This Time, Inflation Was the 'Good News'

The Weekend Edition is pulled from the daily Stansberry Digest.

Inflation, of all things, soothed the market this week...

The recent broad market sell-off has been swift... This week, the benchmark S&P 500 Index joined the tech-heavy Nasdaq Composite Index in formal "correction" territory, falling 10% from previous all-time highs... and in roughly three weeks.

But on Wednesday, we got some respite when the Bureau of Labor Statistics released its consumer price index ("CPI") data for February.

It showed inflation rose 0.2% from January and 2.8% year over year. And when stripping out energy and food costs, "core" inflation rose 0.2% month over month and 3.1% year over year. All four of those readings came in below Wall Street's estimates.

The year-over-year readings were lower than those from January, marking the first time since last July that both core CPI and headline CPI showed a slowing inflation rate. And core CPI hit the lowest level since April 2021.

Mr. Market appeared to exhale on some good news and reacted in kind.

But the S&P 500 still remains below its 200-day moving average. So we'll need to see stocks climb back above that technical level to be more confident in a turnaround.

Why inflation still matters...

Of course, ever-rising prices always matter to everyone, if in different ways.

For example, as our Stansberry Research senior analyst Alan Gula shared with a group of colleagues this week, you may notice your breakfast is still getting a lot more expensive. The "Bacon, Egg & Cheese Price Index With A Cup of Joe" from Bloomberg continued to rise last month and is now up about 68% since 2019.

But we're not referring to the fact that everyday Americans are still noticing higher prices at the store. What we're talking about is why the inflation story still matters to the market.

Coming up next week, the Federal Reserve will meet to decide its next policy move. And this week's CPI and producer price index releases are the most recent numbers the central bank will review while it decides on interest rates.

A significant drop in inflation or a rise in unemployment (the other piece of the Fed's dual mandate) could encourage the Fed to cut rates sooner than later. And rising inflation or falling unemployment could lead to a rate hike or a longer "pause" in changes.

According to the CME Group's FedWatch tool, federal-funds futures traders still expect the central bank to hold rates for the next two meetings before cutting in June. And they've put 99% odds that no change will happen this month.

Based on what we've heard from Fed officials lately about concerns of reigniting high(er) inflation, we'd be just as surprised as the market if the Fed were to cut rates next Wednesday.

So, instead of expecting a rate move next week, we're going to keep an eye on what the Fed says about the future path of rates.

Since this is the March policy meeting, the Fed will release one of its quarterly Summary of Economic Projections. This is where central bankers share their projections for interest rates, economic growth, and unemployment.

So far, we've seen a disconnect between markets and what we've been hearing from the Fed. Last week's Fed speakers all tried to throw cold water on hopes for a rate cut in the near future. If they do more of this, it could disappoint the market.

And this is entirely possible. It will take more than one month of soft inflation data to move the needle for the Fed. Plus, inflation is still well above the central bank's 2% annualized goal.

What's more, no one knows yet what tariffs will do to inflation. But if February's data is the start of a trend lower, the Fed will start to get more accommodative as the year goes on. If Chair Jerome Powell suggests that path, it would likely be well reflected in stock prices.

We also had moves in the trade war this week...

The latest moves included the European Union ("EU") and Canada announcing their own tariffs in response to President Donald Trump's blanket 25% tax on steel and aluminum imports that went into effect on Wednesday.

Canada will add a 25% tariff on more than $20 billion of U.S. goods, including steel, aluminum, computers, sports equipment, and cast-iron products. These are in addition to the 25% counter-tariffs that were already in place.

The EU also said it will tax an additional $28 billion worth of U.S. goods starting in April. European Commission President Ursula von der Leyen told reporters on Wednesday...

Tariffs are taxes. They are bad for business and worse for consumers. They are disrupting supply chains. They bring uncertainty for the economy. Jobs are at stake, prices [are] up. Nobody needs that on both sides.

But she said that the EU "must act to protect consumers and businesses."

Meanwhile, Chinese officials are also digging in... As CNBC said this week...

China is willing to do more to address White House concerns about illicit fentanyl trade, but it will be "a different thing" if ongoing debate over the drug facilitates more U.S. tariffs on the world's second largest economy, an official from the Chinese Ministry of Foreign Affairs told reporters Wednesday.

Washington should have "said a big thank you" to China on what it has done to restrict fentanyl trade in the U.S., the official said via an official English translation, claiming the White House did not appreciate the effort and instead raised duties on Chinese goods twice this year over the drug.

In other words, negotiations are ramping up with the U.S. and China next. It's enough to make your head spin – and has made enough investors sell a lot of stocks in the past couple weeks.

Putting this week together...

Stocks endured another wild week like we've seen lately, but there are signs that point to volatility cooling off.

The CBOE Volatility Index ("VIX") – considered by some as the market's "fear gauge" – fell from its Tuesday high of 29 to roughly 22 on Friday. While 22 is still higher than the VIX has been for most of the past two years, it's still not at historically high levels.

And the high-yield credit spread, while about 80 basis points higher than it was just a month ago, isn't at what we would consider an elevated level either. That doesn't mean it can't get there, but it does mean that not many debt investors think the entire economy is on the brink of collapse right now.

If you're bullish – or at least expect a slowdown of what is already at minimum a market correction – keep an eye on these indicators. A few more weeks like this will tell us more.

All the best,

Corey McLaughlin

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