Market Minute: Headline Risks Have Opened Up Opportunities
The S&P 500 has been essentially flat since early December, with big swings occurring in in either direction. Traders are hedging against volatility induced by uncertain economic policy, higher inflation expectations, and a central bank in a holding pattern. Rising inflation remains an unfortunate nuisance for consumers and investors following two hot inflation reports this week. The headline CPI rose 0.5% in January, which was above expectations for a 0.3% increase. Core inflation rose 0.4%, which was also above expectations for 0.3%. That led to the annualized rate increasing from an upwardly revised 2.9% to 3.0%, while the core rate rose from 3.2% to 3.3%.
This data supports the Federal Reserve’s stance and something that Fed Chair Powell mentioned in testimony earlier in the week. Powell remained steadfast in his assessment that the central bank isn’t ready to lower interest rates yet, especially with uncertainty surrounding the economy. While measures of inflation expectations appear today to remain well anchored, Fed officials have indicated that they will certainly not take these for granted. Despite the CPI print, markets remain cautious as there is still a lot of uncertainty regarding how tariffs will impact both global growth and inflation.
The market has reacted negatively to Trump’s tariffs announcements and positively on tariff delays. Yesterday’s price action was a case in point. Market sentiment is still positive, reflected in the quick reversal of the VIX index after each headline induced spike. The short-term effects of these negative headline triggers have not had immediate negative effect on data. Ultimately, heightened policy uncertainty may not in the end represent much of a headwind to the economic growth outlook or financial conditions despite the uneasiness negative headlines produce.
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Charles Schwab and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions.
