Stock Market Turmoil Continues as Investors Brace for Critical Inflation Report

The US stock market remains in a state of turmoil, with investors growing increasingly anxious about the potential for an economic growth slowdown and the impact of President Donald Trump's tariffs. Despite a brief gain on Friday, the benchmark S&P 500 suffered its worst week in six months, while the tech-heavy Nasdaq Composite fell more than 10% from its December all-time closing high, confirming it has been in a correction for several months.

Investors are grappling with the implications of dramatic policy changes around the world. Trump's back-and-forth implementation of fresh tariffs on Mexico, Canada, and China has exacerbated broad concerns about the economy. Markets were also shaken by Germany's surprise spending plans, which drove a selloff in the benchmark German Bund.

Recent US economic data has been disappointing, but one silver lining for stocks has been markets factoring in more interest rate cuts by the Federal Reserve this year to account for potential growth weakening. However, Wednesday's US consumer price index (CPI) report could scuttle those expectations if it confirms that inflation is still simmering at levels that force the Fed to keep monetary policy tighter.

"A hot CPI print will likely scare the market," said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments. "The market still wants the Fed to come to the rescue... Until inflation and inflation expectations come down, the Fed is handcuffed."

Investors are mindful of last month's hotter-than-expected CPI data that saw inflation rise 0.5% in January, its biggest monthly gain since August 2023. The February CPI report is expected to have climbed 0.3%, according to a Reuters poll.

The inflation report will be among the last key pieces of data before the Fed next meets on March 18-19. While the central bank is expected to hold its benchmark rate steady at 4.25%-4.5% at that meeting, Fed funds futures indicate about 70 more basis points of easing are expected through December of this year, according to LSEG data.

"Equities would not enjoy a hot CPI print because... it softens that Fed easing view that has been starting to build in the market," said John Velis, Americas macro strategist at BNY. Investors are also increasingly concerned about "stagflation" - slowing growth and rising inflation that is feared to be a toxic combination for a broad range of assets.

An elevated CPI report could "bring the 'S-word' into play," Velis said. Data on Friday showed US job growth picked up in February, but cracks are emerging in the once-resilient labor market amid chaotic trade policy and federal government spending cuts.

Trade Policy Remains at Center Stage

The market's focus will also be on Washington, as lawmakers wrangle over a spending bill that would avert a partial shutdown of agencies late next week. Trade policy remains in the spotlight, with tariffs on foreign imports expected to hurt corporate profits and increase consumer prices. However, investors are weighing how lasting the levies will be against their potential as negotiating tools.

Trump on Thursday said Mexico and Canada won't be required to pay tariffs on goods that fall under a prior trade deal until April 2. Under the new Trump administration, the barrage of initiatives on trade and other issues, such as federal workforce cuts, has fed uncertainty for businesses and consumers.

Market Volatility Continues

Market unease is also rising. The Cboe Volatility index jumped this week and was around its highest level since late last year. "Volatility is here to stay for a while because we do not have economic and trade policy certainty," said Irene Tunkel, chief US equity strategist at BCA Research.

Conclusion

The US stock market continues to be plagued by uncertainty and volatility, with investors anxiously awaiting the outcome of critical inflation report due out this week. The potential for an economic growth slowdown and the impact of Trump's tariffs are major concerns, while the Fed's next move will also play a crucial role in determining the market's direction.

As investors weigh the risks and opportunities presented by these developments, it is essential to consider the broader implications of these events on the economy and financial markets. The stakes are high, and the outcome remains uncertain.