Hello, my friends!
To the surprise of no one, this economic week proved to be another heavily influenced by the Iran war and related developments in the Middle East. Oil prices were greatly impacted, of course, with Brent futures closing above $100 per barrel on Thursday for the first time since August 2022.
Stocks again wilted under the pressure of spiking oil prices and broader war-induced uncertainty this week. The S&P 500 sank 1.6% to close at 6,632.19 on Friday, while the Dow Jones Industrial Index tumbled roughly 2% to land at 46,558.47. For its part, the tech-heavy Nasdaq Composite fell 1.3% to close the week out at 22,105.36.
As for this week’s array of scheduled economic data reveals, it turned out to be “inflation week” with the releases of the economy’s two most prominent price-pressure measures – the consumer price index (CPI) and the personal consumption expenditures (PCE) price index – coming just days apart.
It’s unusual for us to see the data generated by these high-profile inflation gauges revealed in quick succession, but ongoing backlogs caused by the government shutdown conspired to make it happen; while CPI is back on its normal schedule, the PCE report, which normally comes out at the end of each calendar month, remains about two weeks behind schedule.
First up this week was CPI for February, which showed that while price pressures continue to struggle in their effort to get all the way back to the 2% target, neither do they seem prone to intensifying in the face of ongoing tariff pressures.
According to the Labor Department’s report, released Wednesday, headline CPI increased by 0.3% on a monthly basis in February while annual inflation rose at a pace of 2.4%. Both numbers were in line with estimates.
As for core CPI, which excludes more volatile food and energy prices, that climbed 0.2% for the month and 2.5% year over year. Those numbers also matched economists’ projections.
Notably, the annual rates for both headline and core CPI remained unchanged from January.
Overall, the report suggested a prevailing stability in consumer prices, including within the notoriously challenging shelter category. The shelter index stood fast on its January readings, rising 0.2% monthly and 3.0% for the year.
That said, many observers think the continued stabilization of prices is now suddenly at risk from an oil shock triggered by the Iran conflict, with Sonu Varghese, chief macro strategist for the Carson Group, telling CNBC:
“CPI inflation for February was along expectations but this is the calm before the storm that will show up due to surging gasoline prices in March.”
Commerce Department’s Inflation Gauge Confirms Ongoing Price-Pressure “Stickiness”
It was more of the same on Friday with the release of the shutdown-delayed personal consumption expenditures price index for January, which – like February’s CPI data – showed inflation still perched comfortably above the 2% target level.
According to the Commerce Department’s report, headline, or all-items, PCE rose 0.3% on a monthly basis in January while climbing at a year-over-year pace of 2.8%.
Core PCE moved even faster, spiking 0.4% from December while increasing at an annual rate of 3.1%. Notably, the year-over-year core rate represented a slight acceleration from the 3.0% pace both notched in December and projected by economists for January.
Although this latest round of PCE data was reflective of January’s…rather than last month’s…price activity, the data, coming as it did on the heels of the uninspiring February CPI numbers, seemed to reiterate analysts’ lack of confidence in the idea that inflation is nearly at an end.
Citing headline PCE’s monthly 0.3% increase, Jeffrey Roach, chief economist at LPL Financial, said investors “need to see monthly prints stay consistently in the range of 0.1% and 0.2% before they can realistically believe inflation risks are mostly contained,” but suggested such numbers are likely to remain elusive through at least the near term, noting:
“Underlying inflation pressures will continue to boil under the surface and next month’s print will also be impacted by the war in the Middle East.”
Business Owner Sentiment Dropped in February…but So Did Uncertainty
Also this week, the nation’s leading advocacy group for small and independent businesses said its most recent survey of members found that while overall sentiment declined modestly last month, key component data suggests they may feel more confident about what lies ahead.
On Tuesday, the National Federation of Independent Business reported that its headline Small Business Optimism Index landed at 98.8 in February…a 0.5 percentage point drop from January’s number but still above the metric’s historical average of 98.
Survey data revealed the broader index was weighed down by concerns about future sales expectations as well as hiring in the months ahead. The share of firms expecting to increase payrolls fell to its lowest level since last May.
But the report was not without its silver linings. For one thing, despite the diminished expectations for sales going forward, sales volumes actually rose in February. So did positive profit trends, up seven points from January. And while labor quality was again cited by small business owners as their single most important problem in February, the percentage saying so – 15% – is the lowest it’s been since April 2020.
Notable, too, is that the Uncertainty Index, a collateral measure of the headline Optimism Index, decreased three points last month to 88. The drop in uncertainty among business owners is something that NFIB chief economist Bill Dunkelberg made sure to mention in his official statement on the February survey results:
“Although optimism declined slightly, small businesses report feeling more certain in February as they look toward the coming months. High sales and increased profits made February a more positive month for many owners, but competition from large businesses is putting stress on Main Street firms as they navigate the current economic climate.”
Consumer Sentiment Loses Expected March Gains to Outbreak of Iran War
Finally this week, the preliminary March reading of the highly regarded University of Michigan Consumer Sentiment Index saw that metric decline modestly from January amid fast-growing concerns about the Iran war.
According to the data, the index ticked down to 55.5 this month from February’s measure of 56.6. One consensus estimate projected the index would improve slightly this month to 56.8.
Indeed, the index was poised to climb this month before the outbreak of hostilities in the Middle East, survey director Joanne Hsu confirmed. But that changed as survey feedback quickly began to reflect a surge of war-generated uncertainty.
“Interviews completed prior to the military action in Iran showed an improvement in sentiment from last month, but lower readings seen during the nine days thereafter completely erased those initial gains,” Hsu said.
Despite the dip in sentiment, consumers’ one- and five-year inflation expectations remained largely unchanged from February. The 12-month outlook held steady at 3.4%, while the longer-run projection actually fell 0.1 percentage point to 3.2%. However, both outlooks remain well above the 2.3%-3.0% range that characterized the years leading up to the pandemic.
That’s it for now; have a terrific weekend!
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