February Market Recap: Inflation, Tariffs & the Fed's Next Move
Last month was a mixed bag for the markets. We saw some hotter-than-expected inflation numbers, ongoing tariff discussions, and a bit of market volatility as February came to a close. With all that in mind, let’s take a closer look at what happened and what could be ahead.
How the Markets Moved
After a strong January, U.S. stocks took a step back in February:
A pullback after a strong rally isn’t unusual, and some of the selling pressure came from concerns around tariffs and inflation data.
Tariff Uncertainty Continues
Trade tensions remained in the headlines last month, with new tariff rollouts on the calendar:
- The March 4th deadline looms for new tariffs on Mexico and Canada, including levies on aluminum and steel (scheduled for March 12th).
- An additional 10% tariff on China is also expected on March 4th, adding to the existing 10%. This move is largely tied to concerns over fentanyl imports into the U.S.
Despite these uncertainties, the market held up reasonably well for most of February. However, the second half—especially the final week—saw increased volatility, which isn’t unusual from a seasonality standpoint.
Inflation: Running a Bit Warm
January’s inflation data, released in February, came in hotter than expected, which briefly shook the markets:
- Consumer Price Index (CPI): Up 0.5% month-over-month (vs. 0.3% expected), bringing the annual inflation rate to 3.0% (vs. 2.9% in December).
- Initially, markets reacted negatively, fearing the Fed might delay rate cuts. However, by the end of the week, stocks had largely recovered.
- Producer Price Index (PPI): Rose 0.4% month-over-month (vs. 0.3% expected) and 3.5% year-over-year (vs. 3.2% expected).
The good news? Some positive trends in the PPI report suggested better news might be coming in the Core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge.
A Bright Spot: Core PCE
On the last trading day of February, markets got a welcome boost from Core PCE data:
- Month-over-month increase: 0.3%, in line with expectations.
- Year-over-year increase: 2.6%, a step down from the previous month’s 2.9%.
- This was the lowest Core PCE reading in seven months, which helped ease inflation concerns.
Federal Reserve: Holding Steady (for Now)
The Fed didn’t meet in February, but we did get the minutes from their January meeting, which revealed concerns over how tariffs could impact inflation. That led to a more cautious tone on rate cuts.
- As of February’s last trading day, Fed Funds futures indicate a 93.0% probability that rates will remain unchanged in March.
- Looking ahead to June, markets see a low chance of no rate change—meaning June is increasingly viewed as a potential turning point for a rate cut.
Labor Market: Slower Job Growth, but Still Strong
The January jobs report (released in February) came in weaker than expected:
- Nonfarm payrolls increased by 143,000 jobs (vs. 169,000 expected).
- Some of this slowdown was attributed to California wildfires and uncertainty around new policies from the administration.
- However, December and November payroll numbers were revised upward, providing some balance to the weaker headline figure.
- The unemployment rate fell to 4.0%, and wages continued to rise, showing resilience in the labor market.
Consumer Spending & Sentiment
- Retail sales for January fell 0.9% (vs. -0.2% expected), suggesting a bit of a post-holiday spending hangover. Severe weather may have played a role.
- University of Michigan Consumer Sentiment Index hit a 15-month low, as tariff concerns weighed on consumer confidence, which also hit its lowest reading since 2021.
Looking Ahead: Spring on the Horizon
Despite all the noise around tariffs, inflation, and the Fed, the markets largely held their ground in February. Volatility crept in later in the month, but that’s not uncommon.
Much like Punxsutawney Phil seeing his shadow, tariff uncertainties might stick around for a bit longer. But as always, long-term investing is about staying focused on the fundamentals, not getting caught up in short-term market swings.
If you have any questions about your investments or how these market trends might impact your portfolio, let’s connect. I’m here to help you navigate it all.
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