at the end of 2025, twice the average in 2021, and by the end of 2026 the rate will only have dropped to 6.2%.
Businesses are also bracing for rising inflation and challenging economic conditions.
“While tariffs are likely to add a one-off shock to inflation, it remains very unclear on how long the tariffs will last, as it's very possible that a future trade deal leads to reduced or even no tariffs. The tariff questions add lots of uncertainty to the inflation outlook,” Robert Ruggirello, chief investment officer, Brave Eagle Wealth Management, based in New York City, told InvestmentNews.
The latest CNBC CFO Council Survey revealed that most are pessimistic about the state of the US economy and are uncertain about the stock market and the uncertainty around tariffs. Three quarters of CFOs who took part in the survey said they expect a US recession either this year (60%) or in 2026 (15%).
The MetLife and US Chamber of Commerce Small Business Index for Q1 2025 fell to 62.3 this quarter from 69.1.
It also revealed a 10-point increase in concern about revenue to 35%, the highest level since the third quarter of 2021 (34%) while concern about inflation reached a new high of 58%.
“The data is clear, confidence is being shaken as small businesses increasingly worry about their revenue while at the same time confronting the possibility that tariffs will raise costs for them and their employees,” said Tom Sullivan, vice president of Small Business Policy at the US Chamber of Commerce. “But while measures related to revenue and cash flow dipped, other underlying indicators such as hiring plans, investment plans, and overall confidence in the economy remain strong. The prospect of tax and regulatory relief may be buoying optimism amid uncertainty.”
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