US Market: CPI fuels More Sell-Off this Week ?
With US Non-farm payroll out last Fri, 04 Apr 2025, there will not be any economic reports in early part of the week of 07 Apr 2025.
Focus on jobs (employment reports) will turn to inflation from mid-week onwards.
Investors should (at least) take a look at the latest inflation report because it’s the first after the initial 25% tariffs imposed on Mexico, Canada and China (20%).
Economic Reports.
Below are US economic reports that will be out this week.
Wed, 09 Apr 2025.
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US Fed’s FOMC minutes of meeting for March 2025. Not an economic report (per se) but it provides insight to FOMC sentiments towards inflation control, in light of global tariffs rollout.
Thu, 10 Apr 2025.
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Consumer price index (CPI) for March 2025.
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US weekly jobless claims.
Fri, 11 Apr 2025.
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US Producer price index (PPI) for March 2025.
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Consumer sentiments (prelim) for April 2025.
Non-Farm Payroll - March 2025.
The report was released without any fanfare on Friday. (see below)
On any “normal” day, the latest report would have been greeted with lots of celebration on the US exchanges.
Unfortunately, last Friday was not one of those days.
US Nonfarm Payroll report for March 2025, showed a stronger-than-expected job growth of 228,000, well above a downwardly revised 117,000 for February and beaten forecasts of 135,000. (see above)
Key contributors to the gains were:
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Healthcare (+77,800 jobs).
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Leisure & hospitality (+43,000).
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Retail trade (+23,700) sectors.
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Temporary help services and government employment saw declines.
On the other hand, unemployment rate ticked up slightly to 4.2% from 4.1% for February 2025. (see above)
Unemployment has been driven by increase in labour force participation as 232,000 individuals entered or re-entered the workforce.
Wage growth remained steady, with average hourly earnings rising 0.3% MoM and 3.8% YoY.
Overall latest job report shows moderate inflationary pressures with robust data suggesting US labour market remains healthy in the short term.
Many analysts believed that Trump's “toxic” tariffs could dampen future job growth by (1) increasing costs for businesses and (2) reduce hiring confidence in the coming months and quarters.
CPI Report for March 2025
Tariffs implemented in February & March 2025 are very likely to impact US’s March 2025 inflation report due on 10 April 2025.
This is because:
(1) Direct Pass-Through to Prices:
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Research suggests a high pass-through rate for tariffs, meaning the cost increase from the tariffs is largely passed on to domestic consumers and firms.
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This would directly increase the prices of (i) imported goods and (ii) potentially domestically produced goods that rely on imported components.
(2) Increased Costs for Businesses:
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Tariffs increase the cost of imported goods for US businesses.
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These increased costs can be passed on to consumers in the form of higher prices for goods and services.
(3) Retaliatory Tariffs:
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Canada and China implemented retaliatory tariffs on US goods.
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This could lead to decreased US exports and potentially higher prices for certain domestically produced goods, especially if (a) supply chains are disrupted or (b) domestic demand increases for goods previously exported.
(4) Recent Analysis and Projections:
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Recent analyses conducted before 10 Apr 2025 CPI report indicate a significant inflationary impact from these tariffs:
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One model suggests that all tariffs implemented in 2025 through early April could raise the price level by +2.3% in the short run.
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Specifically regarding the tariffs on China, Canada, and Mexico that went into effect in February and March, are expected to contribute to higher prices for a range of goods, including apparel, food, and potentially motor vehicles in the longer term.
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Economists predict that these tariffs will likely accelerate inflation, with some forecasts suggesting a potential increase in the inflation rate by around +1.0% point by the end of 2025.
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Concerns about stagflation (higher inflation & slower economic growth) are also rising due to the implementation of these tariffs.
CPI March Forecast.
According to Cleveland’s Fed Nowcasting, March inflation data is a mixed bag. (see below)
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Both headline inflation & core inflation MoM data shows sign of creeping inflation.
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Strangely enough both headline & core inflation YoY data indicates cooling inflation.
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Just so we are clear, annual (YoY) inflation data is derived based on past 12 trailing months readings.
In short, impending March 2025 CPI inflation data should capture initial impact of the tariffs on Canada and Mexico that went into effect on 04 Mar 2025.
My viewpoints : (mine only)
With MoM inflation data cruising higher while YoY data cooling, I think US market will react accordingly.
(1) Mixed Sentiment:
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Rising MoM inflation numbers suggest persistent price pressures, that could fuels the Fed’s continuing hawkish stance, when it comes to reviewing its interest rate policy.
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Cooling YoY inflation indicates the full impact of the waves of tariffs repercussions are not fully felt yet. Rest assured it is coming.
(2) Sector-Specific Impacts.
Growth sectors like technology may face pressure due to fears of prolonged higher interest rates stemming from MoM inflation increases.
Defensive sectors such as Utilities ($Utilities Select Sector SPDR Fund(XLU)$) and Consumer staples ( $Consumer Staples Select Sector SPDR Fund(XLP)$) could benefit as investors seek safer assets amidst uncertainty.
(3) Federal’s Expectations:
If MoM inflation shows only marginal increases, markets may interpret this as a sign that the Fed could pause rate hikes, boosting sentiment.
However, persistent MoM gains might keep rate cuts off the table, dampening optimism.
(4) Volatility:
The mixed inflation signals could lead to heightened volatility as investors adjust their positions based on Fed policy speculation and broader economic outlooks.
Overall Impact
The stock market's reaction will depend on how closely the actual CPI data aligns with expectations. Marginal MoM increases paired with cooling YoY readings may result in cautious optimism but leave markets highly sensitive to Fed’s commentary and other macroeconomic developments.
Any subsequent tariff actions as announced on 02 April 2025, will become more evident in the coming months and quarters inflation reports. Thank you president Trump !
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