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(Bloomberg) — Cooler-than-forecast February inflation pushed stocks higher after two days of heavy losses. A kneejerk rally in bonds quickly reversed and yields rose across the curve amid concerns over an escalating trade war.
Equities advanced after a selloff that put the S&P 500 on the verge of a technical correction. The bounce was led by tech megacaps, which got heavily hit during the recent market rout. While the surprise slowdown in consumer prices brought a degree of relief to traders, several voices on Wall Street saw the data as the “calm before the storm” given the uncertainties around the potential impacts of tariffs on the economy.
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In fact, all the anxiety around President Donald Trump’s trade war continued to influence sentiment, with the US equity benchmark briefly erasing a 1.3% rally before moving higher again.
“For the last three weeks, traders have felt like buying this market is like trying to catch a falling knife,” said Mark Hackett at Nationwide. “But extreme oversold conditions and near-universal pessimism suggest a relief rally is likely.”
Despite the improvement provided by the latest consumer price index, uncertainty remains in the air as the outlook for inflation remains hazy due to trade policy developments, according to Oscar Munoz and Gennadiy Goldberg at TD Securities.
“In this context, the Fed is unlikely to change its policy guidance anytime soon,” they said.
The S&P 500 rose 0.5%. The Nasdaq 100 climbed 1.1%. The Dow Jones Industrial Average lost 0.2%. Tesla Inc. extended a two-day surge to 12%. In late hours, Intel Corp. said it named industry veteran Lip-Bu Tan as its next chief executive officer. Adobe Inc. gave a tepid outlook.
The yield on 10-year Treasuries advanced three basis points to 4.31%. A dollar gauge was little changed.
Today’s inflation release is unambiguously positive for risk assets as there is greater confidence that inflation is not re-accelerating like January’s data showed, which gives policymakers a bit of breathing room and should allow the Fed to loosen policy should signs of labor market weakness emerge, according to Jeff Schulze at ClearBridge Investments.
“However, the Fed will also need to see that inflation expectations are recovering from their recent rise before cutting rates, as a de-anchoring of inflation expectations is what keeps most central bankers up at night, given the challenge it represents to restoring price stability in the future,” he said.
To David Russell at TradeStation, a June Fed cut is still on the table because inflation continues to moderate, especially the key shelter category.
“The White House and the Fed are breathing a sigh of relief because tariffs didn’t filter through to consumer prices,” he said. “This is a positive for investors because a huge amount of negativity is priced into stocks. For the first time in several weeks, we might get a break in the streak of frightening news. The other shoe didn’t drop, and that could be good news for Wall Street. Next week’s Fed meeting got a little less worrisome.”
A government report on producer prices due Thursday will offer insights on additional categories that feed directly into the the Fed’s favored inflation gauge, which is due later this month.
Traders are still fully pricing in another quarter-point interest-rate cut in June, with about 70 basis points of easing seen for all of 2025.
The two-year yield, which reflects traders’ expectations for Fed policy, declined as much as four basis points to a session low of 3.90%, before rebounding to as high as 4%. The 10-year yield also whipsawed before rising as high as 4.33%.
As we entered 2025, investors’ main economic worry centered around reflation. But as the trade war continues to escalate and as economic policy uncertainty continues to rise, that worry has shifted from inflation to the labor market and the economy as a whole, according to Bret Kenwell at eToro.
“In that respect, it will take more than a few reassuring inflation reports to ease investors’ worries,” he said. “Moving forward, the Fed will soon take center stage, but not just for its latest view on inflation. Investors will want to hear the committee’s stance on the economy and the labor market, while they’ll also be on the lookout for the Fed’s quarterly update to its economic projections.”
Recent market pricing suggests that the Fed will be on near-term hold but then may execute a more rapid rate-cutting cycle after their March meeting, according to Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the BlackRock Global Allocation Investment Team.
“Our eyes will be keenly focused on the next couple of payroll reports, and very much on immigration’s impact therein, to determine whether the Fed will feel the need to allow for some distance from its inflation objective in order to prevent a more persistent labor deterioration,” he said.
In the interim, Rieder thinks it makes sense to keep interest-rate exposure moderate with a focus on the short to belly segments of the yield curve, focusing on good-quality yielding assets.
“That approach allows us to clip coupon and yield to provide generous levels of income in a well-structured fixed income portfolio, while keeping excessive levels of interest rate risk at bay, he concluded.
Key events this week:
- Eurozone industrial production, Thursday
- US PPI, initial jobless claims, Thursday
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.5% as of 4 p.m. New York time
- The Nasdaq 100 rose 1.1%
- The Dow Jones Industrial Average fell 0.2%
- The MSCI World Index rose 0.5%
- Bloomberg Magnificent 7 Total Return Index rose 2.3%
- The Russell 2000 Index rose 0.1%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro fell 0.3% to $1.0890
- The British pound rose 0.1% to $1.2968
- The Japanese yen fell 0.4% to 148.35 per dollar
Cryptocurrencies
- Bitcoin rose 0.1% to $82,909.17
- Ether fell 3% to $1,878.14
Bonds
- The yield on 10-year Treasuries advanced three basis points to 4.31%
- Germany’s 10-year yield declined two basis points to 2.88%
- Britain’s 10-year yield advanced five basis points to 4.72%
Commodities
- West Texas Intermediate crude rose 2.2% to $67.68 a barrel
- Spot gold rose 0.5% to $2,931.36 an ounce
–With assistance from Isabelle Lee, Sujata Rao, John Viljoen and Winnie Hsu.
©2025 Bloomberg L.P.
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