Inflation, Trade, and Economic Outlook

Good Afternoon. It was not a good week for markets, with two out of three leading indices closed down. The Nasdaq lost ~3.5% as the weaker economic data on unemployment claims and consumer confidence raised growth concerns. I don’t think this week’s data clearly shows any issues with the US economy. The PCE numbers especially showed that inflation is moving in the right direction. The data indicates some economic slowdown, which is expected with the restrictive Fed policy.

• Inflation (PCE): The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 0.3% in January, bringing the annual rate to 2.5%. Core PCE, which excludes food and energy, also climbed 0.3% for the month and stood at 2.6% year over year. This is in line with the FOMC forecast mentioned in the FOMC minutes. Read

• GDP Projection: The Atlanta Fed GDP model predicts a -1.5% GDP for the first quarter, but you can see below how volatile the model output is. A few days ago, this model predicted 2.3% of GDP growth. Hence, I won’t rely on a point in time, one negative number, unless this sustains for some time.

  

• Post-Election Enthusiasm Fades: After back-to-back two good years, 2025 was expected to be volatile. There is a lot of uncertainty around new administration policies, especially around tariffs, which is making the market nervous. However, the tariffs are still uncertain, and their effect generally takes some time to reflect. I would say some healthy corrections are good for the markets. This earning season was also very strong, and with inflation moving in the right direction, this is good for the folks who do dollar cost averaging.

  

• New Home Sales Down: New home sales fell 10.5% in January, partly due to cold weather. The median price rose 3.7% year-over-year to $446,300. Inventory reached its highest level since late 2007.

• Unemployment Claims: According to Labor Department data, jobless claims rose by 22,000 to 242,000 for the week ending Feb. 22, reaching the highest level since October. Economists surveyed by Bloomberg had projected 221,000 applications.

• Growth Assets Suffer: Tesla is down ~40% from the pick and close to giving up all the post-election gains. Bitcoin is also down ~30% from the pick. Mag 7’s are underperforming in 2025 compared to other sectors. As expected, the growth assets/stocks are struggling even with mostly good earnings.
  
  Overall, there is definitely some slowdown in the economy, which is expected with the restrictive Fed policy. If this continues, the Fed will be forced to cut rates later in the year, maybe even with somewhat higher inflation. With inflation expected to decrease and rate cuts offset the slowdown, equity markets should still give decent returns for 2025. There is tariff uncertainty, but more about it is in the curated insights section. Overall, the impact of tariffs on inflation should be limited, and due to the higher base effect, inflation will eventually cool closer to the Fed target.

For the week:

• The S&P 500 is down 0.98%, the Nasdaq is down 3.47%, and the Dow 30 is up 0.95%.

  

  Source: barchart

CNN's Fear & Greed Index now stands at 20 (Extreme Fear) out of 100, down 15 points from last week. Details here

The top five trending stocks on Reddit are SPY, Nvidia, Tesla, AMD, and Weight Watchers. Read More

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for Mar 19th FOMC Meeting:

CME FedWatch

New Sports Asset Class: Morgan Stanley is launching a portfolio linked to major sports leagues, targeting high-net-worth sports fans with a $250,000 minimum investment. Over the past decade, rising valuations have solidified sports as a lucrative asset class. Read

BNY OpenAI Partnership: BNY Mellon announced a multiyear partnership with OpenAI, granting the bank access to advanced AI tools like Deep Research and its top reasoning models to enhance its internal AI platform, Eliza. Through this collaboration, OpenAI aims to assess its models’ effectiveness in handling complex real-world tasks. Read

Bitcoin Retracts: Bitcoin plunged 7.2% to $78,226 on Friday, extending its drop to 28% from its all-time high set less than six weeks ago. It later trimmed losses, closing the session nearly unchanged. Read

Relief For Robinhood: Robinhood Markets announced the SEC had closed its investigation into its crypto unit without pursuing enforcement action, reflecting the Trump administration's favorable stance on cryptocurrency. Read

Setback For FDIC: A California federal judge ruled that the FDIC must face a lawsuit over its seizure of $1.93 billion following Silicon Valley Bank’s 2023 collapse. Read

Skype Retired: Microsoft will retire its 21-year-old messaging service in May. After rapid growth in the 2000s, Microsoft acquired it in 2011, but it faded in the smartphone era. Read

Nvidia Beat: Nvidia’s fourth-quarter earnings exceeded Wall Street expectations. Quarterly revenue surged 78%, while full-year revenue climbed 114% to $130.5 billion. The company projected first-quarter revenue of approximately $43 billion, ±2%, surpassing LSEG’s $41.78 billion estimate. Read

Home Depot Beat: HD slightly exceeded Wall Street’s Q4 earnings estimates, breaking an eight-quarter streak of declining comparable sales. The retailer continues to navigate pressure from high interest rates and home prices, which have weighed on both Home Depot and Lowe’s. Read

Salesforce Miss: Salesforce reported quarterly revenue below expectations and issued a forecast that missed analysts' estimates. Read

Lowes Beat: Lowe’s surpassed Wall Street’s Q4 earnings and revenue forecasts, projecting an end to its sales decline this year. Its strong results follow Home Depot’s first positive comparable sales in nine quarters. Elevated borrowing and housing costs have dampened home improvement demand. Read

TJX Beat: TJ Max's parent company reported a strong holiday quarter, surpassing expectations as higher customer transactions drove growth. This signals continued market share gains from department stores and discounters as budget-conscious shoppers seek deals. Read