US equity indexes experienced a mixed performance after midday Wednesday during a volatile trading session, following reports that inflation eased more than expected, coinciding with the implementation of President Donald Trump’s 25% tariffs on aluminum and steel imports. The Nasdaq Composite saw a notable increase of 1.4%, closing at 17,688.2, while the S&P 500 rose by 0.7% to reach 5,612.1.
Conversely, the Dow Jones Industrial Average experienced a slight decline of 0.14%, settling at 41,374.3. In the context of sector performance, technology, communication services, and consumer discretionary stocks demonstrated strength, reflecting the positive influence of the unexpectedly low inflation data.
Among the top gainers within the market, six of the Magnificent-7 stocks emerged prominently, with Tesla and Nvidia leading the charge. On the other hand, consumer staples and health care sectors saw the steepest declines, signaling a market sentiment that exhibits a preference for riskier investments.
This behavior aligns with the implications of the inflation reports, which offered new insights into consumer spending habits and market dynamics. The Bureau of Labor Statistics released data revealing that the consumer price index growth retreated to 0.2% in February, down from a 0.5% increase in January.
Analysts participating in a Bloomberg-compiled survey had anticipated a rise of 0.3%. Year-on-year, inflation moderated to 2.8%, a decrease from January's 3% growth and below Wall Street's expectation of 2.9%. Core inflation, which omits the unpredictable food and energy components, similarly decelerated to 0.2% from the previous month’s 0.4%, also falling short of the consensus estimate of 0.3%.
Year-on-year, core inflation culminated at 3.1%, which was again less than the forecasted 3.2%. "This was a well-behaved CPI inflation report that will raise expectations for an even tamer core (personal consumption expenditures) inflation print later this month," commented Scott Anderson, Chief US economist at BMO.
He further noted the significance of the report, stating, "This will calm market fears that consumer inflation is meaningfully heating up again and getting away from the [Federal Reserve’s] goal even before new tariffs on goods imports hit." While it won’t suffice for the Federal Reserve to reduce interest rates in March, it opens the door for potential cuts later in the year.
The Fed funds futures currently anticipate three quarter-point reductions beginning in June, as indicated by the FedWatch Tool. For the Federal Reserve, mitigating inflation pressure alleviates the dilemma of deciding which side of its dual mandate to prioritize while shaping monetary policy. As Simons articulated, "They can continue to maintain a patient stance, while also standing ready to ease financial conditions should the labor market cool further." In terms of market volatility, the CBOE's volatility index (VIX), often referred to as the fear gauge, plummeted by 8% to 24.8, marking a retreat from levels not seen in approximately seven months. Turning to commodities, West Texas Intermediate crude oil futures surged 2.3% to $67.75 per barrel.
The dynamics in the bond market reflected upward shifts, with most US Treasury yields increasing intraday; notably, the 10-year yield rose by 1.1 basis points to 4.30%, and the two-year rate climbed 3.5 basis points to reach 3.98%. Although this movement can be seen as a "welcome directional adjustment" following several months of inflationary pressures, Stifel emphasizes that the brief reprieve offered by one month's data does little to inspire confidence in a longer-lasting disinflationary trend. Amid these developments, the Trump administration’s imposition of a 25% tariff on global steel and aluminum has implications beyond US borders, impacting allied nations such as the UK.
As a punitive response, the European Union and other allies have initiated reciprocal tariffs on $28 billion of US goods, scheduled to take effect from April 1, with additional measures projected to be implemented by mid-April. Responses from Canada are anticipated, promising to counter Trump's import duties with increased tariffs on CA$30 billion (approximately $20.86 billion) worth of US goods, particularly affecting steel and aluminum sectors. In commodity markets, gold futures gained 0.8%, trading at $2,943.01, while silver saw a robust rise of 1.6% to reach $33.68..