Markets Turn Lower as Trade War Tensions Overwhelm Positive Inflation Data
U.S. stocks initially rallied Wednesday after the Consumer Price Index showed housing costs rising at the slowest pace in over three years, but the gains evaporated as escalating trade tensions overwhelmed the positive inflation news. Markets, which had jumped on signs of cooling inflation, reversed course after Canada and the European Union announced retaliatory tariffs against the United States, highlighting how trade concerns are now overshadowing economic improvements.
Broader Inflation Picture Improves
Overall, consumer prices rose 0.2% over the previous month, down from January’s monthly increase of 0.5% and below economists’ expectations of a 0.3% rise. The annual inflation rate came in at 2.8%, down from 3% in January, while core inflation (excluding food and energy) eased to 3.1% year-over-year.
Several factors contributed to the cooling inflation:
- The rent index rose 0.3% in February, matching January’s pace
- Owners’ equivalent rent increased 0.3% for the month, unchanged from January
- Lodging away from home price increases cooled dramatically, rising just 0.2% in February compared to 1.4% in January
Markets Turn Lower Despite Inflation Relief
In a clear sign that tariff concerns are overwhelming positive economic data, major indices turned lower despite the better-than-expected inflation report. The S&P 500, which initially surged 1.3% on the favorable CPI news, reversed course to close down 0.2% as trade war anxieties took center stage. The Nasdaq 100 initially showed resilience but ultimately fell 0.3%, while the Dow Jones Industrial Average dropped more significantly, declining 0.86%.
The market selloff intensified after Canada announced new 25% counter-tariffs on approximately $30 billion of US-made items, following the Trump administration’s decision to implement global levies on imports of steel and aluminum. Adding to the trade tensions, the European Union detailed plans to impose 50% tariffs on Kentucky bourbon and Harley-Davidson motorcycles beginning in April, with further levies on American goods ranging from chewing gum to soybeans set to follow in mid-April, potentially affecting U.S. exports worth $24.5 billion.
Fed Policy and Economic Outlook
Traders are still fully pricing in the first quarter-point interest-rate cut of the year in June, with about 73 basis points of easing projected for all of 2025. However, economists warn that tariffs could complicate the Federal Reserve’s path forward.
“Today’s cooler-than-expected CPI reading was a breath of fresh air, but no one should expect the Fed to start cutting rates immediately,” said Ellen Zentner at Morgan Stanley Wealth Management. “The Fed has adopted a wait-and-see posture, and given the uncertainty of how trade and immigration policy will impact the economy, they’re going to want to see more than one month of friendly inflation data.”
Some economists believe that rental price growth will continue to move lower this year, potentially pressured by stricter immigration policies and ongoing trade tensions.
“Policy can cut both ways—weaker immigration means less housing demand, but also less labor supply for construction, while tariffs could impact building costs and serve as a headwind to new construction,” Wolfe noted.
Implied FED Rate Cuts. Source: Bloomberg L.P.
Tariffs Cast Shadow Over Inflation Outlook
Wednesday’s positive inflation report largely predates President Trump’s recent tariff actions, meaning the full effect of new tariffs isn’t captured in the data. The U.S. imposed an additional 10% tariff on Chinese-made goods in early February, but many other tariffs have been put on hold or didn’t take effect until March.
Goldman Sachs economists recently raised their forecast for the Commerce Department’s core inflation gauge to 2.9% for the fourth quarter of 2025, up from a previous estimate of 2.4%, largely due to anticipated tariff impacts.
As the trade war escalates, market concerns have shifted from inflation to broader economic health. The American Chamber of Commerce to the EU warned Wednesday that the U.S.’s metals tariffs and the EU’s countermeasures “will only harm jobs, prosperity and security on both sides of the Atlantic.”
US500 (D1 Interval)
US500 erased early gains after tariff tensions escalated. Bears will eye to retest 61.8% Fibonacci retracement level while bulls have to regain 50% Fibonacci retracement level. RSI is in oversold territory with MACD continuing bearish divergence.
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