3/14/25: Political Concerns Drive Market Volatility

Political concerns continue to be the dominant driving force behind markets, with tariffs weighing on risk assets and leading a flight to quality towards bonds. The S&P500 is down around 10% from its recent high, and the 10-year US Treasury yield is 0.50% lower from the January peak, at 4.30%. 

Labor market and inflation data this week provided some welcome distraction and relief. Job openings for January came in higher than expected, at 7.7 million, up from 7.5 million in December while, also positively, the quits rate ticked up and the layoffs rate ticked down. More real time data also continues to depict a healthy labor market, including weekly claims for unemployment benefits which remain stable and benign, at 220,000. That said, we do expect weaker data ahead due to Federal job and related industry cuts.

The Consumer Price Index (CPI) for February rose by 0.2% on a month-on-month basis at both the headline and core level, excluding food and energy, which was better than expected. Of note, shelter (i.e. rental) costs, which have proven sticky, continue to moderate. At the wholesale level, the Producer Price Index (PPI) was unchanged month-on-month and rose just 0.2% on a core basis. Both CPI and PPI feed into the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) index, which is now expected to show a 0.3% rise in February keeping inflation in the 2.50%-3.0% area on an annualized basis. Although this is above the Fed’s 2.0% PCE target, we think the Fed would still act swiftly and ease should labor market conditions deteriorate.

Next Wednesday we expect the Federal Reserve to hold its target rate at 4.25%-4.50%. We will be keenly listening to Chair Powell as he addresses the recent market volatility and analyzing the Committee’s latest quarterly Summary of Economic Projections which includes each member’s view on the future path of interest rates, known as the dot plot. The Chandler team still expects the Fed to lower its target rate later this year.

Next week: Empire Manufacturing, Retail Sales, Housing Starts, Industrial Production, FOMC Rate Decision, Jobless Claims, Leading Index, Existing Home Sales

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