Inflation rebuilds and growth slows
Summary
Markets are adjusting to a more difficult macro environment. Higher energy prices and early signs of slowing growth are beginning to move together. WTI crude remained near $100 per barrel following its recent surge, keeping inflation risks in focus. Equities declined, with the S&P 500 down roughly 2% on the week. The 10-year Treasury yield rose to 4.38%, and inflation expectations also moved higher. The 5-Year Breakeven Inflation Rate (T5YIE) approached 2.6%, signaling that markets see firmer inflation ahead and a loss of momentum in the disinflation trend.
Consumer resilience begins to weaken
February retail sales rose 0.3%, but the details tell a more cautious story. Excluding autos and gas, sales were flat, and discretionary spending is beginning to soften. At the same time, gas station sales rose more than 2%, reflecting the growing impact of higher energy costs. With gasoline prices nearing $3.90 per gallon, pressure on real consumption is building. If energy prices remain elevated, that pressure is likely to intensify in the coming months.
Inflation pressures reemerge through supply channels
Producer prices point to renewed inflation risk. Headline PPI rose 0.7% month over month, above expectations, driven by energy and transportation. Core PPI increased 0.5%, but cost pressures are building beneath the surface. Freight and input costs are rising again, creating a clearer path for margin pressure and, ultimately, higher consumer prices. If sustained, inflation could reaccelerate in the coming months from February’s 2.4% year-over-year pace.
Central banks signal caution
The Federal Reserve held rates steady at 3.50% to 3.75%, as expected. The updated dot plot showed fewer projected cuts in 2026, reinforcing a more cautious outlook. Chair Powell pointed to elevated uncertainty, particularly around energy-driven inflation. Other central banks are taking a similar approach. The ECB and Bank of England also held rates unchanged, citing upside risks to inflation. Markets have responded by pushing out rate cut expectations. Futures now suggest a first Fed cut closer to late Q4, rather than early summer, with some risk that rates remain higher for longer.
The week ahead
The key question this week is whether growth is beginning to slow while inflation remains persistent. Flash PMIs on Tuesday will provide a real-time view of business activity. Initial jobless claims on Thursday will offer insight into whether labor market conditions are starting to weaken from the current 205,000 level. Markets will also watch whether February’s 0.7% PPI increase signals a broader trend. Energy remains the primary swing factor. If oil prices continue to rise, inflation concerns could intensify and further delay expectations for meaningful rate cuts. Geopolitics remained in focus as President Trump announced a tentative five-day ceasefire on Iranian energy infrastructure, prompting a constructive initial response in equity markets.
Disclaimers
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