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Over the past five trading sessions, the S&P 500 index has fallen nearly 2.3%, despite what appears to be a thaw in U.S.-Russia relations and some optimism that the conflict in Ukraine could soon be resolved.
What worries investors? The main concern is Trump and, more specifically, his policies. The expulsion of illegal immigrants and ongoing trade wars are seen as major risks that could fuel another pickup in inflation.
It’s no wonder that the latest University of Michigan consumer confidence survey, released Friday, showed a sharp decline in consumer confidence. It fell nearly 10% from January to a reading of 64.7.
If these expectations hold up, the Fed may have no choice but to keep interest rates high. And the minutes from last week’s January meeting suggest that committee members are bracing for that possibility.
However, if the situation worsens further, it could push Powell and his colleagues back to a more hawkish stance, leading to another round of rate hikes to bring inflation back to the 2% target.
In this context, investors will watch the PCE report, which will be released this Friday. A weak reading could spur a stock rally, but a high reading would likely deepen the current correction.
It is worth noting that both headline and core CPI are expected to be 0.3% monthly. Meanwhile, the annual headline and core PCE figures are expected to fall to 2.4% and 2.6%, respectively.
Another key event in the week ahead will be the progress of tariff negotiations between the US, Canada, and Mexico. The deadline for reaching an agreement has been pushed back to March 4.
In the absence of a last-minute breakthrough, as we saw last time, a trade war with these neighbors could disrupt supply chains, particularly in sectors such as automotive and energy, leading to a spike in prices.
Overall, while market confidence has taken a slight hit over the past week, it’s too soon to say we’re seeing a major shift, at least in the stock market. So, jumping into naked shorts right now might not be the best move.
